The U. S. airline industry has been in a chaotic state for a number of years. In 1993, a U. S. government report indicated that the industry had “Lost huge amounts of money in the past three years, and it has never made a sustained, substantial return on investment…” According to the Air Transport Association, the airline industry trade association, the loss from 1990 through 1994 was about $13 billion, while from 1995 through 2000, the airlines earned about $23 billion and then lost about $35 billion from 2001 through 2005. Early in 2006 the association expected about a $10 billion loss in 2005.
In 1903, the Wright brothers’ first successful flight in Kitty Hawk, North Carolina marked the beginning of the aviation industry. In the early years, the public did not embrace airplane travel as an option, thinking that it was too dangerous. The first major stimulus that helped to develop the industry was the United States’ participation in World War I. After the war, though, the government stopped funding research and development, practically stagnating growth in the aviation industry. In 1927, Charles Lindbergh successfully completed a solo flight across the Atlantic Ocean and created massive interest in flying with the general public.
One of the biggest factors in the growth of the air transportation industry during this time was the development of a mail transport system by the U. S. Postal Service. The Kelly Airmail Act of 1925 provided private airlines the opportunity to function as mail carriers through involvement in a competitive bidding system. These private carriers, through the airmail revenue, could then expand into carrying other forms of cargo, including passengers. Charles Lindbergh, in the position of “technical adviser” to Pan Am World Airways, piloted that airline’s first airmail service flight to South America in 1929.
Passengers were targeted as a way to supplement the income of the airmail systems. Slow starting, due to the perception of less than stellar safety performance and high fare costs, passenger volume grew tremendously and carriers multiplied. The Air Commerce Act, passed in 1926, allowed Federal regulation of air traffic rules. The aviation industry backed the passage of this act, believing that without the government’s action to improve safety the commercial potential of the airplane would not be realized. Air traffic became more and more disorganized and the need for regulation became apparent.
With United States’ entry into World War II, commercial fleets and pilots were sent to Europe to participate in the war effort. The war also helped to generate support for research and development of aircraft, which extended beyond the war to commercial aviation. A major post-war development was the four-engine aircraft, such as the Lockheed Constellation. This innovation substantially cut the flying time for ocean and continent crossings, and thus negatively effecting travel by ocean liner and train. The 1950s saw dramatic improvements in the capacity and comfort of commercial flights.
Planes were modernized, and jet service was introduced in 1959, enabling even faster cross-country service. After major in-air collisions in the 1950s, the Federal Aviation Act was passed in 1958. The Federal Aviation Administration (FAA) was created, and was charged to develop an air traffic control system. The 1970s saw dramatic increases in costs, particularly increases in fuel prices. The 1980s were marked by the deregulation of the industry, which resulted in the growth of smaller carriers and the mergers of larger carriers.
The 1990s saw a dramatic increase in the number of passengers, including first time passengers, as prices were cut and the cities served by airlines increased. Most commercial airline companies declined abruptly after the terrorist events of 9/11 as consumers flew less for business and leisure. As a result of this shock, the industry faced increasing consolidation and key bankruptcies (including United, Delta and Northwest) as the sector struggled to regain its financial footing. Airlines worldwide have also sought to share costs by creating partnerships or alliances.
Through these agreements, airlines can share facilities and operational costs (e. g. , maintenance facilities, sales offices) and negotiate volume discounts on large purchases. Passengers benefit from lower prices (due to lower expenses) as well as optimized routes and pooled loyalty rewards, especially in regards to international travel. Since the deregulation of the airline industry began, airline ownership has been limited to companies and individuals of the operating country. Consolidation is beneficial in two ways for airline companies, as it typically reduces redundant operating costs and raises revenues through higher fares.
The airline industry can be separated into four categories by the U. S. Department of Transportation: •International 130+ seat planes that have the ability to take passengers just about anywhere in the world. Companies in this category typically have annual revenue of $1 billion or more. •National Usually these airlines seat 100-150 people and have revenues between $100 million and $1 billion. •Regional Companies with revenues less than $100 million that focus on short-haul flights. •Cargo These are airlines generally transport goods.
Michael Porter’s Five Force •Rivalry Among Competing Firms The most powerful of the five competitive forces, the strategies pursued by one firm can be successful only to the extent that they provide competitive advantages. In today’s airline industry, many competitors are lowering prices for tickets; some airlines are even offering Wi-Fi on international flights, creating a fierce rivalry among competitors. •Potential Entry of New Competitors You’ll need to look at whether there are substantial costs to access bank loans and credit.
If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. •Development of Substitute Products The likelihood of people using train or driving as a mean to getting to their destinations have increased due to the higher cost of airline tickets. For domestic flights this threat may be higher than those of international flights. •Bargaining Power of Suppliers The airline supply business is mainly dominated by Boeing and Airbus.
For this reason, there isn’t a lot of cutthroat competition among suppliers. •Bargaining Power of Consumers The bargaining power of buyers in the airline industry is quite low. As related to the industrial organization view there are some economic, social, and technological factors that affect the airline industry. The economic factors that “have a direct impact on the potential attractiveness of various strategies” include the oil fuel prices which are increasing, caused by the war, causing airlines to raise prices because they have to afford the new oil prices.
Also, another economic factor is the recession, which is causing more ; more people to travel by car, train, or bus; Revenues for airlines are on a decline because of the recession. Social factors includes companies involvement with communities, many airlines offer programs that benefit children, Southwest have several programs such as the “kids corner” and “adopt a pilot”. Technological factors include airlines now offering Wi-Fi on some of their international flights and the advancements of aircrafts. Firm’s Performance
Southwest Airlines: Daily Departures: More than 3,200 flights a day Employees: Nearly 35,000 total Employees throughout the Southwest system. Stock: Common stock is traded under the symbol “LUV” on the NYSE. 2009 Financial Statistics: •Net income: $99 million •Net income, excluding special items: $143 million •Total passengers carried: 86 million •Total RPMs: 74. 5 billion •Average passenger load factor: 76 percent •Total operating revenue: $10. 4 billion Cities Served by Southwest: Southwest flies to 69 cities in 35 states. Fleet:
Southwest currently operates 544 Boeing 737 jets Continental Airlines: Daily Departures: More than 2,400 daily departures throughout the Americas, Europe and the Asia-Pacific region Employees: 41,300 employees at Continental Airlines Stock: Common Stock is traded on the NYSE. 2009 Financial Statistic: •Revenues: $12. 5 Billion •Operating income: ($146 Million) •Net income: ($282 Million) •Total assets: 12. 7 Billion Cities served by Continental: 135 US destinations and another 135 abroad Fleet: Continental currently operates 340 Boeing 737, 757, 767, and 777 jets