ANALYSIS
OF THE
AIRLINE INDUSTRY
Bua 351 66
Professor Donovan
By
Kaye-Ann Brown-Barrett
Airline Industry Page
TABLE OF CONTENT
I. Executive Summary………………………………………………………….Page 3
II. INDUSTRY ANALYSIS…………………………………………………….Page 4 – 6
The Dominant Economic Features of the Airline Industry
Porter’s Five Forces
The Drivers of Change in the Industry and Their Impact
III. COMPETITOR ANALYSIS…………………………………………………Page 7 -8
Key Success Factors for Competitive Success
Industry’s Attractiveness and Prospects for Long-Term Profitability
IV. BUSINESS STRATEGY ANALYSIS……………………………………Page 8 -13
Companies in the Strongest/Weakest Positions
Strategy of each of the rivals:
Financial performance of the three leading airlines
Characteristics that differentiate the companies from each other:
V. RECOMMENDATION FOR UNITED AIRLINES……………………………Page 14
V1. CONCLUSION………………………………………………………………..Page 15
V11. EXHIBITS
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Airline Industry Page
Executive Summary
Air travel has become such an ordinary thing. It would be hard to imagine life without it.
The airline industry certainly has progressed over the years. It has contributed and has
altered the way in which people live and conduct business by shortening travel time and
altering our concept of distance, making it possible for us to visit and conduct business in
places once considered remote. The airline industry exists in an intensely competitive
market. In recent years, there has been an industry wide shakedown, which will have far
reaching effects on the industry’s trend towards expanding domestic and international
services. In the past, the airline industry was at least partly government owned. This is
still true in many countries. However, in the U.S. all major airlines have come to be
privately held. The airline industry can be separated into four different categories by the
U.S. Department of Transportation. The emerging forms of business models in the airline
industry are presented in terms of how the carrier generates revenue, its product offering,
value-added services, revenue sources, and target customers.
The airline industry continues to grow rapidly, but its consistent and robust profitability is
elusive. Airlines earn the largest proportion of their revenue from regular and business
class passengers. Revenue is also earned from transporting cargo, selling frequent flier
miles to other companies and up selling in flight services. Measured by revenue, the
industry has doubled over the past decade. According to the International Air Transport
Association (IATA), revenue increased from US$369 billion in 2004 to a projected $746
billion in 2014. In recent years, the airline industry has exhibited impressively dynamics.
The sector has gone through a drastic change on both the supply and the demand side.
Unlikely in other industries, the driving forces governing the recent changes do not
depend mainly on technological factors, but on developments in the legal, institutional,
and cultural domains. Airbus and Boeing, the main aircraft manufacturers, have a huge
list of orders from airlines and this has changed their negotiating positions resulting in
higher purchase prices and lease costs for the carriers
In the commercial aviation sector, just about every airport, airplane manufacturers, jet
engine makers, travel agents, and service companies, turns a tidy profit. Yet it’s one of the
enduring ironies of the industry that the companies that actually move passengers from
one place to another, the most crucial link in the chain, struggle to break even. Their
struggles are largely due to the complex nature of the business, manifested in part by the
significant degree of regulation and the ongoing price pressure, which is a huge factor in
the airline industry. Given these unique circumstances, airlines must continue to focus on
top-line growth because their limited profitability depends almost solely on revenue
gains, while increasing productivity in order to shore up and perhaps even increase
margins. The way individual commercial airlines react to and navigate several trends
playing out across the globe will determine carrier performance in the coming years.
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Airline Industry Page
The Dominant Economic Features of the Airline Industry
The Market size of the Airline industry has growth since the decline after September 11,
2001. There are over 2000 airlines operating in over 23000 aircrafts in the global airline
industry today. These airlines are providing services in just over 3700 airports. The
growth of world air travel has averaged approximately 5% per year over the past 30
years, with substantial yearly variations due both to changing economic conditions and
differences in economic growth in different regions of the world. Historically, the annual
growth in air travel has been about twice the annual growth in GDP. Even with relatively
conservative expectations of economic growth over the next 10-15 years, a continued 4-
5% annual growth in global air travel will lead to a doubling of total air travel during this
period.
As for the U.S airline industry, approximately 100 certificated passenger airlines operate
over 11 million flight departures per year, and carry over one-third of the world’s total air
traffic. US airlines reported over $160 billion in total revenues, with approximately
545,000 employees and over 8,000 aircraft operating 31,000 flights per day. The
economic impacts of the airline industry range from its direct effects on airline
employment, company profitability and net worth.
Rivalry in the airline industry is highly intense. Intense rivalry is driven by a number of
underlying factors of air transport. At its core, the aggressive buildup of capacity that
never leaves the market drives pricing decisions that fail to support attractive returns.
Airlines compete by making a number of sequential choices that relates to quality and
price. An airline has to choose its capacity, which would be its overall aircraft fleet.
Airlines also have to choose how to allocate the capacity across different connections.
Airline also has to set prices. These prices can be changed very frequently. The airline
industry offers other services that can be broken down in segments such as domestic,
regional, and international. Competitive rivalry is high and the demand for air travel is
inelastic due to the fact that there are many different airlines to choose from.
Recently, there has been a wave of industry consolidation resulting from mergers and
acquisitions, which has reduced competition in a few regions. Mergers of major US
airlines have resulted in a reduction in the number of key players from 11 in 2005 to just
six in 2015. The six major airlines in the United States, including Delta Air Lines, Inc.,
United Continental Holdings Inc., Alaska Air Group, Inc., JetBlue Airways Corporation,
Southwest Airlines Co., and American Airlines. Of these airlines in the industry, only
three of them are considered legacy carriers and major players. These three are American
airlines, United Continental and Delta airline. These three take up about 60% of the U.S.
airline industry. The reduced competition has resulted in efficient utilization of resources.
Airlines are able to align supply and demand in an efficient manner. The industry
provides customers with wider coverage as well as more routes and destinations. The
industry is fairly concentrated and entry is very low. The airline industry is in it maturity
stage of the industry life cycle.
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Airline Industry Page
Forward/Backward integration is prevalent in the airline industry. The industry is
concerned about the customers preferences that leads to the technology change the
airlines have taken on. Since airplane manufacturers are normally focusing on research,
development, and production, all of which require high amounts of capital, there is not a
high risk of forward integration. Established airlines have experience and supply channels
that may be hard to replicate easily. The economic importance of the airline industry and,
in turn, its repercussions for aircraft manufacturers, makes the volatility of airline profits
and their dependence on good economic conditions a serious concern for both industries
Porter’s Five Forces
Profitability is a function of the collective strength of the Five Forces as well as the
interaction among them. These forces shape the behavior of the players in the industry. It
also determines both the overall value and the way in which the value is divided among
them.
The rivalry among the competitors is high. Growth has been rapid but volatile. There is
limited product differentiation and the structures of the companies are similar. There is
low marginal cost per customer and high cost per aircraft. Airlines primarily compete on
price and service. However, to a lesser extent they do compete on frequency of flights,
frequent-flyer programs, reliability of flights, and other amenities. In recent years,
carriers have stayed within their existing geographical areas of dominance, concentrating
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