Analysis of the
Airline Industry
Marketing Management
Fall II
December 8, 2003
Table of Contents
Environment… 3
Demand… 6
Competition…. 7
Product…. 9
Pricing. 11
Placement/Distribution… 14
Promotion 16
Conclusions. 17
References… 19
The airline industry is facing one of its most challenging environments in history. A global
economic recession coupled with the terrorist attacks of September 11, 2001 have led to a
decrease in passenger traffic, reduction in revenue per mile flown, and rising labor costs.
Additionally, a collapse in pricing power and a shift in the buying behavior of business
travelers, coupled with fierce competition from low cost airlines, are forcing major airlines
to restructure their operations or face the prospect of going out of business. The airline
industry has responded to this difficult environment by taking measures to reduce their
costs. Airlines announced layoffs involving more than 100,000 employees immediately
following the attacks. To make matters worse for the industry, the Federal Aviation
Administration (FAA) predicts only a gradual recovery in passenger traffic during the
coming years.
Environment
The U.S. airline industry went through a deregulation process in 1977. Prior to
deregulation, 34% of all passengers did not have a choice of selecting an airline and
domestic carriers transported 240 million passengers annually (TIA.org website). After
deregulation, 85% of all passengers in the U.S. had a choice of two or more carriers and
traffic increased to 640 million passengers annually (TIA.org website). The growth in the
number of passengers flying can be attributed to increased competition, innovations in
marketing & operations resulting in lower cost of flying, introduction of new services and
improvements in service quality. The industry became a perfect competition marketplace
in that no single firm can influence the price of the product, consumers (for the most part)
view the products of all firms as perfect substitutes and consumers will purchase a product
from the firm with the lowest price.
In late 1990s, during the technology bubble and the increased globalization of business, the
airline industry grew at a rapid pace. However, the industry has suffered quite a few
setbacks after experiencing that boom. Pummeled by poor profits and scarred from a
terrorist attack against the United States, the airline industry finds itself on an uncertain
course. Below are travel expenditures (in $billions) for the U.S. airline industry from 2000
through 2004 secured from the plunketresearch.com website.
Year Total Travel Expenditures in US$billions
2000 563.6
2001 527.3
2002 529.2
2003estimate 555.6
2004forecast 583.6
In an already intensely competitive market, the inevitable industry-wide shakedown is
having far-reaching effects on the industrys trend towards expanding domestic and
international services. Many international airlines are still partly owned by their respective
nations, and treaties between nations determine which airlines can land where. In 1992, the
United States, as part of the continuing deregulation of its airline industry, began signing
“open skies” treaties with other countries, which eliminate restrictions on routes and fairs.
The United States currently has fifty-nine open skies treaties, including eleven with
European Union countries. The United States is presently negotiating with the European
Union (15 members in total) on a single aviation agreement with all participating nations
that would allow any US or EU airline to fly to any point on either side of the Atlantic,
without needing permission on routes, fares or frequency of flights (Michaels, 2003, p.A3).
The accord could result in lower fares through increased competition as airlines find it
easier to enter each others market. However, some believe that fares may also rise, as any
open skies treaty would yield massive consolidation among European airlines and lower
the number of competitors in the marketplace (Michaels, 2003, p.A3).
To get around national laws and regulatory problems, airlines have formed global alliances
such as Star (United Airlines and Lufthansa), Oneworld (American Airlines, British
Airways, etc.), and SkyTeam (Delta Air Lines, Air France, and AeroMexico). Through
such alliances, airlines benefit from each others resources, which include additional routes
and marketing strategies as well as code-sharing agreements, without incurring the high
costs of expansion. The costs involved with increased security precautions and route
changes will force the airlines to examine their agreements and consider expansions of the
same. For customers, airline alliances offer broader frequent flier programs, streamlined
travel, and simplified systems for purchasing tickets, but those benefits may do little to
allay passenger concerns regarding safety.
Advances in communication technology have also played a role in the airline industrys
recent troubles. Advances such as video conferencing, internet chat and internet telephones
allow firms to conduct business without having their executives get on the plane and visit
their customers site. Further, “coast to coast business class” era has become a thing of the
past. Businesses are currently focusing on cutting costs and reducing overheads. While the
volume of passengers getting on the planes is slowly increasing, there is no significant
increase in people traveling business class or first class, which is a key component in any
airlines profit margins. According to a survey conducted by the Travel Industry
Association of America, business travel volume in the U.S. fell by 5.8% from 2001 to
2002. More and more passengers continue to look at “deals” and cheap fares. Nearly 80%
of business travelers are stating that their company has implemented travel policies that,
among other things, place restrictions on the class of air service. The results have left
airlines struggling to come up with ways of attracting more premium passengers.
Demand
The terrorist attacks accelerated and exacerbated an existing trend of decreased demand
and reduced industry revenues. The impact of the attacks was so huge on the industry that
the U.S. Congress passed the Air Transportation Safety and System Stabilization Act. The
