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Statistical Mechanics And Its Applications System

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Question:

Discuss about the Statistical Mechanics and its Applications.
 
 

Answer:

Introduction

Since the introduction of flight in 1903, air travel has become a crucial mean of transport for populace and goods. The hundred-plus years after the development of the foremost aircraft have brought about an uprising in the method people journey. The airlines industry is a major industry that has helped a lot of countries to shape their economies (Chang et al. 2014). This industry has become important not only as a faster way of haulage but also as a way of making a living. Today, the global airlines industry includes more than 2000 airlines operating more than 39,000 aircrafts that are responsible for providing services to over 5000 airports (Belobaba et al. 2015). In the case of the US airlines industry, approximately 100 proficient passenger airlines companies are operating in the country. They are responsible for over 12 million flight departures per year and carry over nearly one-third of the world’s total air traffic. This airlines industry has direct impacts on the employment rate of the country along with impacts on company profitability and economy of the country. Some areas that are indirectly impacted by the airlines industry in the US are aircraft manufacturing industry, airports, tourism industry and hotel industry. According to Dana et al. (2017), commercial aviation in the United States of America normally contributes 8 percent of the country’s Gross Domestic Product. However, this airline industry is not able to experience higher amount of profitability for several reasons. This report will focus on the factors that are preventing the US airlines industry to improve its profitability. Based on those factors, a strategy will be recommended so that the US airlines industry can increase its overall profitability in the future.

At the beginning of 20th century, the management strategies and practices of US airlines industry were essentially changed mainly due to deregulation, liberalization and competition. All the airlines organizations started to focus on cost management and productivity enhancement (Mallikarjun 2015). In the past, the airlines companies used to take advantage of scale economies through internal growth and/or mergers. However, the government became concerned about industry consolidation and as a result, further mergers became less likely. During the period of 2001, the airlines industry of the US experienced a major crisis mostly because of economic downturn that reached critical proportions after the terror attack of September 11, 2001 (Dai et al. 2014).

Since then the US airlines industry has made tremendous improvements. In order to understand the current scenario of the US airlines industry, three aspects can be described which are Hub and Spoke model, unique cost structure and top costs and drivers (Scotti and Dresner 2015).

 

Hub and Spoke Model:

Network Carrier: It provides most of the flights from at least on hub, where adjourning flights are made.

Regional Carrier: It delivers airlines services to small cities.

Hub: Airport network carriers are used as a transfer point to get passengers to their anticipated destinations.

Spoke: These airports are mainly served by regional or contracted airlines that assist a hub with connecting flights.

Labor cost (32%): It is a highly unionized industry where there are high wage premiums and long-term union contracts. However, right after the deregulation non-union competitors emerged. On the other hand, unions were challenged by bankruptcies for wage concessions (Zou et al. 2014).

Fuel cost (18%): It includes price of crude oil, fuel burn efficiency of aircrafts, route flown and circumvent with forward contracts.

Aircraft leasing cost (3%): This cost is associated with the aircrafts that are operational through leasing procedures.

Within this part three attributes are majority fixed cost (aircrafts are purchased or leased, fuel and labor cost, leasing space from airports), minority variable costs and aim to improve customer load factor.

In the US, there are mainly three types of airlines that include four major carriers. Those four carriers are dominating nearly 70% of the total market share in the US airline industry. These four major carriers are also offering full service to the consumers without asking for any type of extra charges (Hannigan et al. 2015). Those three types of airlines are major airlines, low cost carriers and regional airlines.

Type of airline

Explanation

Distinctive factors

Market share (per airline)

Major Airline

These are known as the full service airlines that has various hubs and destinations to all 50 states.  Fares for these type of airlines include baggage, food and other costs.

Hubs, large market share, prices are higher, all-inclusive pricing.

14%-20%

Low cost carriers

These types of low cost carriers mostly focus on delivering cheap flights to most of the states of the country. Homogeneous aircrafts are used by these airline organizations along with no frills ticket pricing model to remove unnecessary costs.

Ticket prices are lower, fleets are homogeneous, no hub and spoke, no frills pricing.

1%-5%

Regional airlines

These types of airlines only serve within a particular geographic area with the United States.  Regional airline organizations are generally small and most of the times operate for some major airlines.

Centered to region, Most of the times operate as a part of larger airline companies.

Less than 2%

 

A competitive forces analysis of the industry

In order to conduct a competitive forces analysis on the US airline industry, Porter’s five forces analysis is provided below.

Supplier power (High): In the airlines industry of the United States of America, the power of suppliers is immense. This is due to the reality that three inputs that the airlines have in stipulations of fuel, aircrafts and employment. All of these factors are exaggerated by the peripheral atmosphere. For example, the outlay of aviation fuel can experience fluctuation in the worldwide market for oil, which can rotate riotously as a result of geopolitical and other factors (Borenstein and Rose 2014). On the other hand, labor force entirely depends on the power of the unions who are responsible for bargaining and receiving irrational and expensive concessions from the airlines organizations. Besides, the airlines organizations need aircrafts either on absolute sale or wet lease base. That clearly indicates that airlines organizations are bound to have trust on the two big organizations which are Airbus and Boeing for their aircraft requirements. That is why; the supremacy of suppliers in conditions of the three inputs required for them is categorized as towering.

Buyer power (Moderate to high): With the introduction of online ticketing and allotment systems, consumers are no longer depending on the agents and mediators as well as the airlines for fulfilling the ticketing necessities. On the other hand, the growth and popularity of low cost carriers in the US airlines industry along with the ensuing price wars has also helped the consumers. Besides, the rigid governmental rules and regulations are also protecting the passengers and fliers which have tipped the balance of power in the favor of the consumers (Bazargan et al. 2013). As a result, it can be stated that the buyer power in the airlines industry of the US is moderate to high. In addition, the buyers are also allowed to engage in “price discovery”. It means now the passengers nowadays are absolutely not bothered about the ticket price as they have numerous options and channels via which they can book their tickets. Besides, as low cost carriers are offering exemplary low prices for air travel, the consumers are slowly but steadily shifting towards those airlines organizations. It has forced the major airlines to reduce their ticket prices to retain the existing consumers (Barla 2013). From this scenario it is again clear that consumers hold a great amount of power in the airlines industry of the US.

Entry and exist barriers (High): Any organization that wishes to join the US airlines industry will need huge capital investment. Even when an organization will exit the sector, it will have to write down and soak up many fatalities. It clearly indicates that the entry and exit barriers are high for the airlines industry. In order to enter in the airlines industry of the Unites States, it is required to have a high infusion or capital; therefore, it is not easy for everyone to enter in this industry (Brueckner et al. 2013). Along with high capital, sophisticated knowledge and expertise is also required in order to enter this industry which is again not easy to have. On the other hand, exist barriers are subjected to rules and regulations. Policies in the United States of America never allow the airlines companies to depart easily except they are fully contented that there are authentic business reasons. Moreover, the airlines industry of the United States of America leverages the efficacies and the synergies from the economies of scale and therefore; the barriers to entry is high.

Threat of substitutes and complementarities (Low to moderate): The airline industry of the United States has minimum amount of threat from substitutes and complementarities. For long term journeys, consumers prefer air travel rather than travelling via bus or train. Therefore, flying is the natural occurrence for the consumers of the US. Therefore, the impact of bus and trains as substitutes is low (Baker 2013). However, some Americans also love to travel by their cars for long distances which can become a threat for the airlines industry in the near future. On the other hand, as for complementarities, the services like free Wi-Fi, a la carte meals and passenger facilities that are offered by full service airline companies does not attract higher amount of consumers. Passengers are mostly attracted by lower fares than these extra facilities. Lower cost for flying the same amount of distance is provided by the lost cost airlines. Therefore, the chances are high that consumers will shift from large airline companies to low cost airline companies (Lu et al. 2014). However, it is also true that in the US, low cost airlines do not cover all the states which will force the consumers to use full service airlines organizations.

 


Intensity of competitive rivalry (High): The airline industry in the United States is tremendously spirited mainly because of the entry of low cost carrier airlines. On the other hand, the rules and regulations related to passenger safety are tightening regularly. As a result, operating expenses are rising normally. Additionally, in order to gain competitive advantage, some airlines companies are using highly modified safety accessories which are again increasing their overall operational costs. Besides, the airlines industry of the US is synchronized on the supply side more than the stipulate side (Keiningham et al. 2014). It means that airlines companies are cannot chose which markets to function and which segments to target where passengers are pampered by the regulators and they have the full right to chose which airline company they want to avail (Lin and Ban 2014). This is main reason that the low lost carriers have successfully grounded the full service airlines. Besides, the online pricing war is also fierce for the airlines companies of the US which is also affecting the profitability of organizations.

In spite of these figures that are showing that the airlines industry of the United States is growing, according to (Lu et al. 2014), it still remains less profitable than other airline industries.

Identifying strategies for airline profitability

According to International Air Transport Association (IATA), the US airline industry is expected to double its profits in 2017-2018 due to cheap oil price and increased demand for air travel. However, it is recommended to invest in fast growth carriers. The reasons behind such investment are hereby mentioned below.

Favorable crude oil prices

  • Low oil prices are continuing to benefit bottom line.
  • Free up capital for investments in growth

Consolidation among carriers

  • Alaskan airlines and Virgin has merged to improve ALK west coast penetration and scale
  • Two dissimilar types of merger which are consolidate overlapping routes and adding geographic scope
  • Expected to continue at a modest pace in disjointed regions of the United States.

No-frills pricing

  • Enhancement of major carriers’ competitiveness through LCCs which will increase profit margins
  • It can negatively affect the customer satisfaction level

Subject to demand shocks

  • It is expected that demand of consumers will increase in 2017 as the economy of the United States of America is improving
  • A major risk is also there that includes risk from Zika virus and terrorist attacks

If the investment rate increased in the US airlines industry, then the chances are high that it will overcome most of the issues that are not allowing the airlines industry of US to improve its profitability. On the other hand, another major problem that the airlines companies are facing from low cost carriers can also be minimized by using the recommendations stated under pricing strategy.

 

Conclusion

From the entire report, it can be concluded that the US airlines industry is not actually low on profitability. After the attacks of 9/11, the airlines industry of the US faced critical issues and downfall. Currently the situation is way better than before. However, it was expected that the industry will experience higher amount of growth from 2015 that did not happened actually. From the porter’s analysis, it is clear that high bargaining power of passengers along with the strong presence of low cost carriers and tremendous market competition is affecting the profitability of the overall airlines industry in the US. On the other hand, the strict rules and regulations implemented by the government to ensure customer safety is another reason that the airlines companies are forced to increase their operational cost. Operational cost is increasing; however, because of low cost carriers the airlines companies are unable to increase the ticket prices. As a result, margins of profitability are decreasing. In order to deal with these issues, a recommendation part is also added where some strategies are mentioned that the airlines companies of the US can use to increase their profitability.

 

References

Baker, D.M.A., 2013. Service quality and customer satisfaction in the airline industry: a comparison between legacy airlines and low-cost airlines. American Journal of Tourism Research, 2(1), pp.67-77.

Barla, P., 2013. Market share instability in the US airline industry. Journal of Applied Business Research (JABR), 15(4), pp.67-80.

Bazargan, M., Lange, D., Tran, L. and Zhou, Z., 2013. A simulation approach to airline cost benefit analysis. Journal of Management Policy and Practice, 14(2), p.54.

Belobaba, P., Odoni, A. and Barnhart, C., 2015. The global airline industry. John Wiley & Sons.

Borenstein, S. and Rose, N.L., 2014. How airline markets work… or do they? Regulatory reform in the airline industry. In Economic Regulation and Its Reform: What Have We Learned? (pp. 63-135). University of Chicago Press.

Brueckner, J.K., Lee, D. and Singer, E.S., 2013. Airline competition and domestic US airfares: A comprehensive reappraisal. Economics of Transportation, 2(1), pp.1-17.

Chang, Y.T., Park, H.S., Jeong, J.B. and Lee, J.W., 2014. Evaluating economic and environmental efficiency of global airlines: A SBM-DEA approach. Transportation Research Part D: Transport and Environment, 27, pp.46-50.

Choi, K., Lee, D. and Olson, D.L., 2015. Service quality and productivity in the US airline industry: a service quality-adjusted DEA model. Service Business, 9(1), pp.137-160.

Dai, M., Liu, Q. and Serfes, K., 2014. Is the effect of competition on price dispersion nonmonotonic? evidence from the us airline industry. Review of Economics and Statistics, 96(1), pp.161-170.

Dana, J.D., Dana, J.D., Schmitt, D.A. and Schmitt, D.A., 2017. The US airline industry in 1995. Kellogg School of Management Cases, pp.1-38.

Hannigan, T.J., Hamilton III, R.D. and Mudambi, R., 2015. Competition and competitiveness in the US airline industry. Competitiveness Review, 25(2), pp.134-155.

Johnston, A. and Ozment, J., 2013. Economies of scale in the US airline industry. Transportation Research Part E: Logistics and Transportation Review, 51, pp.95-108.

Keiningham, T.L., Morgeson III, F.V., Aksoy, L. and Williams, L., 2014. Service failure severity, customer satisfaction, and market share: An examination of the airline industry. Journal of Service Research, 17(4), pp.415-431.

Lin, J. and Ban, Y., 2014. The evolving network structure of US airline system during 1990–2010. Physica A: Statistical Mechanics and its Applications, 410, pp.302-312.

Lu, W.M., Hung, S.W., Kweh, Q.L., Wang, W.K. and Lu, E.T., 2014. Production and marketing efficiencies of the US airline industry: a two-stage network DEA approach. In Data Envelopment Analysis (pp. 537-568). Springer US.

Mallikarjun, S., 2015. Efficiency of US airlines: A strategic operating model. Journal of Air Transport Management, 43, pp.46-56.

Mayo, A., Nohria, N. and Rennella, M., 2016. Entrepreneurs, managers, and leaders: What the airline industry can teach us about leadership. Springer.

Scotti, D. and Dresner, M., 2015. The impact of baggage fees on passenger demand on US air routes. Transport Policy, 43, pp.4-10.

Treanor, S.D., Simkins, B.J., Rogers, D.A. and Carter, D.A., 2014. Does operational and financial hedging reduce exposure? Evidence from the US airline industry. Financial Review, 49(1), pp.149-172.

Zou, B., Elke, M., Hansen, M. and Kafle, N., 2014. Evaluating air carrier fuel efficiency in the US airline industry. Transportation Research Part A: Policy and Practice, 59, pp.306-330.

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