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The United States Airline Industry

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Question :

What is the United States Airline Industry?
 
 

Answer :

Introduction

For a long time, the airline industry of the United States has been struggling to make a profit. Various factors have been identified by analysts that have made the industry performance to deteriorate. There have been other carriers that have entered the industry which charges low fares to passengers. These new competitors have put their focus on more attractive routes, and they use an aircraft of one type enabling them to reduce the costs associated with maintenance.  The U.S. airline industry has been left with no choice but to also reduce their fares. Also, the emergence of travel sites on the internet has enabled customers to compare the prices of different carriers which have made the fares remain low (Holderness, 2009, p.1382).

An Overview of U.S. Airline Industry

The network of air transport in the U.S. is very extensive. Research conducted in 2013 reported that 86 airports handled more than 1,000,000 each year. In the United States, air transport is the most preferred means of transport for distances which are over 480km. This is because of the geographical setup and great distances between cities. Air transportation has reduced from the time the great recession started. Rapid consolidation has also been experienced in the industry due to the mergers of the largest carriers in the nation (David, Dorn, and Hadson, 2013, p.2125)

The terrorists’ attacks which occurred on 11th September in America have made the air industry to suffer significantly. These attacks made customers to lose their confidence in the industry. During the first week of the attack, more than 330 million dollars were lost by the industry every day. In the subsequent years, the reduction in demand followed by the reducing cost of travel by air has made revenues to decrease greatly. The cost of fuel has also been on the rise which has made the losses incurred by the airlines to increase. The other expense incurred by the airline is the salaries of its staff. To compensate for increased cost and reducing revenues, various airlines have reduced the number of the operating planes forcing the airlines to lay off some of the employees resulting in increasing unemployment rate which have an adverse impact on the economy (Keeney and Hertel, 2009, p.897).

In the United States, it is the role of the local government to construct and operate public airports. The military bases are the only exemption. Regarding security and regulation, the air transport industry is regulated by an agency called TSA, which is part of the Homeland Security of the U.S. For every passenger to board a plane, one must provide an ID that is issued by the state, and it must be a valid one. Each person is required to go through a body scan before being allowed onto a plane so that there are no items that are prohibited. In the U.S. the airlines which carry passengers are owned privately. Currently, there is ticket price regulation by the government although the government has jurisdiction over training of pilots, the safety of aircraft, and investigation of aircraft. Air cargo is usually part of the many flights that take place daily and is operated parcel companies that are usually privately owned (Acs and Amoros, 2008, p.310).

 

Competitive Forces Analysis.

An analysis of the competitive forces of the U.S. is critical since it helps investors to know the financial position of the company and its marketplace position. The U.S. airline competitive forces can be analysed using the Porter’s Five Forces tool. This tool is an analytical framework whose aim is to evaluate the position of the company within the industry in which it operates, and it also considers the different types of threats which may either be vertical or horizontal. A threat that is vertical in nature is one that is along the chain of supply, such as suppliers or buyers obtaining the power to bargain which can make a company have a competitive disadvantage. A threat that is horizontal is a competitive one, for instance, the entry of a new company in the market or customer changing their preferences which favor substitutes (Gerardi and Shapiro, 2009, p.12). Investors can, therefore, use these five forces to identify the most likely threats to the U.S. airline industry. The main reason for using the Porters Five forces of analysis for the U.S. airline industry is because it has been faced by challenging external factors which include the rise of fuel prices, reducing passenger traffic, rising operating expenses, high maintenance and landing costs among other factors. The five forces are.

The Power of Suppliers to Bargain.

The suppliers’ power is great because airlines have three major inputs which are labor, fuel, and aircraft which are greatly influenced by the external environment. For example, the price of fuel is affected by the global market fluctuations which can be escalated by factors which are geopolitical or other different factors. Labour is similarly subject to the unions’ power which most of the times bargain for better compensation terms. Thirdly the U.S airline industry acquires aircraft by wet lease basis or by outright sale meaning that various airlines have to rely on two big suppliers, Boeing and Airbus for their different aircraft needs. This is the sole reason why the suppliers’ power has been termed as high regarding the Porter framework. These factors have made the profitability of the United States airline industry to decline significantly (Fu, Oum, and Shang, 2010, p.28)

Customers Bargaining Power

The proliferation of distribution systems and online ticketing has made passengers have a wide range of choices in acquiring the tickets. Customers no longer depend on airlines, agents or intermediaries for them to purchase tickets. Also, there has been an entry of carriers which charge less to their customers and the price wars that result in benefits the customers. There have also been tight regulation on the side of demand of the industry which means that passengers have been protected and the balance of power falls in their favor. This has greatly influenced the profitability of the airline industry in a negative way. This is because customers cannot be deterred by price fluctuations due to availability of many channels which they can use to book tickets (Givoni and Rietveld, 2009, p.504)

 

The Threat of New Entrants and Exit Barriers.

Entering the airline industry requires investing the huge amount of capital and even when a decision to exit the sector is made by the airlines, they are required to absorb massive losses. This indicates that exit and entry barriers of the airline industry are high. Due to the high capital requirements for entry in the industry is limits the number of people who may want start the business of this nature since a lot of expertise and knowledge is required by the players. The barriers of exit are subject to certain regulations, and those who are tasked with the mandate of regulation do not allow airlines to do so unless they present genuine reasons. This exit and entry barriers have made the U.S. airlines to continually incur losses posing a threat to profitability (Fu, Oum, and Shang, 2010, p.33).

Threats of Complementariness and Substitutes

In the U.S. the airline industry does not face threats from complementariness and substitutes, unlike the countries which are developing. This is because air travel is a phenomenon that is natural for the customers and therefore the impact of alternatives such as bus or train is small. However, many Americans use cars to travel longer distances meaning this substitute is a threat. On the side of complementariness, offering services such as free wifi and other amenities to the passengers provided by airlines which offer full service does not necessarily result in more passengers because customers are more enticed by reduced fare rather than these factors (Gerardi and Shapiro, 2009, p.17).

Competitive Rivalry Intensity

Various reasons make the airline industry in the United States to be very competitive. This includes entry of carriers that charge low prices, regulations that are tight where safety become very key which make the operating expenses to be very high and the fact that airlines are managed by a model of business that is a little outdated. To make the matter worse, the industry is less regulated on the demand side than on the supply side meaning the airlines do not have freedom to choose the markets to operate in. On the contrary, it is the consumers who are favored by the regulators. This competition has made the profitability of the U.S. airline to decrease (Givoni and Rietveld, 2009, p.507).

Economic Performance

The U.S airline industry has grown rapidly over the years, but there has not been robust and consistent profitability. Most of the growth has been caused by carriers which charge low cost which today controls some significant percent of the market worldwide. These carriers have been expanding their operations markets that are emerging. The low-profit growth is due to the complex nature of the airline business. There are strict regulations which govern the industry and hence every decision made should not be contrary to the rules. The United States airline sector is one of the sectors that has experienced the fall of prices over the years (Holderness, 2009, p.1401).

The U.S airline earnings have shown a cyclical behavior over the years. Researchers have concluded that the profit cycles in the airline industries are caused by not fully accounting for delays in the feedbacks which are negative which controls capacity acquisition, inventory, and other resources. The reasons for the profit cycles are prices, demand, wages, and costs. The demand affects the profit cycle in that during the seasons that people have much disposable income, they travel a lot, and this causes the revenues of the airlines to increase, and when the disposable income is little, there is less travel which decreases profits as well. The prices of travel have significantly been reducing due to an entry of low-cost carriers in the market. This has in turn reduced the profits and hence there has not been stability in the profit cycle. The costs of operations of aircraft are usually high especially the maintenance costs. This is because safety is very key in the airlines. These high costs have affected the profit cycle since a lot of money is required to maintain the aircraft. The wages have also affected the profit cycle because they are controlled by the union. The union may at times impose a high wage rate that is beyond the capacity of the airlines to pay, and this may affect the profit margin of the airlines (Keeney and Hertel, 2009, p.900)

 

Strategies for Airline Profitability

There are several measures that the U.S. airline industry can take to increase cost-effectiveness and to remain competitive. One of the steps that can be implemented is ensuring that they know their customers better. As seen in other companies, knowing consumers preferences are very important so that services that are personalized can be delivered effectively. However, the U.S. airline industry must move beyond relying on loyalty programs that exist which are capable of generating important customer data but do not instantly lead to insights which are real concerning travel choices and behaviors. Most carriers, therefore, need to concentrate and invest in the services that they offer to customers as a result of the knowledge they gather about them. The benefits derived from better knowledge of customers are increased experienced by the passengers who make the customer loyal to an airline. This gives airline greater chances of obtaining revenues which help improve profitability (Nidomulu, Prahalad, and Rangaswami, 2009, p.59).

The other measure that the U.S airlines can use is technology that is digitalized to reduce the costs of operations. For airlines to reduce cost and streamline their operations, they must internally adopt new technology. For instance, engines which are tech-enabled can make operations and maintenance centers aware of issues of performance while a plane is in the air and request that the part is used for a replacement to be ready by the time it lands. Taking such measures help to substantially boost performance and reduce costs while at the same time increases passenger satisfaction by more rapid on time departure and arrivals (Ciliberto, Hikino, and Chandler, 2009, p.1802).This can help to increase profitability.

The third strategy that can be taken is to identify the areas that the airline needs to cut the cost of the expenses. The management of airlines needs to identify areas that are not associated with customer value, reputation, branding and safety and reduced the cost of such areas. The airlines should determine their capabilities which give them a competitive advantage over their rivals and invest in such areas and by doing so the profitability of the airline can be boosted (De Neufville, 2008, p.63).

The final strategy that the U.S. airline industry can take is to find strategic partners. The legal framework of consolidation and restructurings of bankruptcy in the U.S. cannot be applied in many other markets, and regulation by government continues to put a limit on such consolidation. It is, therefore, necessary for airlines to partner with others which help them to improve their strengths. Partnerships allow carriers to share routes which make them access many destinations. Partnership can contribute to boosting the profitability of the U.S Airlines as a result of increased revenues (De Neufville, 2008, p.41)

 

Conclusion

The U.S airline industry has over the years experienced deteriorating profit margins. This has been caused by competitive forces such as new entrants threats which offer reduce fare costs making most customers to prefer them. Secondly, the power of customers to bargain which makes the customers choose carriers which have low costs since there are sites on the internet that they can access where they can compare the fare prices of different carriers. Third, competitive rivalry intensity is caused by the demand side of the customer having more power than the supply side.Fourth,  the threat of substitutes and the power of clients to bargain are other forces that affect competition. The profitability of the U.S. airline has been a cyclical one due to factors such as prices, demand, wages, and cost. There are strategies that the U.S airline can take to increase its profitability. These plans are partnering strategically, identifying areas they can cut their costs, using technology that is digitalized and knowing their customers better. By implementing these strategies, the U.S. airline industry can improve its financial performance considerably.

 

References

Acs, Z.J. and Amorós, J.E., 2008. Entrepreneurship and competitiveness dynamics in Latin America. Small Business Economics, 31(3), pp.305-322.

Buhalis, D. and Law, R., 2008. Progress in information technology and tourism management: 20 years on and ten years after the Internet—the state of tourism research. Tourism Management, 29(4), pp.609-623.

Chandler, A.D., Hikino, T. and Chandler, A.D., 2009. Scale and scope: The dynamics of industrial capitalism. Harvard University Press.

Ciliberto, F., and Tamer, E., 2009. Market structure and multiple equilibria in airline markets. Econometrica, 77(6), pp.1791-1828.

David, H., Dorn, D. and Hanson, G.H., 2013. The China Syndrome: Local Labor market effects of import competition in the United States. The American Economic Review, 103(6), pp.2121-2168.

De Neufville, R., 2008. Low-cost airports for low-cost airlines: flexible design to manage the risks. Transportation Planning and Technology, 31(1), pp.35-68.

Eichengreen, B. and Hausmann, R. eds., 2010. Other people's money: debt denomination and financial instability in emerging market economies. University of Chicago Press.

Fu, X., Oum, T.H. and Zhang, A., 2010. Air transport liberalization and its impacts on airline competition and air passenger traffic. Transportation Journal, pp.24-41.

Gerardi, K.S. and Shapiro, A.H., 2009. Does competition reduce price dispersion? New evidence from the airline industry. Journal of Political Economy, 117(1), pp.1-37.

Gilpin, R., 2016. The political economy of international relations. Princeton University Press

Givoni, M. and Rietveld, P., 2009. Airline’s choice of aircraft size–Explanations and implications. Transportation Research Part A: Policy and Practice, 43(5), pp.500-510.

Holderness, C.G., 2009. The myth of diffuse ownership in the United States. Review of Financial Studies, 22(4), pp.1377-1408.

Keeney, R. and Hertel, T.W., 2009. The indirect land use impacts of United States biofuel policies: the importance of acreage, yield, and bilateral trade responses. American Journal of Agricultural Economics, 91(4), pp.895-909.

Morrison, S. and Winston, C., 2010. The evolution of the airline industry. Brookings Institution Press.

Nidumolu, R., Prahalad, C.K. and Rangaswami, M.R., 2009. Why sustainability is now the key driver of innovation. Harvard business review, 87(9), pp.56-64.

Oum, T.H. and Yu, C., 2012. Winning Airlines: Productivity and cost competitiveness of the world’s major airlines. Springer Science & Business Media.

Porter, M.E., 2011. The competitive advantage of nations: Creating and sustaining superior performance. Simon and Schuster.

Rothaermel, F.T., 2015. Strategic management. McGraw-Hill.

Shapiro, A.C., 2008. Multinational financial management. John Wiley & Sons.Sklair, L., 2010. Assembling for development: The maquila industry in Mexico and the United States (Vol. 98). Routledge.

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