The Airline Industry

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Table of Contents

1) Abstract ……………………………………………………………………………… 3

2) Introduction …………………………………………………………………………… 4

3) Organization, Products and Services……………………………………………. 5

4) Major Players in the airline industry……………………………………………… 6

a) Aircraft Departures……………………………………………………….. 7

b) Passengers Enplaned……………………………………………………… 8

c) Revenue Passenger Miles………………………………………………… 8

d) Cargo Revenues………………………………………………………….. 9

e) Operating Revenues……………………………………………………….. 9

5) Factors considered for competitive success………………………………………….. 10

6) Logistics and supply chain factors…………………………………………………….. 11

7) Growth trends, Revenue size and significant statistics in the airline industry………… 14

8) Conclusion……………………………………………………………………………… 15

9) References ………………………………………………………………………………17

10) Appendix………………………………………………………………………………. 19

Abstract

Purpose: To provide an account of the airline industry with an in-depth pursuit of its state of affairs, past and present, as well as economic implication of this ever-growing industry

Design/Methodology/Approach: This study was carried out by analyzing the organization of the airline industry, as well as the products and services that are offered as a process. Furthermore, a study of major players in the airline industry was carried out, thereby seeking an understanding of factors considered for competitive success. Consumer confidence surveys carried out by major airline companies were scrutinized in the process.

Findings: It was found that 2 different traveler needs presented various opportunities and challenges to an airline. 4 main categories were noted amongst players in the airline industry. The major players in the American airline industry are based on 5 key performance indices. Other influential factors included logistics and supply chains, as well as labor, which were noted as the highest expense for most airlines. Growth trends, revenue size and significant statistics in the airline industry were noted as being positive in Europe and North America, which was at the expense of their Asia/Pacific competitors.

Research Limitations/Implications: Prospective research into the industry should consider other external factors affecting the airline industry including rising fuel prices and the global economic recession. The direct or indirect implications of such factors are not easily discernible especially due to the variety of other co-factors affecting each aspect of the industry.

Originality/Value: This paper provides an array of factors that affect the airline industry which may not be noticed from a micro-study level. The research fills the void provided by an analysis of a singular factor affecting the industry as well as other limitations arising from the lack of study into consumer habits, confidence and marketing approaches.

Keywords: airline industry, consumer confidence, competitive success, logistics, supply chain factors, growth trends, revenue size, significant statistics

Paper Type: Research Paper

The Airline Industry

Introduction

The airline industry, and associated air travel, represents a significant and growing industry in the modern economies of the world. The industry acts as a facilitator to economic growth, global trade and investment as well as playing the role of a major variable in other industries in the process of globalization. An assessment of the airline industry is incomplete without delving into a brief history of the industry. In 1903, the American Wright brothers made history in Northern Carolina with the first successful manned flight in history, the maiden flight of their craft ‘Kitty Hawk’. In the years following their milestone and after numerous advances in flight that made the option of air travel viable, the public was not keen to embrace the new development in travel as yet. However, the involvement of the United States in World War 1 provided the first stimulus to the industry. The government embarked on a major funding program for research and development in the airline sector.

The dawn of World War II and the subsequent entry of the United States into the military affairs saw the country send its air force as well as commercial planes and pilots to Europe to participate in the Allied effort. Again, research and development into aircraft went into overdrive with impressive milestones such as the post-war development of the four engine aircraft such as the Lockheed Constellation taking place. Continental and cross-ocean flights were now viable at a large scale commercially. Travel by ocean liner and rail en masse gradually fell as the jet service was launched in 1959. Major collisions in the air in the 1950’s prompted the passing of the Federal Aviation Act in 1958. Following the acts passage, the Federal Aviation Administration was (FAA) was created and given the mandate to develop a secure efficient system for traffic control (Yosef, 2005).

This paper attempts to provide an account of the airline industry with an in-depth pursuit of its state of affairs, past and present, as well as the economic implication of this ever-growing industry. From the analysis provided, the paper is aligned to the purpose of providing a clear outline of the existing industry as well as the players involved. It is also important to note that the boundaries of the airline trade are defined according to traveler needs with major players having to contend with various factors such as supply chains, labor as well as diverse logistical issues that will be discussed below.

Organization, Products and Services

An airlines revenue base is and can be extremely varied dependent on the size and type of airline in question (Robbins & Coulter, 2008). Revenues are generated from regular and business passengers boarding fees, the sale of ‘frequent flier miles’ to other companies and organizations, fees for the transportation of cargo and the sale of in-flight services to the customer/passenger. This considered it is important to note that the overwhelming majority of airlines generate the majority of their revenues from regular and business passengers boarding fees. With this in mind, it becomes paramount for airlines to factor in consumer and business confidence at the very top of all factors under consideration (Plunkett, 2008)

This state of affairs therefore highlights the importance of regular consumer confidence surveys by any airline seeking to maintain a healthy bottom line at the marketplace. The business traveler and the leisure traveler present different opportunities and challenges to an airline. Business travelers are unique to the airline since they present the type of customer most likely to travel several times in the course of the year and in some instances to the same destination repeatedly. In addition, the business traveler is the customer most likely to purchase upgraded airline services that have highest margins for the airline such as premium services. Leisure travelers on the contrary are less likely to purchase such services and their passenger numbers typically decline in climates of economic strain and times when consumer confidence is on an industry low (Tarry, 2006)

Major players in the airline industry

The U.S. Department of Transportation (DOT) categorizes the airline industry into four succinct categories. There is the ‘international’ category whereby you have 130+ seat planes with the capability to ferry passengers to any destination around the world. Companies operating businesses in this category typically command revenues of $1 billion or more. Under the ‘national’ category, there are planes with seating for approximately 100-150 people and companies run businesses typically operating with revenues of between $100 million and $1 billion (David, 1997). Under the ‘regional’ categorization, there are companies operating businesses with revenues less than $100 million, which place their focus on short-haul intra-state and in some instances, inter-state travel routes.

Finally, the (DOT) has the ‘cargo’ categorization whereby companies running businesses in this categorization generally transport long-haul high value and perishable goods such as horticultural produce. Critical factors in any airline industry include a myriad of variables discussed below. The airline deals with factors of airport capacity, route structures, technology acquisition and the overheads of purchase or lease of aircraft. Various airlines for instance have been forced to reconfigure their operations following the acquisition of aircraft too big to land at some of their global/regional airport destinations. Technology is also rapidly developing in the aviation sector and the costs and logistics of its acquisition and implementation on a regular basis is a critical factor in the industry.

The major players in the American airline industry based on five key performance indices: number of aircraft departures, number of passengers enplaned, revenue passenger miles, cargo revenue, and operating revenues.

In terms of aircraft departures, the ten largest players in the industry are shown below:

In terms of passengers enplaned, the ten largest players in the industry are as shown in the table below:

In terms of revenue passenger miles, the ten leading players in the industry are as depicted below:

The ten largest airlines in the US in terms of cargo revenues are as shown below:

In terms of operating revenues, the ten largest airlines in the US are:

The airline industry is also experiencing competition from small, low cost carriers prompted by the acts of deregulation in the industry in North America and Europe. The United States aviation industry pioneered and commenced the process in 1978 and the Europeans have just recently followed suit, with their last stage of deregulation taking effect as from April 1997. This saw them permit airlines from one member state to ferry passengers within another member states domestic market. Beyond North America and Europe, the adoption of ‘open skies’ agreements between countries is beginning to ease the rules and regulations governing which flights are permitted on certain routes. Despite these developments, the global aviation industry has fervent nationalistic inclinations that mean that airlines globally continue to contend with limitations concerning approved flight paths and the ownership and privatization of foreign carriers (Smyth & Pierce, 2006)

Factors considered for competitive success

Considering the critical role profitability plays in an airlines’ debt reduction, reserves accumulation and investment sustenance, airlines today have resorted to radical changes to ensure survival and profitability. These include stringent cost cutting which often implies mass layoffs and efforts to increase load factors. In spite of the extremity of these actions, they have proven effective since the airline industry today, as a whole is in profitability despite a number of airlines remaining perpetually unprofitable. The industry is also in a phase where the modern customer is very discerning and demanding translating into the need for heavy investment in the improvement of services both in the air and on the ground by the industry players. For instance, today it is perceived as standard to enjoy ticket-less travel, ergonomic seating and advanced entertainment systems in routine flights (O’Conner, 2001)

The analysis explores various factors affecting and determining an airline company’s competitiveness, they include the threat of new entrants, the power of suppliers, the power of buyers, the availability of substitutes and competitive rivalries. Considering the ‘threat of new entrants’; at face value, the airline industry seems difficult to verge into but the reality is that, in a healthy economy with a good borrowing environment (borrowing is cheap), the chances of new airliners accessing entry into the industry remain enhanced. The industry is then at risk of saturation. The development of a strong brand name as well as incentives by an airliner along with the establishment of frequent flier miles for consistent customers is a step towards mitigating competition that a company in the industry can adopt (Gowrisankaran, 2002)

Considering the ‘availability of substitutes’ a question is proposed; what are the chances that a potential airline customer will prefer the road or the railroad as a means to his/her preferred destination? The answer to the question varies among different types of airline companies. For instance, for a regional operator, the threat posed by these alternative modes of travel is significantly higher than that for an international operator. Considering the ‘competitive rivalry’, an airline, to be successful must prudently manage the cost of competition. This is bolstered by the fact that statistically; it holds that highly competitive industries generally have lower returns in most business enterprises, the airline industry notwithstanding. The need for prudent management of the same thus becomes clear.

Logistics and supply chain factors

Considering the ‘power of suppliers’, in the modern airline industry, the majority of the plane supply enterprise is monopolized by the two corporations Boeing and Airbus. This means the competition in the plane-supply business environment is not very stiff with only two players. This is disadvantageous and advantageous to the airline. It is negative since it means that the costs of buying and leasing aircraft are unlikely to come down in the short and medium term. It is positive since it means that the chance of the suppliers vertically integrating by diversifying and starting to offer flight services is highly unlikely. Considering the ‘power of buyers’, it is evident that the haggling power of buyers in the airline industry is significantly low. This implies that high costs are involved in the replacement of planes in order to maintain service quality competitiveness of an airline (ATW, 2007)

Source: FAA. (2008). Retrieved on 21 March 2010 from http://www.faa.gov/

By sourcing aircraft from only one manufacturer, many airlines have also been able to reduce training and aircraft maintenance costs. E-procurement has also been widely adopted, as has been the use of radio frequency identity (RFID) tags, among other technologies. Advances in technology have also enabled airlines to respond to concerns about the need to improve their carbon footprint. By operating through the point-to-point model rather than the hub and spoke model, airlines have also been able to lower their operational costs substantially. Simultaneous with the deployment of these cost reduction initiatives has been the attempt to deliver superior value by taking advantage of emerging technologies to offer cutting edge in-flight entertainment for example (ATA, 2009)

Other factors affecting the airline industry include weather, fuel cost and labor. Weather especially, is an unpredictable and significant variable. Extremes of weather such as heat waves, heavy snow and fog can warrant the shutting down of operations in an entire airport or even region, a costly preposition for the airlines. An example is cited of the Gulf of Mexico region of the United States whereby regional airports and other auxiliary transport facilities are almost annually closed down in response to hurricane warnings during hurricane season in North America. Fuel cost is also a major factor to contend with. The Air Transport Association (ATA) considers jet fuel as an airlines second largest expense in their accounting books. Despite the fact that fuel efficiency among different airlines has a high degree of variability, the short haul routes generally have lower fuel efficiency due to their regular fuel intensive take off’s and landing’s (ATA, 2009)

The labor factor then presents itself. According to ATA, labor presents an airlines highest expense in their balance sheet (ATA, 2009). The airline must pay the multitude of different workers running the business. The pilots, technical staff, flight attendants, baggage handlers, customer service and administrative team all have to be adequately remunerated for the critical services they provide to the airline in its daily operations. For further comprehension of the airline industry, it is in order to define a number of key ratios and terms pertaining to the industry. The ‘Available Seat Mile’ refers to the total number of seats available for customer transportation multiplied by the number of miles flown during the period. The ‘Revenue Passenger Mile’ refers to the number of revenue paying passengers multiplied by the number of miles flown during the period. The ‘Revenue per Available Seat Mile’ refers to the total revenues earned divided by the number of seats available.

The ‘Air Traffic Liability’ meanwhile, is an estimate of the amount of monies that have been received for the sale of passenger tickets and cargo space that is yet to be provided by the airline. This figure is critical and should be accurately determined and removed from the company revenue figures when computation of revenues is being done. Another term, the ‘Load Factor’ is an indicator that the ATA compiles on a monthly basis. The load factor is a measure of the proportion of available seating capacity in the aircraft that is actually filled with passengers. The market convention held is that once the airlines’ load factor breaks even, then revenue exponentially trickles down to the bottom line. The clincher is that during holidays and vacations, the load factor can and usually is significantly enhanced, presenting a great opportunity to expand the bottom line.

Growth trends, Revenue size and significant statistics in the airline industry

Growth in Europe and North America where the industry is already highly developed will register some growth in the coming years but the figures pale in comparison to the growth figures expected from the Asia/Pacific region. A myriad of factors will drive the growth here including rapidly growing trade and investment in the region and rising domestic incomes and prosperity. However, the principal air travel markets of the future will continue being in Europe, North America and Asia (IATA, 2009). Of note is the relationship between airlines’ profitability and economic growth and trade. For instance, the depression of global trade triggered by the housing market bubble in the United States in 2008 witnessed airlines suffering immense losses with the imminent collapse of giants such as Japanese Airlines (JAL).

The graph below depicts the decline in air travel demand in the 2008 depression:

Source: IATA (p.13).

Business travel on its part has also grown enormously. With the advent of globalization and businesses subsequently becoming international in terms of investment, customer pool and supply-production chains, business travel have taken a prominent role. Business travel has also benefited from other global developments apart from globalization. The world has experienced rapid growth in global trade of goods and services between countries and economic federations, making business travel commonplace among the public. Similarly, the entry of Asia in earnest to the global economy as a major player has also played a role in the increase of the numbers of business travelers globally. Globally, the International Air Travel Association (IATA), forecasts that growth in the airline industry will continue posting impressive figures up to 2010 and beyond (IATA, 2009)

Conclusion

The US airline industry is one of the key sectors of the country’s economy. Employing over ten million people, it contributes up to half a trillion dollars in annual revenues (about 5% of the US GDP). In recent years, the industry has been faced with major challenges arising from its external environment. Some of these include rising fuel prices and the global economic recession. As a result, growth in the industry has significantly slowed down with the ATA estimating that by the end of 2008 the industry had lost between $9 and $24 billion (FAA, 2008). Players in the industry have responded to these challenges in various ways. Cost reduction initiatives undertaken have included the adoption of technology to cut costs. For example, airlines have revamped their distribution channels. Through the adoption of e-ticketing and internet based selling, they have been able to sell their seats directly, thereby cutting out the middleman and registering substantial cost savings (Tarry, 2006).

As was with the objectives of the paper, an attempt has been made at providing further analysis of the airline industry, with the factors affecting major players discussed at length. It has been noted that despite the operational complexities confounding the airline industry, the industry has continued to proceed inexorably along a path of globalization and consolidation. These are traits in keeping with industries of similar complexity and size in today’s modern economies (Robbins & Coulter, 2008). The industry has achieved this through the setting up of working relationships and financial partnerships between airlines, simultaneously creating links between their networks and expanding their access to their customer base. The alliances have been varied in type and function. Some are only marketing arrangements while others include code sharing with franchises while others involve equity transfers as well. Following that overview of the global airline industry structure and function, it is extrapolated the outlook for the industry is that of strong sustained growth. The successful airline will be that which judiciously tackles its costs, enhances its products and therefore secures a strong presence in lucrative global aviation markets.

References

Air Transport Association (ATA). (2009). A new vision for moving America. Retrieved on 21 March 2010 from http://www.airlines.org/NR/rdonlyres/83BC223A-6855-4257-B74C-209A43C70F65/0/2009AnnualReport.pdf

ATW. (2007). The electronic supply chain, Airline procurement. Retrieved on 21 March 2010 from http://www.atwonline.com/channels/airlineprocurement/article.html?articleID=1979

Bilotkach, V. (2009). Market segmentation and airline networks. Retrieved on 21 March 2010 from http://www.its.ucla.edu/uctc/PowerPoints/Bilotkach_UCI.pdf

David, FR. (1997). Concepts of strategic management. New York, NY: Prentice Hall.

FAA. (2008). The economic impact of civil aviation on the US economy. Retrieved on 21 March 2010 from http://www.faa.gov/about/office_org/headquarters_offices/ato/media/2008_Economic_Impact_Report_web.pdf

Gowrisankaran, G. (2002). Competition and regulation in the airline industry. Retrieved on 21 March 2010 from http://www.frbsf.org/publications/economics/letter/2002/el2002-01.html

International Air Transport Association (IATA). (2009). Annual report 2009. Retrieved on 21 March 21, 2010 from http://www.iata.org/NR/rdonlyres/A33BC4B3-431B-4690-BE6D-6788900C8AE3/0/IATAAnnualReport2009.pdf

O’Conner, W. E. (2001). An introduction to airline economics. Greenwood Publishing Group.

Plunkett, J. W. (2008). Plunkett’s Transportation, Supply Chain and Logistics Industry Almanac 2008: Transportation, Supply Chain and Logistics Industry Market Research, Statistics, Trends and Leading Companies. Houston, TX: Plunkett Research.

Robbins, S., & Coulter, M. (2008). Strategic management. John Wiley and Sons.

Smith, FL., & Cox, B. (2008). Airline deregulation. Retrieved on 21 March 2010 from http://www.econlog.econlib.org/library/Enc/AirlineDeregulation.html.

Smyth, M. & Pierce, B. (2006). Airline cost performance. Retrieved on 21 March 2010 from www.iata.org/NR/rdonlyres/52205DC1-8AE5…/CEOBriefSept2006.pdf

Tarry, C. (2006). Managing the airline economic cycle. Retrieved on 21 March 2010 from http://www1.iata.org/NR/rdonlyres/EE372C10-D333-4CF2-A858-30865DD97C6D/0/Economic_Cycle_Tarry.pdf

Tsoukalas, G. (2007). Convergence in the US airline industry: a unit cost and productivity analysis. Boston, MA: Massachusetts Institute of Technology, Dept. of Aeronautics and Astronautics.

Yosef, E. B. (2005). The evolution of the US airline industry: theory, strategy and policy. Springer.

Appendix

Data courtesy of the U.S. Airlines website. Accessed April 7, 2010 from http://www.usairways.com

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