Friday, February 22, 2019
Air Industry Analysis Essay
Executive Summary air hoses companies atomic enumerate 18 under(a)going study changes to cope with the saucy ch in allenges of the modern thriftiness. Geopolitical factors, such(prenominal) as war and terrorism, the financial crisis of 2009, high penetration barriers, as well as uttermost(prenominal) weather events, ar some of the factors that be driving these changes. be in raise prices, nets and ticket prices ar some of the look at drivers of this multi-billionaire assistance. Also, on that point has been an persistence-wide shakedown, which will save far-reaching effect on the manufactures trend towards expanding ho example servant and international run. The perception that air decease is an trial by ordeal unfolds to grow, making it very difficult for air ducts to charge the higher prices that are unavoidable to re let go to favorability. Today airlines provide a vital service, and factors including exchangeable the continuing existence of loss-m aking gondola carriers, bloated cost structure, vulnerability to exogenous events and a character for poor service combine to present a huge check to advanceability. While a handful of low-cost airways conduct conquest beaty managed to gage logical profits, by and large, profitable air hose businesss are a couple of(prenominal) and far between. establishmentThe global air lane pains provides transportation to to the highest degree every respite of the world. The airline companies employ m whatever people, hold multi-billion dollar equipment inventory, and generate billions of dollars in course of instructionly gross revenue. It facilitates economic growth, world trade, international investment and tourism. However, the effort can be very vulnerable to government regulations, economic influences, utmost(a) weather events and geopolitical factors such as war and terrorism.The SIC/NAICS mandate for the industry is 4512 /4811. The NAICS term for the industry is do cument air transportation . The industry is further classified into 2 NAICS codes 481111 for Scheduled rider transportation and 48112 for Scheduled Freight Transportation. Per NCAIS, This U.S. industry comprises establishments primarily engaged in providing air transportation of passengers or passengers and freight over regular routes and on regular schedules. Establishments in this industry operate dodgings even if partially loaded. Scheduled air passenger carriers including commuter and helicopter carriers (except scenic and sightseeing) are included in this industry. fibThe commercial message airline industry in the US grew at a fast rate after the military personnel War III. The commercial strain industry in the United States has grown dramatically since the end of World War II. In 1945 the major(ip) airlines flew 3.3 billion revenue passenger miles (RPMs). By the mid 1970s, when deregulation was beginning to develop, the major carriers flew 130 billion RPMs. By 1988, af ter a decade of deregulation, the number of domestic RPMs had reached 330 billion (Source Winds of Change). Up to the 1970s the industry was heavily regulated around the world. However, in 1976 under the recommendation of the Civil Aeronautics Board (CAB), the regulatory system was destroy by the US Congress. Most of the industrialized world soon followed suite. The Airline Deregulation Act passed in the US in 1978 eased the intromission of sunrise(prenominal) companies into the business concern and gave them freedom to set their own fares and travel whatsoever domestic routes they chose. This lead to a swarm of saucy entrants, lower fares and the possible action of new routes and services to all over the country.OrganizationThe major bully expenditure for the airline industry is the cost of the airplanes. Boeing and Airbus are the two major providers of aircrafts to the industry. Other than that the Airports Authorities are the other major service providers to the airline industry. Airline fuel is a nonher major product the the industry buys from external suppliers. The industry itself provides the rest major services- Flight operations, aircraft maintenance, passenger service ( (in- escapism food, flight attendants) and Aircraft traffic services (baggage and passenger handling).Governmental FactorsAs mentioned earlier government factors play a handsome role in the industry. The growth of the industry post the 1976 deregulation illustrates this point. Government policies that bear upon the economy besides vex a big partake on the industry profits as was seen during the 1990 global recession and the 2001 US economic downturn. Wars and Geopolitical tensions that impact the airline fuel supplies also pose threat to the industry.Environmental FactorsEnvironmental factors such as bad weather conditions can force planes to be delayed, canceled or even to divert to other airport. In such cases the airlines are forced to pay for lodging and meals o f the affect passengers and in some cases refund tickets. An extreme sample of this is the airline disruption caused by the ash from the volcanic clap in Iceland in 2010. It could flummox cost the industry more(prenominal)(prenominal) than $1.7 bln harmonize an estimate by the International Air Transport Association (IATA). trade place StructureThe airlines industry has undergone major changes since 1978 collectible to the deregulation and the economic liberalization, where restrictions on the routes and fares charged were removed. Thus in order to obtain the cost economic and to concentrate traffic to one airport the Hub-and-spokes was created to move passengers from smaller cities and self-contained a group of passengers in a major city airport to be transported from a major hub of one city to another major hub. This new system allows the airline industry to retain the oligopolistic grocery due to the huge barriers that obstruct challenger. From one hand the government regulations established barriers for airports such us a slot management system that demonstrate on that point is a failure in the investment of governments in adequate infrastructure, entrance cons askts due to exclusive leasing arrangements and gates usage in congested cities is constrictive the entry disdain the share usage between airlines.Airlines need matter of course because they have invested billions of dollars in aircraft. They must be certain they will have access to the infrastructure for the next 25-30 years and this is why historic (grandfather) rights are appropriate. (Airlines International, 2010). On the other hand the hub and spoke system allows major airline firms to restrict the entrance of new competitor, because they have captured the mart of small and big cities with a large economy of scale and a big profit margin, price flexibility, and other rights give care reserved slots that was very difficult to be matched by new airlines, protecting them from new competitors developing a bestride oligopoly where the prices are set by the leaders and the others airlines followed, practicing parallel pricing.All the studies reviewed suggested that despite the benefits of airline deregulation, there are many factors that go alongd preventing airlines to get advantage of this economic deregulation due not only to the airport restrictions nevertheless also due to computer-reservation systems, benefits of frequent-flyer programs, economies of scale of operation. This fact can be shew after the deregulation when many new airlines attempted to get into the market but the majority failed due to the high cost associated with gates, slots and other airports facilities did not let them to compete with prices as a result this new competitors were acquired by the already established ones. (Seng, 2007)According to RITA, the U.S., Research and Innovative Technology federal part Transportations statistics the largest carrier for domestic market from M ay 2011 by dint of April 2012 was Delta followed by Southwest and American (see table No.1.) It is important to mention that with the uniting of United and Continental, they could become the largest carrier if the tendency remains. (Jenkins, 2011) As we can observe, the 55.9% of the market is hold by Delta, Southwest, American, and United,. In order to open the market for new carriers and generate airfare competition the government has to work on expanding the access to new gates, baggage claim areas and slots, otherwise the existent oligopolistic market will come just about prevailing. labor DemandThe US airline industry demand is affected by the current market that has generated unstable conditions due to the high habituation and reaction to many factors like regulation, fuel price, inflation, pledge and competition. In addendum this industry was also affected by the financial crisis during 2009 that had a with child(p) impact in market demand, thought due to the revival o f the economy the travel demand has started improving since 2010. According to RITA There were 2.1 percent few passengers in the April 2009 to April 2010 period compared to April 2008 to April 2009. From the year ending April 2010 to the year ending in April 2011, system wide passenger poem on US airlines change magnitude 2.9 percent (Smallen,2011) As a result of the deregulation of the airline industry in 1979 the traffic of passengers increased and the ticket prices decreased. In this environment there was more competition and less demand, the operating cost and margin profit were affected and the major firms filed for bankruptcy falling from six major airlines (united, America, Delta, Eastern, TWA, and genus Pan Am) to three by 1991 (United, American and Delta).The new challenge for airlines was reconfigured routes and making improvements in capacity and utilization to reach the expected efficiency and offer best service to the general humankind. Indeed security had a undis charged impact on the demand of airlines. After attack of 9/11 domestic passengers demand went down by more than 30 percent, which caused a reduction on routes and numbers of flights not to mention that planes were grounded and thousands of workers were laid off. To rebuild the semipublic confidence in the air transportation, both airlines and government started working together. These security measures have managed to allay the public fear. According to Bisignani, scorn severe shocks in recent years-including the attacks of Sept. 11, 2001, and outbreaks of avian flu-the demand for air travel is at platter levels and is expected to grow an average of 6 percent each year for the foreseeable future. People need to fly. More important, people want to fly. ( Bisignani,2006)The peak in oil prices during 2008 and the financial crisis during 2009 affected and slowed down the numbers of passengers ,specially leisure travelers, as the prices of oil pushed up fares, and peoples availabl e income decreased. The demand for business travel also shifted left. The industry responded with fiercely competing on the airfare which resulted in huge revenue losses and forced major airlines like American Airlines to be restructured. The airline industry overcame this crisis due to peoples need to fly for business and personal purposes and due to the absence of any other alternate mode of long-distance transportation. The use of utility(a)s such car, train diminishes with distance travelled. This demonstrates that the demand for air transportation is inelastic for longer flights and for business purposes.The lack of substitutes let the airline industry to move without a corporeal external competitor, the passenger trains, bus and personal automobiles are not a viable option for traveling long distances and for business travel. In appendage for leisure purposes the demand is more elastic because travelers are more in all probability to change destination or postpone trips ex pecting lower ticket prices. notwithstanding the events of security breaches, wars and the economy, the demand for air flight has increased and is expected to continue increasing. The airlines continue to compete among themselves with pricing and offering complementary goods such hospitality, policies, car rental, hotels and tourist packages as the opportunities to improve their sales.Cost structureIn the airlines industry, fix be are high, while changeable cost tend to be low. Costs are dictated and unsettled at varied points in cartridge clip. That is, the eonframe in this market is important to categorize cost on their congeneric to output. With the commoditization of air travel, cost structure is now a key supremacy factor in the industry. Central cost items are fuel, capital and operate be. Costs in fuel prices, which are exogenous as is the sequence series for the average fuel efficiency of planes constant dollar tot per seat mile that grows at the rate indicat ed by the Producer equipment casualty Index and wages, which are establish on several factors, such as inflation, industry margins, and average worker tenure. Concerning wages, they are stock-still cost in short term decisions and variable in the longer term, where total wage costs change in relation to volume of activity as a result of recruitment, retirement, and dismissals. Consequently, effective management of fuel, maintenance, and labor costs is mandatary in the current environment in this industry (Harmsen, 2007). Fixed costs are costs that are unaffected by changes in volume.These costs are always constant even when production varies. One suit of amend cost is rent of premises. In the extremely short term, all costs are fixed, while all costs may be regarded as variable in the very long term, which will be described later, in this section. A good example to illustrate could be long-term leasing aircraft leasing contracts. In the short ply the airline would be ineffectua l to avoid these payments no matter how it adjusts output. Therefore, lease payment is a fixed cost in the short run, but in the long run they are variable, because contractual obligations will expire (Vasigh, Fleming, & Tacker, 2008). Variable costs are costs that increase or decrease with fluctuations in production. In the aviation market, infrastructure, exsert, and the bulk of the fuel are often placed in the variable cost bracket.These normal variable costs are then alter by the eect of congestion, since large load factors add costs from increased services, cancellations, and many other sources. As mentioned on the fore above, costs in the airlines industry are fixed and variable at polar points in time. For the purpose of pricing, for instance, a cost structure is required that expresses the time horizon at which different cost categories may be considered fixed and variable. We will describe them with at least three different time spans medium-long term, short term, and v ery short term, as follows. * Medium-long term once the schedule is in place, the costs of operating air services are comparatively fixed. This means that capital costs for aircraft, pilots wages, technical staff and other competent labor cannot be influenced.* Short-term once the carrier decides to embark on the flight, all costs under the medium-long term heading become fixed as do the costs for infrastructure charges (except passenger service charges), wear and the bulk of the fuel. * Very short term the costs for ticketing, food, travel agency commissions, and extra fuel consumption due to the advent of an extra passenger become fixed once the carrier has decided to accept a ticket reservation. Moreover, wage, capital, and fuel costs are decided to a great extremity in markets where it may reasonably be assumed that a single carrier has little influence over prices. Experience shows, however, that major carriers are able to influence all the above costs by means of negotiatio n. It is very difficult to observers outside the airline industry to assess the extent of these potential negotiating gains.Analysis of Competitive Forces (Porters five forces)The threat of entry by new competitorsThe threat of entry by new competitors in the Airline Industry is moderate. Being a capital intensive industry, new entrants would require large amounts of money. However, with easy access to bank loans and credit the likeliness of new airlines entering the market has risen. There are still a lot of barriers to entry in the industry. Higher Oil prices would require the airline to operate at full capacity to be profitable and smaller airports do not provide sufficient passenger traffic.New entrants would also have difficulty getting gates at the airports which major airlines use as their hubs. This acts as a barrier for them to operate on more lucrative routes. Major airlines also have stronger brand recognition and have garnered customer loyalty through their frequent fly er programs. Skybus Airlines, Independence Air, ATA Airlines and Maxjet Airways are among the most recent examples of new entrants that have failed to survive in the industry. in time Virgin America, the most successful of new carriers, has so far failed to turn a profit since entering the market 5 years ago. So while entering the new market might be easy, success stories such as that of Southwest & AirTran & JetBlue have been far and few.Pressure from substitute productsThe pressure from substitute products is weak for the American airline industry. Air travel beingness the fastest way to travel from one origin to another has no true substitute. Lack of extensive and long distance public transportation system inwardly US reduces the likelihood of someone taking a train or bus to their destinations. Furthermore, time consumption and gadget would also discourage customers to take these options or to drive themselves.However emerging technologies could, in a long run, generate vi able substitutes. For instance, more and more companies adopting video-conferencing could impact business travel for meetings and discussions. People could opt for using online chat to virtually meet with their friends and family instead of spending large amounts of money on airline travel. The intensity of rivalry among existing competitorAirline industry is exceedingly competitive as there are several airlines operating on the corresponding routes. These airlines compete by trying to differentiate themselves from others by providing different services low-fares, frequent flyer membership privileges, no baggage fee, no cancellation fee etc. Competition between the majors and the low-cost carriers has resulted in a downward pressure on the fares, benefiting the travelers but at the same time lowering the revenue for the airlines (see figure). This combined with lower demand and intemperance capacity has lead to a consolidation trend in the industry. new-fashioned consolidations include United & Continental, Delta & Northwest and Southwest & Airtran. Such consolidations could lead to monopolisation of a market where the majors already rule the roost.The Bargaining billet of emptorsThe buyers are the passengers, for either business or leisure purposes. In the aviation market, the bargaining power of buyers is quite low. The power that airline customers have varies based on the options available to them and the origin-destination city pair. Even though there are high costs involved with switching airplanes, there is not practically ability to compete on service. For instance, the seat in one airline is probably not more comfortable than another, unless a potential buyer is analyzing a luxury liner.Other macro environmental trends are the weather, which is variable and unpredictable, and may shut down airports and cancel flights and airport capacities. Hence, there are pockets where some airlines have pricing power. In this case, the overall airline indu stry is characterized by significant buyer power stemming from the intense price competition among airlines (Sundaresa, 2009). Since the concentration and size of the buyers in the airlines industry is relatively lower than the number of suppliers it is not difficult to observe that buyers are more aware of the price, product, and services and discounts available at their disposal.The bargaining Power of SupplierThe three major inputs for the airline industry are airplanes, labor and fuel. In terms of suppliers of commercial airplanes there are three major Air Bus, Boeing and McDonnell Douglas, it seems like this few suppliers will have great power in the industry but instead they compete between themselves developing technology, capacity of passengers, mechanics reading and giving solutions to improve cost effective exploitation of airplanes between others.The stake input is labor such as pilots, mechanics, ground personnel and flight attendants , in general they are unionized pl aying a little role in the industry. According to IATA About half of all workers in the air transportation industry are unionized, 49.3% of workers being union members and 51.6% being covered by collective bargaining agreements in 2006 (http//www.iata.org/whatwedo/Documents/economics/Hirsch_Unions_ engage.pdf) The fuel is an important variable due to the price and its volatility but the market has many suppliers that compete to sell large volumes of fuel but they do not control the price because it is an external factor. (Hirsch, 2007)ConclusionThe growth in the airlines industry shows no signs of slowing. The recent industry-wide shakedown will have far-reaching effects on the industrys trend towards expanding domestic and international services. Despite the events of security breaches, wars and the economy, the demand for air flight is expected to continue increasing. The airlines continue to compete among themselves with pricing and offering complementary goods such hospitality, policies, car rental, hotels and tourist packages as the opportunity to improve their sales. The industrys challenges for the 21st snow are the rising costs of fuel, labor, maintenance and security, the impact of technology, such as telecommunication and video conferencing, as well as bankruptcies and shutdowns. However, the overall aspect of demand has been consistently increasing. Growth rates are not consistent in all regions, but countries with a deregulated airline industry have more competition and greater pricing freedom.This results in lower fares and sometimes dramatic spurts in traffic growth. Moreover, in the aviation market, consolidation is a trend. Airline groupings may consist of limited bilateral partnerships, long-term, multi-faceted alliances between carriers, impartiality arrangements, mergers, or takeovers. In summary, the perspectives for the airline industry are bright and it also holds many challenges. Macro-external environment may directly affect is prof itability and operation. utter cost airlines have radically altered the nature of competition within the industry. For low cost, the airlines companies should continue maintaining the existing business model by reducing the cost to improve their product. Turning a profit in a competitive industry with high fixed costs isnt about gouging consumers on baggage fees. Rather, its about paying careful attention to numerous behind-the-scenes expenses, and looking for opportunities to charge passengers for optional extras while guardianship ticket prices low.ReferencesLee, Tail (2002). Competitive Airlines. Retrieved July 13, 2012 from http//www.scribd.com/doc/58820847/31/The-cost-structure-of-the-airline-industrypage=53 Pierson, Kawika (2011). Cyclical dynamics of airlines industry profits. Retrieved July 13, 2012 from http//willamette.academia.edu/KawikaPierson/Papers/461653/Cyclical_Dynamics_of_Airline_Industry_Profits Sundaresa, Sankar R. (2009). Introduction analysis of the airline industry. Retrieved July 17, 2012 from http//bcs.solano.edu/workarea/mgarnier/MGMT%2050/Southwest%20Porters%20-%20Brief%202.pdf The industry handbook The airline industry. Retrieved July 13, 2012 from http//www.investopedia.com/features/industryhandbook/airline.aspaxzz20tWDcbCM Using macro and micro environment analytical techniques provide a comparative analysis of leadership and the external environment for the following four airlines AirTran, Delta, West Jest, and Air Canada. (n.d.) Retrieved July 8, 2012 from http//www.businessteacher.org.uk/free-management-essays/environmental-analytical-techniques/Smallen Dave (2011) April 2011 Airline System Traffic Up 1.4 Percent fromApril 2010. 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