Airline Industry Essay

Many people assume flying is a fairly new endeavor. However, although the first few years of the 20th century were a risky time for flying, it did exist. It wasn’t until 1925 that flying became more common. This began when the Air Mail Act took place, which enabled the post master to contract with private airliners to deliver mail, developing the airline industry. Shortly after, the Air Commerce Act gave the Secretary of Commerce power to establish airways, certify aircraft, license pilots, and issue and enforce air traffic regulations (Harris, nd). Within ten years many modern day airliners such as United and American had emerged as great players in this up and coming industry. In 1938 the Civil Aeronautics Act was established creating the Civil Aeronautics Board. This board’s two most significant functions were determining airlines’ routes of travel and regulating prices for passenger fares (Harris, nd). The Federal Aviation Administration was created in 1958 to manager and regulates safety operations and in 1978 the era of unencumbered free market competition would finally take place due to the Airline Deregulation Act. Airliners have come a long way. With special accommodations such as first class, food and beverage available, and often times even radio or television. Often times, it is easy to find a deal for tickets such as packages. Some examples would be round a bout trips, or package deals on hotel rooms, inclusive food, and the trip back home. The Airline Industry Business model can be easily broken down into five models. First, the buyer and second is supplier power in the industry. â€Å"Airbus and Boeing dominate the jetliner market, so it makes it hard for other suppliers to have a lot of power in the industry, â€Å"(â€Å"Airline Economics, p.14, 2010). Different types of Carriers are demanded in the industry, depending on what it is used for. So, a lot of suppliers find it easy to get into the industry thanks to the buyers. â€Å"Competition from low-cost carriers such as Southwest Airlines tends to strengthen buyer power in the airlines market, where United Airlines, for example, has a Mileage Plus scheme (â€Å"Airlines economics†, p.14, 2010). A new entrant is something very hard to accomplish within the airline industry. New entrants can make it hard because, generally, a lot of established airlines hold a monopoly over slots at most airports (â€Å"Airline Economics†, p.14, 2010). Fourth, a good example of the Availability of Substitutes can be said to be boats, trains, or busses. However, in today’s economy with the oil prices sometimes flying wickedly high, it is the best way to travel, and it’s a lot more time saving. The final force is Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. With a lot of expenses being high today, different companies need to advertise so they’re not wasting seats. It is important to remember that fundamentally airlines are a service industry. Airlines perform a service for their customers – transporting them and their belongings (or their products, in the case of cargo customers) from one point to another for an agreed price (â€Å"Airlines Economics†, 2012). Airlines vary greatly. From a single aircraft carrying mail or cargo, to a full-service international airline many people depend on airline services. However, it seems that it is the Low Cost Carriers which continue to grow and bring in the crowds. Most of the passenger revenue (nearly 80 percent) comes from domestic travel, while 20 percent comes from travel to and from destinations in other countries (â€Å"Airlines Economics†, 2012). However, it is the frequent flyers, or the people who take more the 10 trips a year, who take up a significant portion of air travel. While they only account for 8% out of the total number of passengers in a given year, they make up 40 % of the trips. Rivalry in the airlines industry is strong, due in part to the sheer size of competitors and the difficulties in exiting the industry (Datamonitor, p. 14, 2011). Because the industry product is so minimal, high sensitivity is essential when considering pricing. Therefore, rivalry increases the more low cost carriers are in the market; these companies are capable of competing more intensely. Rivalry is also intensified where storage costs are high. Storage cost in this industry is equivalent to unsold seats on a flight, similar to unsold inventory in a manufacturing industry (Datamonitor, p. 22, 2011). A lack of diversity in the passengers increases the need for players to use their single core business to compete with. Rivalry in the U.S. airline industry is assessed strong (Datamonitor, p. 23, 2011). Some of the major rivalry in this particular industry would include AMR corporation, Southwest airlines, and United Continental Holdings. Since 1978, the airline industry has seen more than 180 bankruptcies (Alukos, p. 1, 2012). Currently, US Airways Group Inc. has decided to partner with AMR in the midst of their bankruptcies. In doing this, their hope is to minimize the amount of employees being laid off and put more money into creditor’s pockets. American Airlines has been at a competitive disadvantage for many years (Corridore, p. 2, 2012). In the last couple of months pilots retiring have taken its toll, with 240 in September and October 2011. The companies cash balances quickly drained out due to many lump-sum payouts. Oil prices have also taken its toll on airlines, peaking at its all-time high at $147.27 a barrel. Since then, the cost per barrel has receded going down 58% from the record high. However, it is thought to be possible for oil prices to climb, once again, over $100 a barrel over the next year, reflecting the view of Corridore that the oild market has again become more volatile (Corridore, p. 3, 2012). References Airline economics. (2012). Retrieved from http://www.avjobs.com/history/airline-economics.asp (â€Å"Airline economics,† 2012) Harris, A. (n.d.). The history of airline industry. Retrieved from http://traveltips.usatoday.com/history-airline-industry-100074.html Airlines Industry Profile: the United States. (2011). Airlines Industry Profile: United States, 1-42. Corridore, J. (2012, June 28). Standard & poors airlines. Retrieved from http://www.netadvantage.standardandpoors.com.ezproxy.ohiodominican.edu/NASApp/NetAdvantage/showIndustrySurvey.do?loadIndSurFromMenu=html Alukos, B. (2012, August 22). We believe southwest is making the right decision by repurchasing its own equity.. 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