The Main Characteristics of Airline Industry and Factors Affecting Competition

In this post you will find one more example of an illustration essay. Hopefully, it will help you write your own essay.

An outline:

  1. Introduction.
  2. Current situation in airline industry.
  3. The problems and difficulties facing modern airline companies.
  4. The future of airline industry.
  5. The competition in the market of air transporting.
  6. Conclusions. Benefits and losses of managing airline company.

A foreword:

The sky always attracts human beings. And this report will touch the sky in some way, it is dedicated to the US Airline industry. It has long and really interesting economical history to analyze. Although we will not deal with the history of the topic it is important to know. Our main assignment is to analyze modern situation in the US Airline industry using appropriate instruments (Strategic Group Analysis, Competitors Analysis etc).

Current situation in the US airlines is far from the ideal, it is suggested to be the most depressive industry. The US airline industry slump will probably linger until at least 2005, said a majority of executives attending an annual airline finance conference, with more than 80% predicting another major airline bankruptcy in 2003.  The outlook from presenters was decidedly grim at the annual New York Air finance Journal conference here, which drew hundreds of professionals from the United States and abroad.

The Sept. 11, 2001, attacks, a weak economy, the war in Iraq and a deadly pneumonia virus have conspired to slam demand for airline tickets in what several executives referred to as the “perfect storm” now blowing through the aviation market[1].

As the industry’s worst crisis ever mounted in 2002, US Airways filed for Chapter 11 bankruptcy protection in August. That was followed by United Airlines in December the world’s largest carrier – American Airlines – narrowly avoided bankruptcy by reaching 11th hour cost-cutting agreements with its major unions. Those deals still have to be ratified by rank-and-file and American’s future is by no means assured. American Monday announced it will fly about 2% fewer domestic flights than planned in May. International flying will be about 13% lower, the Fort-Worth based airline said, citing the weak economy and the Iraq war.

For one of the nation’s most distressed economic sectors, the US airline industry, the war in Iraq could prove to be an unsustainable “final straw”[2]. For some time, major US carriers have been dealing with the combined impact of inflexible costs, an increasingly price-sensitive customer base, and a sputtering economy. And, in the aftermath of September 11, Americans have been choosing in large numbers simply not to fly.

Now, the new conflict is taking an additional large toll on airline revenues. The depth and duration of the current depression in air travel remains to be seen, but the Iraq invasion’s initial impact on major US airlines has been dramatic, with international travel down in the range of 20% – 100% on some routes, where cancellations are actually outpacing new reservations. Traffic declines on domestic routes have been more pronounced than during the 1991 Gulf War.

For an industry already losing more than $1 million every hour, the effects have been grave. The nation’s second largest airline, United Airlines, remains in Chapter 11 bankruptcy, with some analysts warning that it faces a longer-term possibility of outright liquidation. Meanwhile, the largest U.S. carrier, American Airlines, remains at risk of bankruptcy, despite a last minute, month-end reprieve[3]. The seventh largest, US Airways, very recently emerged from bankruptcy after cutting both services and jobs by a third, and some observers question whether even that will be enough in the event of an extended war in Iraq.

The bottom line is that much of the nation’s network airline sector could be under court protection within the year, and another major incident of domestic terrorism, particularly an aviation-related event, could force all major US airlines (except Southwest) to insolvency. The industry has lost some 90,000 jobs over the last 18 months, and further widespread bankruptcies would leave thousands more unemployed. Wholly aside from the potential effect of an industry meltdown on jobs and shareholder equity, the economic implications are obvious and of deep concern.

To date, there have been sporadic, largely piecemeal, efforts by government to address the situation. Congress compensated the major airlines for the $5 billion losses suffered during the government’s closure of the airways in the week after September 11, and authorized a $15 billion loan guarantee program to assist US carriers facing extraordinary financial stress in the post-9/11 environment, (the program, however, has approved only a few loan guarantees, well below authorized levels). Currently, Congress and the Administration are considering additional assistance – e.g., having government take over aviation security costs, continue to underwrite war risk insurance, and limit part of the industry’s heavy burden of taxes and fees[4].

While such specific assistance measures can help short-term in dealing with the effects of extraordinary geopolitical events, crisis-to-crisis intervention is unlikely to achieve long-term industry viability. Indeed, given the depth of some airlines’ financial distress, there is a real question whether the most likely levels of government assistance would suffice even short-term. Such fixes are, in any event, no substitute for development of a coherent policy for this sector, nor for fundamental industry self-assessment of its traditional business model and mode of operating.

No economically developed nation – much less the world’s most technologically and economically integrated one – can survive in a global marketplace without a viable, reliable, and ubiquitous system of air transport. Airlines are today’s quintessential “essential facilities” – key aspects of the nation’s infrastructure, underpinning our commerce, our social and cultural interaction, and our national prosperity.

The challenge for policymakers is to begin now to develop a longer-term vision for a post-crisis US airline industry – an industry that may well find itself involuntarily “reinvented” by economic exigencies. While there are surely no easy answers, there is a real and immediate need to focus on possible approaches – including some “radical” ones[5]. Several have begun to emerge.

The one favored by most airlines is for the government to help stabilize industry finances by relieving the airlines of major costs arguably associated with the broader national interest in protecting homeland security. Having the government bear the burden of aviation security, including absorbing war-risk insurance costs and relieving security-related taxes and fees, might help several now-threatened airlines survive, but the long-term impact of this approach is far less clear.

A second model, advocated vociferously by a relative few, would be to “re-regulate” the US airline industry. Airline deregulation a quarter-century ago was the template for the now widely supported disentanglement of government from the day-to-day workings of key regulated industries, from energy to telecommunications to financial services. It is far from clear whether re-regulation would offer a workable or beneficial alternative from the standpoint of either airlines or consumers, and such an approach would engender considerable policy debate and objection.

A third model – raised by the airlines themselves as an extreme potential response to widespread bankruptcies in a critical infrastructure sector – is simply nationalization of the industry. Turning over to the government the ownership and operation of an “essential facility” facing financial collapse could find some precedent in Conrail or Amtrak, and there may be other examples. Indeed, nationalization could theoretically become the “default option” if an extended war or a major new domestic terrorist incident make a profitable airline industry financially untenable[6].

A final option is simply to do nothing – or, in any event, as little as possible. Given the controversial nature of other possible responses, it is natural to hope that the industry can “self-correct,” with the market’s “invisible hand” eliminating weaker carriers and strengthening survivors (Wholesale industry consolidation is also a possible outcome). But the nature and depth of the industry’s current woes may already have gone too far to make full “laissez-faire” a viable option. As was the case in the S&L crisis in the 1980s, the costs to shareholders, workers, consumers, communities, shippers and other stakeholders of system-wide failure may be deemed too great[7].

A range of policy approaches should be considered in coming weeks and months, as the fortunes of the US airline sector continue to undergo unprecedented strain in a wartime environment. In the last two years, US airlines have added $30 billion in lease-adjusted debt for a total of more than $100 billion, which Bitten bender sees taking about five years to pay back.

Among the main competitive factors are[8]:

1)      Strong labor unions;

2)      Concentrated aircraft makers;

3)      Entrants have cast advantages;

4)      Low capital requirements;

5)      Little product differentiation;

6)      Deregulation of governmental barriers.;

7)      Large quantity of airline companies;

8)      Good access to information;

9)      Low switching costs;

10)   Autos and railway for short distance travel

We can suggest some ideas how to neutralize the five competition forces:

1)      Entry force – additional entry barriers and different isolating mechanisms can be created. We can suggest create exploit economies of scale, aggressive deterrence (high taxes, high fixed costs etc.), design in switching costs;

2)      Rivalry force – compete on nonprice dimensions: cost leadership, cooperation;

3)      Substitutes force – improve attractiveness compared to substitutes: better service, more features;

4)      Buyers force – reduce  buyer’s uniqueness: forward integrate, new customers;

5)      Suppliers force – reduce supplier’s uniqueness: backward integrate, obtain minority position, and second source[9]

To enter airline industry market a company must have huge amount of money to cover fixed and variables costs. Secondly accompany will have to present agressive marketing policy to find its place on the market. The third point is that company has to find the best time to enter the market because of the fluctuations in demand. The next point is that company has to choose passenger or cargo airlines to open, and it is the problem – the market has little differentiation.

I named problems that company will meet on the airline market it is time for benefits. Firstly, company will get tax advantages during the first years of its activity. Secondly, customers of the airlines are usually steady in their choice, so company will always have needed minimum of customers (if it successfully enter market). The third benefit is deregulation of the governmental barriers because of the industry decline.

List of notes:

[1] “Global Airlines” – by Hanlon, P., 1999.

[2] The same source.

[3] “Airline industry: survey” – an article in “The Economist”, 2002 , 11-17 December.

[4] “Flying into Future” – by Button, A., 1998

[5] “Hard Landing: The Epic Contest for Power and Profits that Plunged the Airlines into Chaos” – by Petzinger, T., 1999.

[6] “Global Airlines” – by Hanlon, P., 1999.

[7] “Gaining and Sustaining Competitive Advantage” – by Barney, J.B., 1997.

[8] “Competitive Strategy” – by Porter, M.E., 1980.

[9] The same source.

If you need more examples of an illustration essay, check out this post.

One Response to The Main Characteristics of Airline Industry and Factors Affecting Competition

  1. Alana says:

    With the ideas given in your sample article published here there would be hardly a student not able to finish a book report. Your critical thinking is fine with me, and I began writing college papers

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