Us Airline Industry Case Study

US Airline Industry Case Study

1. Introduction

In the following article, we will analyze an industry that has been heavily criticized due to its inability to generate profits. The financial performance of the US airline industry has been somewhat of a roller-coaster over the past 20 years. It is an industry that has seen its structure change more than once, it has been regulated and deregulated yet it is still a challenging puzzle for many economists and capitalists all over the world. Many investors would agree that putting one’s money into the airline industry is risky business.

1.1 Objectives of Report

An analysis of any industry involves the application of certain economic principles to the industry’s factor markets, consumption trends, and general productivity. The aim of following analysis is to accomplish the following objectives:

•Understand how the structure of the airline industry drives competition between international legacy carriers and new low-cost carriers and how this competition has affected (negatively or positively) the level of profitability.

•Evaluate the appeal of entry for industry newcomers by determining the major barriers involved in entry

•Evaluate how changes such as regulation, deregulation, consolidation and private ownership have affected the structure and interpret this data in order to predict future trends on profitability

•Identify key success factors towards improvement of profitability and capitalize on them by suggesting hypothetical changes to the industry structure that would favor these factors. Handouts pg. 9 (26)

1.2 Identifying the Current Situation

The structure of the airline industry in the United States has transformed from an oligopoly to a very competitive market. In hopes of identifying the issues surrounding the economic state of the airline industry, a theory supported by many was one of deregulation. In 1978, the Airline Deregulation Act attempted to minimize the barriers of entry and exit by the elimination of many restrictions over domestic flights. After a minor turbulence, the industry steadily blossomed over the next 12 years, with mileage flown growing four percent per year (Grant 26-39).

Shortly thereafter, consolidation took place and networks of carriers were formed. Several important mergers and alliances between larger and smaller firms transpired, which led to a new industry structure. The uprising of many new low-cost carriers had created the need for major carriers to make many price cuts, for example, the separation of price-sensitive leisure consumers (economy class) and price-inelastic business consumers (first-class)(Grant 32).

2. Issues & Problems affecting Profitability