Us Airlines Case Study

The case discusses the U.S. Airline Industry since the establishment till now. Two main periods in the history of industry, regulation and deregulation, are explained briefly. The strategies which were adopted with the deregulation period and the performance of the major companies are the other issues that are discussed in this case.

1. Assess the overall financial performance of the US airline industry during the past 20 years.

Between 1978 and 1981 deregulation, oil shock, world-wide recession and Air Traffic Controllers’ strike have caused massive losses and decrease in net incomes. Moreover, higher operating leverages have caused bankruptcy and then merger and acquisitions were established. In 1990s The Gulf Crisis brought increase in oil prices and this caused negative net incomes for 4 years. In 2001 September 11 has caused huge increase in oil prices and security measures which decrease in demands and customer loyalty, and end up with negative net incomes for 5 years.

2. Why has the US airline industry been so unprofitable since deregulation? To what extent can the industry’s low average profitability during this period be attributed to the structure of the industry? Which of Porter’s five forces has had the biggest impact in depressing industry profitability?

To evaluate the structure of the industry with Porter’s 5 forces it is needed to look at the power of suppliers, threat of new entrants, power of substitutes, power of buyers and threat of rivalry .

The Power of Suppliers

In airline industry, power of suppliers is high. In terms of jet suppliers, they are few in number (which are mainly Airbus and Boeing), and passenger jets are a vital component of the industry and a major source of financial strain thus this limits the flexibility of airline companies. Also, because aftermarket sales are a major cost, sticking with the same air jet supplier is important for airline companies and this adds to the leverage held by major jet suppliers. Another thing that adds to the power of suppliers is, the nature of the product, which is highly differentiated. There are no close substitutes for air jets. And because there are only two major suppliers, they can easily make agreements about prices and benefits they will provide to airline companies to increase their profits.

Also, airport facilities play a critical role as a supplier; they are limited in number and charging high prices to companies.

Labor costs are very high because of low labor productivity and rigid working practices agreed with unions. Most airline workers belong to one of a dozen major unions like the association of flight attendants, the airline pilots association and so forth. But recently, airline companies managed to decrease labor costs by forcing employees to major concessions and decreased