The U.S. airline industry has long struggled to make a profit. Analysts point to a number of factors that have made the industry a difficult place in which to do business. Over the years, larger carriers such as United, Delta, and American have been hurt by low-cost budget carriers entering the industry, including Southwest Airlines, Jet Blue, Air Tran Airways, and Virgin America. These new entrants have used nonunion labor, often fly just one type of aircraft, have focused on the most lucrative routes, typically fly point-to-point, and compete by offering very low fares. New entrants have helped to create a situation of excess capacity in the industry, and have taken share from the incumbent air- lines, which often have a much higher cost structure. The incumbents have had little choice but to respond to fare cuts and the result has been a protracted industry price war. To complicate matters, the rise of Internet travel sites such as Expedia, Travelocity, and Orbitz has made it much easier for consumers to comparison shop, and has helped to keep fares low.

Beginning in 2001, higher oil prices also complicated matters. Fuel costs accounted for 32% of total revenues in 2011 (labor costs accounted for 26%; together they are the two biggest variable expense items). Many airlines went bankrupt in the 2000s, including Delta, Northwest, United, and US Airways. The larger airlines continued to fly, however, as they reorganized under

The late 2000s and early 2010s were characterized by a wave of mergers in the industry. In 2008, Delta and Northwest merged. In 2010, United and Continental merged, and Southwest Airlines announced plans to acquire Air Tran. In late 2012, American Airlines put itself bankruptcy protection. US Airways subsequently pushed for a merger agreement with American Airlines, which was under negotiation in early 2013.

Requirement

Read the short account of the US airlines industry and prepare a report that addresses the following:

1. Conduct a competitive forces analysis of the U.S. airline industry. What does this analysis tell you about the causes of low profitability in this industry? ?

2. The economic performance of the airline industry seems to be very cyclical. Why do you think this is the case? ?

3. Given your analysis, what strategies do you think an airline should adopt in order to improve its chances of being persistently profitable? ?

Answer rating: 100% (QA)

Introduction The United States airline industry has faced intense competition from other airline service providers from the time it was deregulated in the year 1978 In the regulated environment the re... View the full answer