economic analysis of the airline industry

Solution Preview

Present scenario:

The U.S. airline industry has been in a chaotic state for a number of years. According to the Air Transport Association, the airline industry trade association, the loss from 1990 through 1994 was about $13 billion, while from 1995 through 2000, the airlines earned about $23 billion and then lost about $35 billion from 2001 through 2005. Early in 2006 the association expected about a $10 billion loss in 2005. However, a few U.S. airlines are able to compete successfully.
Dramatic changes in industry structure have occurred against the backdrop of strongly growing airline activity. Growth in air passenger traffic has outstripped growth in the overall economy. The airline industry is highly responsive to economic cycles. Just as most network, airlines are now expected to turn an operating profit, most lost substantial sums in the last several years; The U.S. airline industry remains in the midst of an historic restructuring. Over the last five years, U.S. network airlines have reduced their annualized mainline costs excluding fuel by more than 25%, or nearly $20 billion. While some of the cost savings were the product of identifying greater operational efficiencies, most of the savings were generated by renegotiation of existing contractual arrangements with creditors, aircraft lessors, suppliers and airline employees and achieved either through the bankruptcy process itself or under threat of bankruptcy. 22 percent of industry capacity is still operated in bankruptcy - down from a high of 46 percent in 2005 but still substantial by any measure. The result is that several carriers that were on the precipice of liquidation just five years ago now have much lower cost structures that should allow them to return to profitability over the short term.

Economic profile of the Air line industry:

The airline industry has always exhibited cyclicality because travelers' demand is sensitive to the performance of the macro economy yet airlines must predict this demand accurately because of the lead time required to acquire aircraft. When airlines over predict demand, which can happen for any number of reasons, they suffer losses. The main components of demand for airline services are business travelers, tourism, freight transport, and mail transport. Flight schedules tend to be the crucial competitive issues for business travelers, while tourists and personal travel is much more price sensitive. Freight and mail services account for about 15% of airlines ...