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US airlines – Case Study
The United States Airline Industry
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, AirTran Airways, and Virgin America. These new entrants have used nonunion labor, often fly just one type of aircraft (which reduces maintenance costs), have focused on the most lucrative routes, typically fly point-to-point (unlike the incumbents, which have historically routed passengers through hubs), 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 (primarily due to higher labor costs). 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 Chapter 11 bankruptcy laws, and excess capacity persisted in the industry.
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 AirTran. In late 2012, American Airlines put itself under Chapter 11 bankruptcy protection. US Airways subsequently pushed for a merger agreement with American Airlines, which was under negotiation in early 2013.
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Around 100 certified airlines regulate over 11 million flight depart per year in the US airline industry. It carries around 1/3rd of the total air traffic of the world. In 2006, US airlines boarded around 745 million passengers. The total revenue of US airlines was $ 160 billion along with 8000 airlines regulating 31000 flights as well as with 545000 per day (Wensveen and John, 2011). The economic influences of the airline sector have direct contributions to company profits, employment of airline, airports, manufacturing industry of aircraft and tourism industries. As per current estimation, commercial aviation constitutes 8% of GDP of the US (US Department of Transportation, 2011). The economic influence of the airline sector and its consequences for aircraft producers makes the airline profit and their dependency on good financial situations a serious issue for both sectors. This issue had drastically increased since the deregulation of the airline. The total net profits of airlines in the world have shown dreadful volatility in the past fifteen years. After the airline industry of the world recovered from the losses of over $22 billion for four consecutive years from 1990 to 1993, it experiences the gulf war and subsequent financial turmoil (Bilsten, 1996). During a financial crisis from 2000-05, it has a loss of $40 billion.
The US has a huge network of air transportation. There were eighty-six airports in the US during 2013 that handled around 1 million passengers annually and handled over 12 of the thirty business airport of the world in 2014 in the US (Wensveen, John, 2011). This includes Hartsfield-Jackson Atlanta International Airport, which is the busiest airport in the world (Sequestration, 2011). Around 88% of total traffic was from the sixty-two busiest airport in the US in 2012.