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Airline Industry Overview

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Airline Industry Overview

History - The airline business has been in existence for over 75 years. There have been many upward and downward swings in the overall airline business economy. History has recorded that while 140 airlines have declared Chapter 11; only two have emerged. Today, the U.S. airline industry is facing an unprecedented financial crisis and the outlook is bleak. Only one major carrier that has shown a profit over the past four years and, in the same timeframe, the other major carriers show a combined total loss in excess of 25 billion dollars. This downward spiral cannot be attributed solely to the 9/11 disaster, many other factors contributed to their downfall.

From an investor's point of view uncertainty, instability, and mismanagement have made the airline industry an unattractive, if not bad, investment. The terrorist attacks of September 11th generated an economic slowdown that disproportionately hurt carriers. Numerous other factors including soaring fuel prices and labor conflicts have plagued the industry. Analysts and executives are not exaggerating when they say the industry has hit the worst times in its history. The airlines as we have know them are being forced to change, and the revamped industry will differ greatly from its past.

Overview - The current industry crisis was truly accelerated by the 9/11 disaster which resulted in immediate layoffs and cutbacks of almost 20% in total system capacity. However, the airlines were in serious trouble before the disaster. The economic slowdown had already reduced business travel by 30%. Labor costs were increasing by nearly 10%, fuel prices were increasing, and serious business decisions needed attention. Only a few airlines were proactive in restructuring their business plan to react to the failing economy. Those who chose to do nothing have either filed chapter 11 or are very near to doing so. The industry is at a major turning point. There could be major restructuring, bankruptcy, liquidations, or consolidations of major network carriers. The airlines that survive will face ongoing challenges in coping with significant changes in both revenue and cost structures. Assuredly, the government will play a major role in reshaping the future of the airline industry and the national air transportation system. (Industry, n.d.)

Strengths - The U.S. has had the best transportation system in the world for over 75 years. We would not have today's advanced economic advantages and societal stature without the airline systems. How could we have formed our just-in-time economy without them? The airline transportation system is rapidly eroding as each day passes by and the U.S. is in danger of ending up with a second-rate airline transportation system as compared to other developed countries. If this happens, we would reduce our competitive advantage and face a long-term economic decline.

Weaknesses - The ability to generate adequate revenues that cover operating costs has hampered the airlines ability to be profitable. The major carriers have been severely impacted by fuel costs, labor costs, decline in overall travel, increased security requirements and a slow economy has forced potential business travelers to look at alternatives such as teleconferencing, less travel, and alternative travel modes.

In addition, low-fare competition is growing rapidly. Business travelers are refusing to pay premium prices to the major hub and spoke carriers and are looking toward the low-fare carrier. Low-fare carriers accounted for about seven percent of the total market share in the early 1990's; today they account for more than 25% of the market share.

Opportunities - To survive in 2005 and beyond, the transportation industry must continue to reduce costs and reinvest in solutions that can help them respond quickly and easily to changes in their business, technology, and consumer-buying trends.

Threats - Fuel costs are at an all time high. A one dollar increase per barrel of crude oil translates to anywhere from 50 to 80 million dollars annual increase in fuel costs, depending on the airline's fleet size. With crude oil topping 50 dollars a barrel, a sluggish economy, and another major airline filing chapter 11, the entire industry has taken a fall. The Dow Jones airlines index was down 25% at the start of 2004 and, since then, the industry has not had any significant improvement.

The ticket pricing structure is in total chaos. The government and lenders are enabling bankrupt, financially unstable airlines to continue operations by extending loans to keep them flying. One result is a glut of empty seats in the market. Additional seats are flooding the market with start up airlines and supply is outweighing demand. While these bankrupt airlines continue to fly they reorganize under bankruptcy protection and lower costs through cuts in worker benefits. Major carriers have made several recent attempts to raise ticket prices only to rescind them after customers flocked to low-fare carriers offering the same ticket for as little as one dollar less. Customer loyalty is a thing of the past.

Trends - Over the past 75 years not one major airline has ever been a big profit gainer, some have done very well to just break even over the course of existence. A positive trend is the renewed focus on technologies that streamline operations, improve passenger facilitation and loyalty, and create flexibility in changing business processes that will eventually lead to lower costs. The news in 2005 will be the revival of the major carriers. New low-cost carriers will continue to emerge, but the new-generation major airlines will continue to consolidate. Airports and government



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