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The structure of the airline industry.

Extracts from this document...

Introduction

Executive Summary The structure of the airline industry has been defined by two historical events: regulation and deregulation. The industry was tightly regulated by the Civil Aeronautics Board starting in 1938. This led to the formation of regional monopolies because federal regulations forbade entry into the industry by new firms. In 1978, airlines were deregulated, which led to an influx of start-up airlines. This deregulation increased competition and led to the hub-and-spoke structure of today's airlines. As profit margins for airlines are low, many airlines have since merged or formed alliances. Mergers, alliances, the hub-and-spoke structure, and limited space at major airports have all led to an oligopoly in the airline industry. Table of Contents History of Airtran 3 Airline Comparison 3 About Southwest 3 About Delta 4 About AirTran 4 Coping with September 11th 4 Firm Characteristics 5 Business Strategy and Goals 5 Investment Relations 5 Operations 7 Cost Reduction Methods 7 Commitment 8 Current Industry Structure 8 Industry Description 8 History 8 Effects Of Deregulation 9 Safety 10 Airline Industry Economics 10 Size of Industry Relative to the Economy 10 Current Market Structure 11 Close Substitutes 11 Consumer 11 Classifications 12 Geographic Area 12 Alliances 13 Macroeconomic Analysis 13 Introduction 13 Gross Domestic Product and Inflation 14 Productivity and Employment 15 Spending and Interest Rates 15 World Economy 15 Forecast 16 Future of the Airline Industry 16 What's Next For AirTran? 17 For the Future 17 The Future in General 18 History of Airtran In the summer of 1997, ValuJet Inc. and AirWays Corp. merged to form AirTran Airways in a deal worth approximately $61.8 million. The emergence of AirTran Airways allowed ValuJet to shed its troubled name following the 1996 crash of Flight 592 which went down in the Florida Everglades killing all 110 people on-board. The merger allowed AirWays the size and scale it needed to become one of the fastest growing discount airlines in recent history. ...read more.

Middle

Current Market Structure Close Substitutes Car, Bus, and Train are the only close substitutes for travel over land, but when over 150 miles, airplanes are faster. Boat is another option, but too slow compared to an airliner. Small commuter craft are noisy, cramped, and unstable compared to the larger jets used by mainstream airlines. Consumer There are two types of consumers of air transportation: business and leisure. The business traveler travels as a representative of a company or firm and usually must travel on a timetable. The leisure traveler travels for vacations or visits. The business traveler is a primary moneymaker for airline companies. Business travelers have a tendency to be price inelastic with regards to airfares, because their fairs are paid by companies and must travel to many locations. Airlines offer special deals to the business traveler such as priority check-in, expedited baggage handling, luxury lounges, in-flight amenities such as cellular phones, faxes, and outlets for laptop computer usage. However, the leisure traveler is highly price conscious (elastic). The leisure traveler usually goes out of the way to save money by using the Internet, discounted airfares, and other methods to save money. Classifications The industry is broken in to four main categories: Majors, Nationals, Regionals, and Cargo. These classifications are determined by the FAA who gives a firm certification when the meet proper criteria. The Department of Transportation (DOT) gives similar certification to smaller commuter aircraft. Major airlines generate over $1 billion annually. These airlines provide nationwide and international service. They usually operate with between 130 to 450 seats per aircraft. As of 2000, there were 12: Alaska, America West, American, American Eagle, American Trans Air, Continental, Delta, Northwest, Southwest, Trans World, United and US Airways. Three cargo airlines are considered major as well: DHL Airways, FedEx, and United Postal Service. National airlines generate $100 million to $1 billion. These airlines primarily serve a region of the country, although they may extend to other regions and even international destinations. ...read more.

Conclusion

The FAA expects to see commercial airfares continue to decline in 2002 and spike back up again in 2003 as traffic increases to pre-September 11th levels (barring future terrorist attacks). However, the FAA's increasing airfare forecast does not take into account the prospect of a Federally mandated "ticket tax" to cover the cost of increased airport security. This might put a damper on increased demand, but at a maximum of $10 additional per ticket it is doubtful. Certainly by 2004, the FAA expects to see a normal level of growth taking place in the airline industry. Another damper on recovery has been increased security. The long lines and lengthy check-in procedures (combined with fewer scheduled flights) are rendering business travel less productive than pre-September 11th. Airlines will have to find creative ways to maintain high safety standards but improve speed to re-attract these high-dollar customers. The FAA has recently mandated that fortress hub airports where one carrier has upwards of 50% of the traffic find new and ingenious ways to foster competition. The Maryland Aviation Administration paid $4.3 million for US Airways to give up 29 gates at the Baltimore-Washington Airport. In North Carolina, the Raleigh-Durham Airport Authority is paying an undisclosed sum to American Airlines to acquire one of its terminals. The airports are buying out the airlines' long-term leases with reimbursements for moving expenses and improvements. The ultimate goal for the airports is to attract greater competition. In the past, hub-and-spoke squatting by major airlines easily squashed competition as other airlines simply had no place to board passengers. This bull-by-the-horns strategy by local airports may signal a new era in airline competition and subsequently lower ticket prices to the public. Many other airports are swapping out their exclusive-use gate leases with preferential-use leases that require specific and frequent use. This will hopefully reduce gate idle time and leave more room for competition. AirTran and Southwest already have plans to utilize some of the gates left vacant in Baltimore. 1 ...read more.

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