Airline Industry

Airline Industry

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Industry Overview
History of Airline Industry
In 1903, the Wright brothers' first successful flight in Kitty Hawk, North Carolina marked the beginning of the aviation industry. In the early years, the public did not embrace airplane travel as an option, thinking that it was too dangerous. In 1927, Charles Lindbergh successfully completed his first solo flight across the Atlantic Ocean and created a massive interest in flying with the general public. After this, a variety of air transport holding companies began, including Aviation Corporation. The air transport division of the company was called American Airways and later grew to become American Airlines, one of the largest commercial carriers in the United States. In 1928, what was to become another leading air transport company was created as a holding company by Boeing and its air transport division, United Aircraft and Transportation Corporation. In 1931 the four air transport divisions of United Aircraft became United Airlines.
Overview of Airline Industry
Air travel grew at a rapid pace until 2001, expanding from 172 million passengers in 1970 to nearly 642 million in 2003. However over the next 3 years, a combination of factors including the events of September 11, 2001 and an economic recession combined to reduce air travels. Despite all the troubles the Airlines have had, air travel remains one of the most popular modes of transportation to date.
SWOT Analysis
According to the University of South Australia's website, a SWOT analysis is defined as, "A critical set of steps in a planning exercise is to perform internal assessments (including an analysis of performance against previous plan) and external assessments (including an analysis of the operating environment) that result in the identification of strengths, weaknesses, opportunities and threats through what is termed a SWOT Analysis. This is a complex analysis which involves matching external possibilities with internal capabilities.

The goal of a SWOT Analysis is to identify internal and external factors that are important to achieving a certain objective within the company (Wikipedia, 2007). The strengths and weakness are the internal factors being observed, and the opportunities and threats are the external factors. This analysis is a good tool for looking at a business as a whole picture. Below is a SWOTT Analysis of the U.S. airline industry. The information in the analysis was obtained from
1. Ability to survive two or more years with growth in annual profitability (increasing positive net profits).

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2. Growth in revenue services rendered (available seat miles flown).
3. Successful in attracting customers, managing its fleet, managing its people and managing the finances.
4. Low cost fares
1. Financial loss due to the events of September 11, 2001.
2. Increasing operating cost.
3. Competition
4. Rising Fuel Cost
5. Government Taxes
1. Maximize funding levels.
2. Participation in (FTAA) Free Trade Agreement of the Americas.
3. Lower cost airfares.
4. Increasing travel

1. Terrorist Attacks
2. Competition
3. Financial Loss

1. More people traveling
2. More goods and services crossing countries
3. Global economic growth

Impact of Real GDP
Gross Domestic Product (GDP) is the final output of businesses and consumers in an economy over a period of one year. In order to calculate GDP it is necessary to put all goods and services on an even table. For this to be possible, the goods and services are converted into measurable values. Once this conversion is done, the values are added together to calculate GDP. All goods that are reused in an economy are only counted when it becomes the final product; this keeps things from being double counted. GDP is one of the most used economic measurements (Colander, 2004).
Gross Domestic Product is also used to measure inflation in a country's economy. Increases in GDP are caused by either inflation or real increase in production and income. To distinguish between the two, economists have separated them into nominal and real GDP. Nominal GDP is calculated at the current existing prices. It does not account for inflation. Real GDP is the nominal GDP that has been adjusted due to inflation. In order to calculate the real GDP, a price index is created. The price index measures how much prices have changed from one year to another. Once the price index is established, nominal GDP is divided by the price index of the good or service and multiplied by 100. Real GDP is the important number for measuring the condition of an economy (Colander, 2004).
"The unemployment rate is the percentage of people in the economy who are willing and able to work but who are not working." (Colander, 2004) During a period of growth for an economy, the unemployment rate is usually falling. When an economy is in a recession, the unemployment rate is usually raising. A good indicator for the amount of labor available for an increase in production is the unemployment rate. It is also used to forecast growth in the economy (Colander, 2004).
Airline Industry Crisis
The tragedy of 9/11 has caused the loss of lives, destruction of property, and a disruption of the American economy. After the disaster, economist immediately dropped the GDP 0.05%. By 2003, the loss in income related to the 9/11 attacks amounted to a half trillion dollars, or 5% of the GDP. Before the national disaster the airline industry was already struggling financially. Since 2001, over 100,000 airline related jobs have been lost and the employment rate dropped by 8%. The airline industry has lost nearly 20% of its "relative value" since September 11, 2001.
Southwest airlines began as a low cost airline serving the United States. Since its beginning Southwest has been able to exceed the "Amex Airline Index over a five year period" (Yamanouchi, 2007). The Air Travel Price Index uses a survey to track quarterly changes of the fares paid by consumers for air travel. This index specifically monitors the "change in the cost of air travel" (Bureau of Transportation). These changes are measured using the base line cost of the first quarter of 1995(Bureau of Transportation). The Air Price Index indicated that there was a "four percent fare decline in the third quarter of 2006 compared with a year earlier, while fares nationally increased 7.5 percent" (Yamanouchi, 2007).
Southwest airline has been instrumental in helping to keep the lower fare trend in the industry. They lead the industry in lower fares. In markets where airline fares have increased, Southwest airlines fares have help to limit fare increases because many carriers are attempting to remain in the competitive with them in the market.
However, like many other carriers, Southwest Airlines has been affected by the "three-pronged impact creating increases in prices" (Walsh, 2006). These impacts consist of increases in air travel demand, increase in oil and the need for the airline companies to return a profit. These impacts have encouraged Southwest Airlines to initiate fare increases as well to counter there affect on the company. To lessen the blow Southwest has initiated these increases around the holiday season. This allowed for other air carriers to make the increases to assist in recovering from the rising fuel cost. Many in the industry felt like these increases would help the airlines since they have attempted increases all year but have not been successful (Yamanouchi, 2007).
These figures in Table 6.1 and 6.2 represent Southwest Airline at the close of business day on March 16, 2007. The S&P 500 also know as "market average" is designed to tell how companies traded on the stock market are doing. There are many different types of averages. The S&P is the average value of 500 different large companies. The S&P average can tell you the general health of the stock prices. Provided that the economy is doing well the prices then of the stocks as a group may tend to rise. If the stock is doing poorly then the prices as a group will tend to fall. The averages in the S&P also show tendencies in the market as a whole. For example, if a specific stock is going down while the market is going up, this tends to tell a person something. Or if the stock price is rising, and it is rising faster or slower than the market as a whole, this tells a person something also. The S&P 500 information can be found in the news paper daily every day. On any day of the week except Sunday a person can hear about how many of the major companies are reaching new highs or new lows. Southwest Airline has been in business for 35 years and doing a good job at it (Keenan, 2007).

Table 6.1
Prev. Close:
Volume Avg.:
52wk Range:
14.56 - 18.20
Market Cap (mil):
P/E Ratio:
Dividend Yield:
1d 5d 6m YTD 1y 3y 5y all data Advanced Charting (

Table 6.2


(2007). Retrieved March 22, 2007, from Web site:
(2007). Bureau of labor statistics. Retrieved March 22, 2007, Web site:
Air Travel Price Index.(2007). Bureau of transportation statistics. Retrieved electronically on
March 19, 2007 from
Graziadio, (2006). A Journal of Relavent Business Information and Analysis, 9, Retrieved March 19, 2007, from
Kennan, Joshua (2007). Inro to stock trading. Retrieved March 22, 2007, from About: Investing for Beginners
Web site:

Walsh, C. (2006 April). Index airfares climb to 5-year high. Rocky Mountain News. Retrieved
electronically on March 20, 2007 from

Yamanouchi, K. (2007 February). Airlines follow southwest, match increases in fares. Denver
Post. Retrieved electronically on March 19, 2007 from
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