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Opportunities and Threats facing the U.S Airline Industry

explanatory Essay
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1607 words
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Opportunities and Threats facing the U.S Airline Industry

The health of the overall U.S airline industry is still tenuous in-spite of the passenger traffic volumes returning to pre-9/11 levels. A survey estimated that from 2001 through 2003, the US airline industry reported to have lost $23.2 billion dollars, compounded by an additional $1.6 billion in the first quarter of 2004. This $24.8 billion shortfall exceeds the total profits earned over the entire six-year period 1995-2000

Drastic changes in the Economic, Political/legal and technological segment of airline’s external environment contributed to some of the major looses seen by the industry. The key factors that heavily contributed to the loses include

• Economic slow down in the country

• Massive decline in business travel

• SARS epidemic

• Increase in competition

• Availability of substitutes for air travel

• soaring fuel prices

• Weak dollar

In response to the industry’s financial crisis, Congress made available several forms of relief that amounted to over $20billion. This relief includes the payment of upto $5billion in pretax cash assistance to reimburse air careers for losses incurred as a direct result of the 4-day government shut-down of air traffic after 9/11. However, relief measures were not enough to bring the airline industry out of hot water.

Most of the airlines have accumulated vast amounts of debt which brought them on the verge of bankruptcy. The list includes Atlas/Polar Cargo, Midway, National, Sun Country, TWA, United and US Airways. American and Delta airlines narrowly avoided bankruptcy but have warned about such possibility. ”An average carrier is now well over 90% leveraged (net debt to equity ratio) compared to 60-70 percent historically. This means most airlines are now completely leveraged and unable to obtain capital. This has added to significant debt service costs and will make the industry even more vulnerable to any future economic downturns.

With industry debt well over $100 billion, much of it due in the next 24 month. 11 of 12 airlines are rated “junk bonds” by S&P. Only Southwest remains at an “investment grade.

Almost all airlines are faced with the same challenges and threats in the external environment like rising fuel cost, weak travel demand etc. Some airlines like Southwest, JetBlue and AirTran whi...

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...work and take necessary action to adapt and sustain its competitive posture.

Southwest employs integrated low-cost and differentiated strategy which enables the firm to

• Adapt quickly to environment changes

• Learns and implement new skills and technology quickly

• Effectively utilize its core competency while competing against rivals.

To sustain a competitive advantage and to seek above average returns, Southwest implements this strategy to produce relatively differentiated service at lower cost compared to its rivals.

Yes this strategy is appropriate to offset the forces in the industry.

Southwest should grow internationally as the demand for air-line travel has substantially declined domestically in the last couple of years and will continue to decline further in some segments like business or corporate travel. The major reason I feel is the growth in communication technology enabling people to work remotely without the need to be present in the office. Voice and data over IP, Live meeting and communication services have substantially reduced the need for corporate executive and divisional managers to travel thus lowering the demand further.

In this essay, the author

  • Opines that improving economy and travel demand is likely to bring legacy airlines in positive territory of profits.
  • Explains that the airline industry is facing several distinct threats and challenges. opportunities for new entrants exist in regional airline market where major airlines have retrenched their operations.
  • Opines that high fuel and maintenance costs will significantly influence the profit margin of the industry in future. increase in supplier price could potentially increase the cost.
  • Explains that customers are always looking for cheaper rates and high value tickets, which puts pressure on the airline industry to keep the cost down.
  • Explains that in mature markets, multiple airlines compete to attract scarce resources, which increases the product substitutability.
  • Explains that airlines are faced with unprecedented challenges due to emergence of low-cost airlines in the market and how they operate and market their products.
  • Explains that ticketless travel reduces back-office costs and operates its own ticket reservation system.
  • Explains that southwest has a sustainable competitive advantage as long as it creates unique value to the customer through its low-cost/differentiated strategy. it is imperative that the company constantly monitors its external environment as described by porter’s five forces framework.
  • Explains southwest's strategy to produce relatively differentiated service at lower cost compared to its rivals to sustain a competitive advantage.
  • Opines that southwest should grow internationally as demand for air-line travel has substantially declined domestically in the last couple of years and will continue to decline further in some segments like business or corporate travel.
  • Explains that the overall u.s airline industry's health is still tenuous in spite of passenger traffic volumes returning to pre-9/11 levels.
  • Explains that congress made available several forms of relief that amounted to over $20billion in response to the industry's financial crisis.
  • Explains that the industry forecasts an increase in tax on the operating income which will further reduce the net profit for the airline industry.
  • Compares the cost-cutting efforts of legacy airlines and low-cost airlines. legacy airlines have high labor costs owing to a highly tenured and unionized work force.
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