USA aviation Industry
-
Upload
manoj-jhawar -
Category
Business
-
view
1.696 -
download
1
description
Transcript of USA aviation Industry
![Page 1: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/1.jpg)
US Aviation Industry in 2009 – Case Study presentation
Manoj Jhawar & GroupMBA , IIT Kanpur2013
![Page 2: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/2.jpg)
The U.S. Airline Industry
![Page 3: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/3.jpg)
“129 airlines in the past 20 years filed for bankruptcy. As of 1992, in fact-though the picture would have improved since then-the money that had been made since the dawn of aviation by all of this country’s airlines companies was zero. Absolutely zero.
Sizing all this up, I like to think that if I had been at Kitty Hawk in 1903 when Orville Wright took off, I would have been foresighted enough, and public-spirited enough-I owed this to future capitalists-to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.”
-Warren Buffet, Chairman, Berkshire Hathaway
![Page 4: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/4.jpg)
History
• 1920: scheduled airmail service started (aircrafts by US Army Air Service)• 1925 Air Mail Act: offered twelve contracts for spur routes to independent bidders• 1925: “Ford Trimotor(The Tin Goose)” with 12 passenger capacity• Major Airlines: United Airlines, American Airlines, TWA(Trans World Airlines)• Demand from Airline industry led to development of aircrafts with
– Higher speed– Larger capacity– Fuel efficient/ less refueling stops
• With Boeing 247 and Douglas DC-3, the US airline industry was profitable even during the Great Depression (1920s).
Boeing 247 Douglas DC-3
![Page 5: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/5.jpg)
Need for federal regulation into Civil Aviation
– Aircraft accidents in 1920s specially during Barnstorming(flying circus) led to safety regulations.
– Risk in US Mail System: delays, cancellations, and crashes– Evolving aviation:
• Infrastructure needed – Navigational aids– Night flying support– Emergency landing strips
– Ownership restrictions required to keep railroads out of aviation field
![Page 6: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/6.jpg)
Regulation and Deregulation
• 1938: Civil Aeronautics Board established
• CAB’s Responsibilities– Safety regulations– accident investigation– regulate airline fares, airmail
rates along with reasonable rate of return
– Allocate Routes used by carriers
– Approve new carriers• 23 existing airlines. No new entry• application for new routes or fare
changes were subject to lengthy delays and often rejected
• 1978: Airline Deregulation Act• CAB’s power of regulation over fare,
route, market entry phased out• dismantled notion of a flag carrier• aggressive free-trade practice of
loss leader strategy• By 1980 20 new carriers (People
Express, Air Florida, Midway…)• 1979-83 huge losses led to
bankruptcies of over 100 carriers– Oil shock of 1979– Recession– Air traffic controllers’ strike
1981
![Page 7: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/7.jpg)
Reasons behind Deregulations• Planes Were Only Half Full - But Airlines Couldn't Offer Discounted Fares• Airlines Couldn't Add New Routes / Airlines Couldn't Remove Old Routes
– World Airways applied for permission to fly a new route between New York and Los Angeles in 1967. After 6½ years of delays and frustrations, the CAB turned around and said 'This application is 6½ years out of date, it is no longer current or relevant' and dismissed it, even though it was the CAB's fault that the application was so old
• New Airlines Couldn't Start Up– No new carrier had been approved by CAB since 1938
• Lessons from intra-state carriers (Southwest and PSA)– CAB only regulated inter-state aviation– PSA in California and Southwest in Texas– Offered excellent reliable service on a par with the inter-state airlines– Lesson- Unregulated (mildly regulated) aviation was demonstrably working
better than tightly regulated aviation via the CAB.
![Page 8: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/8.jpg)
Deregulation
Airfares dropped• Between 1976 and 1990 the paid
fare dropped by ~ 30%
Competition:• Entry barrier decreased• many new airlines entering the
market• airline alliances
Jobs increasedFrom 1979 to 1989, airline employment increased from 356,000 people to 556,000 people
Bankruptcy:• Major Carriers 6 (1978) 3 (1991)• Since 2000 every major airline has
filed for bankruptcy at least once
Increased air travel• 1978 - 275 million passengers.• 2009 - 770 million passengers
Safety improvedThe fatal accident rate, per departure, is 13 times lower in 2009 than in 1969
![Page 9: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/9.jpg)
Firm Strategy and Industry Evolution
![Page 10: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/10.jpg)
San Francisco
Hub-and-Spoke System• Greater Efficiency by reducing no.
of routes and concentrating on traveler and maintenance facilities in fewer locations
• Efficiency benefits reinforced by scheduling flights in a particular way
• Allowed major carriers establish dominance in major regional markets and on particular routes
• Created a barrier to new entrants
• Alliances with local airlines Ex: American Eagle, United Express, Delta Shuttle
![Page 11: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/11.jpg)
City Airline Share of passengers (%)
Dallas-Forth Worth American 73
Miami American 71Minneapolis-St. Paul
Northwestern 59
Detroit Northwestern 54Houston Continental 62Atlanta Delta 53Charlotte U.S. Airways 55Baltimore Southwest 53Newark Continental 52San Francisco United 37Denver United 37
Local market share of largest airline for selected U.S. cities, 2009
Source: U.S. Department of Transportation
![Page 12: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/12.jpg)
Mergers
Deregulation Reduced Seller Concentration Mergers and Acquisitions
Year CR4(%) Year CR4(%)
1935 88 1987 64.8
1939 82 1990 61.5
1949 70 1999 66.4
1954 71 2002 71.0
1977 56.2 2005 55.4
1982 54.2 2008 49.1
American
TWA
TWA
Ozark
American
American
2001
1986
America West + US Airways US Airways2005
Concentration in the U.S. airline industry
Source: U.S. Department of Transportation
![Page 13: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/13.jpg)
Prices and Costs
After deregulation, airlines adopted cutting ticket prices as one of their major strategies to increase their customers
• Low cost entrants played a critical role in stimulating the price wars which characterized competition after deregulation
• Aggressive expansion through rock-bottom fares made possible by highly efficient cost structures and a bare-bones service
• Price initiatives of low-cost airlines Selective Price cuts of major carriers
• Prices cuts selective by routes
• Majors set up subsidiaries to imitate the strategies and cost structures of the budget airlines
Continental’s Continental Lite (1994), UAL’s Shuttle by United (1995), Delta’s Song (1993) and United’s Ted(1994)
• Cut costs through renegotiating union contracts, terminating inefficient working practices, abandoning unprofitable routes and reducing employment numbers
![Page 14: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/14.jpg)
Quest for Differentiation
• Deregulation brutally exposed the myth of customer loyalty - Travellers became more indifferent as to which airline to use
• Primary focus upon business and first-class travellers
• Leisure travellers’ choice was unclear – low prices or quality services. Also low margins on these travellers
• Frequent flyer schemes to gain customer loyalty (1981) – to encourage using a single airline
• Involving other companies as partners – car rental, hotel chains, credit card issuers - Frequent flyer programs became an important source of additional revenue, worth over $10 billion annually
![Page 15: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/15.jpg)
The Southwest Way• Reduce Operation costs
• One type of jet plane – the Boeing 737
• Manage customer expectations• “No frills” approach helps Southwest Airlines keep costs down
• Create a unique culture• “first come, first serve” - unique boarding procedure• “Bags Fly Free”
MaintenanceSpare parts
Training
![Page 16: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/16.jpg)
Another success- Jet Blue
• Operational excellence• cost leader - cutting down on unnecessary frills and wasteful expenses.• more amenities than other airlines - creating a feeling of luxury. • strategy to identify and eliminate non-value adding costs and use the
money so saved, to provide service of better quality.
• Differentiation• leather seats, satellite TV, and more leg-room at a bargain price - still
makes profit. • exceptional customer service experience • one of the first airlines to present online baggage checking.
![Page 17: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/17.jpg)
Overview (2011)
• Industry grew in 2011 by 3.5 % • 730 million passengers• 2 – 3% growth per year projected by FAA over the next 20
years• Passenger carriers generated an operating profit of $3.8
billion in 2011• Major 11 domestic players
![Page 18: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/18.jpg)
Airline Fuel Prices
Source: Energy Information Administration (U.S. Dept. of Energy)
![Page 19: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/19.jpg)
Cost per Available Seat-Mile (CASM) With and Without Fuel
Source: Bureau of Transportation Statistics
• The recent changes in fuel price has pushed fuel expenses to 35 percent of airline operating cost in 2011 against the 10 percentage of total operating cost in year 2001
•The fuel cost was highest in year 2008 and accounted for 40.4% of total operating cost of Airline
• Except fuel cost Airline industry has been able to maintain rest of the operating cost almost at the same level
•The total airline spending on fuel is $31 billion in year 2011 which is triple of the same in Year 2000
![Page 20: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/20.jpg)
Per Capita Disposable Income (Inflation Adjusted to year 2000)
Source: Bureau of Economic Analysis (Census Bureau)
• Demand of the air travel has dropped considerably due to consumers in U.S. experienced the impact of growing unemployment and rising expenses for basic necessities
•As shown in fig. per capita disposable income for U.S. consumers has considerable drop in year 2008-09 and after that it is growing but at a slower rate
![Page 21: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/21.jpg)
Passenger Enplanements and Flight Reduction
Source: Bureau of Transportation Statistics
• Passenger ridership is recovering slowly from its lowest in 704 million in year 2009
• At the same time there has been reduction in travel opportunities due to cut in flights by the airline industry. In June 2012 the no. of scheduled domestic flights of less then 250 miles was 24 percent lower then that of the same in year 2007. For 250-499 flight miles range this no. was 16 percentage. These combines to total of 3000 flight reduction per day from in this 5 year period
![Page 22: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/22.jpg)
Domestic Operating Profit and Loss of Major U.S. Airlines
Source: Bureau of Transportation Statistics
• Mergers, cutting flights, Raising fares etc. have produced positive financial result
•Despite the pressure of rising fuel cost, airlines are able to restore profit from year 2009 onwards
•Major U.S. Airlines as per their market share(1) Merged United-20.6%(2) Merged Delta- 20.3%(3) Merged South west-18.6%(4) Merged American-14.8%(5) Merged U.S. Airwaus-9.8%
Total Market share:- 84.2%
![Page 23: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/23.jpg)
The Accelerating Consolidation of the U.S. Airline Industry
Source: Bureau of Transportation Statistics
•In order to restore Profitability there has been series of mergers in past 12 years.
•In 2000, 10 airlines accounted for slightly more than 90 percent of available seat-mile capacity in the United States. By early 2012, those 10 airlines, through mergers, were reduced to 5 airlines controlling about 85 percent of the domestic passenger market .
•These mergers have helped airlines to cut their cost by reducing competing flights and by reducing Hub Operation
![Page 24: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/24.jpg)
Domestic Passenger Traffic and Capacity
Source: Bureau of Transportation Statistics
• Airlines had reduced the no. of flights since last 11 years and increased the load factor
•Approximately 13.9 percent of domestic flights had been reduced from June 2007 to June 2012
• Airlines have started full utilization of seats per flight and increased the load factor considerably from 71% to 82% over the last 11 year period
• This has increased revenue per flight for the Airline industry also discount offer on seats are reduced due to increasing load factor
![Page 25: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/25.jpg)
![Page 26: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/26.jpg)
Average Fares By Flight Length (2000–2011)
Source: Bureau of Transportation Statistics
• Airlines have been able to increase the price for short haul flights as the no. of short haul flights have reduced considerably over the last 11 years
•Airlines have also increased revenue by implementing additional fees for services like bag checking, seat selection, food etc.
![Page 27: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/27.jpg)
POLITICAL
ECONOMIC
SOCIAL
TECHNOLOGICAL
LEGAL
ENVIRONMENTAL
PESTLE
![Page 28: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/28.jpg)
POLITICAL
•Ecological/Environmental issues
•Government control of airports
•Government term and change:
Stable environment in US
•Home market lobbying
•Wars and conflicts
•International pressure groups
•Funding and grants
ECONOMIC
•Price Elastic industry: In US, supply has
exceeded demand
•Effect of monetary and fiscal policies
•World economic conditions
•Rising fuel prices
•Air traffic control charges and track
access charges
•Trade improvement and Boosts
investments
•Business efficiency
•Improves other aspects of the economy
![Page 29: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/29.jpg)
TECHNOLOGICAL
•Higher safety, better navigation, surveillance
and air traffic management systems.
•Higher efficiency and faster speed, and better
airport operations
•Technology to operate flights in adverse
climatic conditions
•Informed customer
ENVIRONMENTAL
•Noise and air pollution
•Environmental costs not included in cost of
operations.
•Pressure from environmental agencies.
LEGAL
•Contracts conditions for entry, operations and
exit.
•Chapter 11 of bankruptcy
•Regulatory bodies and processes
SOCIAL
•Obesity
•Security
•Ethnicity
•Lifestyle trends
•Labor issues
![Page 30: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/30.jpg)
Threat of New Entrants• Deregulation• Resale market of Aircrafts• Glamour of owning an Airline
Threat of New Substitutes• Telecommunications• Video Conferencing• High speed rail roads
Buyer Power• Buyer Information• Price Sensitivity• Group/Corporate Bargains• Substitute Products
Supplier Power• Oligopoly (Airbus, Boeing)• Access to capital (Airports)• ATF suppliers
Industry Competition• Price Wars• High cost of operations• Congestion on Major routes and Airports• LCCs • Chartered Flights
![Page 31: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/31.jpg)
Legacy Carriers
• Major airlines such as American, Delta, United• Low operational efficiency
– older, cumbersome work structure
• Older, less fuel efficient aircraft fleet– Huge impact of fuel price fluctuation
• Economies of scale not applicable– Cost differences more due to managerial, institutional and historical
factors– Negligible influence of economies of scale, scope, or density
• Huge network– Cannot abandon unprofitable routes in order to maintain route
integrity
![Page 32: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/32.jpg)
Low Cost Carriers (LCC)
• Minor airlines such as Southwest, Jet Blue, Airtran• Operation from secondary airports
– Difficulty in getting gates, landing, and takeoff slots– De facto ownership of takeoff, and landing slots by major airlines
• Newer, fuel efficient aircraft fleet– Fuel price fluctuation invariant
• Highly efficient cost structure (operational excellence)– Confronted labor unions: gained concessions on pay & working practices– Work sharing between employees– Efficiency benefits from outsourcing; better use of information technology– Bare-bones services (economized on in-flight meals, entertainment, and
baggage handling)
![Page 33: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/33.jpg)
Present and The Way Ahead….
![Page 34: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/34.jpg)
Various Stakeholders- Government
•Believes in market forces – some voices of regulation.• Very hard to regulate various aspects of airline business.•Liberal on mergers and alliances policies.•Taxes and fees now represent 20% of a US ticket. The Administration’s 2013 budget proposal heaps even more taxes on aviation.• Manage Competitiveness
Microsoft Office Word Document
![Page 35: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/35.jpg)
![Page 36: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/36.jpg)
![Page 37: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/37.jpg)
![Page 38: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/38.jpg)
Airline• Mergers – heading towards oligopoly (Continental
merged with United in 2010-12).• Emphasis on increasing load factor.• Short to medium term survival.• Limit Capacity Growth.• The industry wants the government to invest in ATC
modernization and airport expansion.• Tie up with regional aircrafts.• Consolidated routes.
![Page 39: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/39.jpg)
![Page 40: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/40.jpg)
![Page 41: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/41.jpg)
![Page 42: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/42.jpg)
![Page 43: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/43.jpg)
![Page 44: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/44.jpg)
![Page 45: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/45.jpg)
Labors• Labor intensive industry.• Union intensive.• Labor costs are high.
![Page 46: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/46.jpg)
![Page 47: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/47.jpg)
Recommendation on Labor side
• More flexible union agreements.• More concession on compensation and benefits side.
![Page 48: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/48.jpg)
Customers
• Reaped the benefit – Lower prices(table 3.2)• Very less choices- effect of mergers.• Technology Upgrades.
![Page 49: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/49.jpg)
![Page 50: USA aviation Industry](https://reader033.fdocuments.net/reader033/viewer/2022050905/54bcc66c4a7959855a8b464b/html5/thumbnails/50.jpg)