A Note on the US Airline Industry

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Case Details:

Case Code : BSTR139
Case Length : 24 Pages
Period : 2001-2004
Organization : Varied
Pub Date : 2004
Teaching Note :Not Available
Countries : U.S.A
Industry : Aviation

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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In the 1970s, when the CAB regulated the industry, there were major barriers to entry and exit and severe restrictions on the operations of airlines. By the end of the 1970s, many airlines had begun to feel the negative impact of regulation - they were forced to operate on unprofitable routes just to keep certain areas connected, and were not allowed to expand into profitable routes or to set reasonable fares. Keeping in view the shortcomings of regulation, the Congress passed the Airline Deregulation Act in 1978, which freed the industry from regulatory restrictions....

September 11 and its Aftermath

On September 11, 2001, terrorists hijacked four passenger aircraft and crashed them into important buildings in the US, killing over 3000 people. (Two aircraft of American and two of United were hijacked for the attacks.) The event left the world in a state of shock, with the natural outcome being a sharp fall in air travel. Prompted by fear, people either cancelled their travel plans or chose other means of travel. Business travel also fell because of the hassles of stepped up security at airports after the attacks. After the attacks, the US airspace was closed for three days and the stock markets were shut down for four days. Most of the airlines were harmed by the sudden fall in traffic. The worst affected were those whose balance sheets showed high debts...

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Profile of the Industry

A broad definition of the airline industry would include all airlines that provide passenger as well as cargo services commercially. However, in this note, we focus only on companies that provide passenger services.

Classification of Airlines

In the US airline industry, airlines were classified under three heads:

• Major airlines: Airlines with over $1 billion in revenues were called major airlines or international airlines. Many of these airlines flew large planes with a seating capacity of over 130, and concentrated on long haul, coast to coast, or international routes. They were also the largest employers in the industry...

The Low Cost Revolution

There was a rapid growth of the LCCs in the US from the late 1990s. LCCs were set up on the premise that 'the customer considers one airline the same as another. The customer always chooses the lowest price'. While most of the LCCs offered only the most basic of services and passengers had to pay extra for normal services like in flight food or entertainment, analysts observed that an increasing number of people preferred the LCCs to the FSCs. In the early 2000s, it was estimated that low cost competition existed on at least 80 percent of the American routes and the market share of the LCCs had also increased dramatically since the 1990s...

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