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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Key Challenges

A number of issues contributed to the problems of the US airline industry. Some of the issues were internal, such as strong unions and overcapacity, while others like fuel prices and falling yields were determined by external factors.

Rising Fuel Prices

Fuel, one of the critical components in the operation of an airline, comprised between 12 and 15 percent of operating expenses, making it the second highest cost after labor. The US airline industry was vulnerable to rises in fuel prices and analysts estimated that a one cent per gallon increase in the price of fuel drove costs up by $180 million for the industry...

Is Consolidation an Option?

There were no easy solutions to the problems of the airline industry. However, some analysts believed that making certain operational and strategic changes would go a long way towards dealing with some of the more pressing challenges. For instance, experts said that the hub and spoke system of airlines used by most FSCs was outdated as it cost more to operate than the point to point system favored by the LCCs. However, they also acknowledged that it would not be easy for all airlines to abruptly abandon their hubs in favor of point to point flights (Refer Exhibit XI for a figure of the two systems). Analysts also believed that airlines would be able to obtain considerable savings if they simplified their fleets and operated similar aircraft models...

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The Outlook

Analysts said that the US airline industry was likely to begin its recovery in 2005-2006. They said that by then, some of the non-performing airlines like US Airways and United could be liquidated and with such unproductive capacity exiting the industry, better performers would have a chance to recover.

It was also likely that some of the majors would relinquish their domestic routes, while focusing on overseas routes, which were relatively more profitable. They also expected the LCCs to dominate the market by 2005-2006. They saw the market share of the LCCs go up to 35 percent or more by around 2007-2008. While they did not think that the industry would go back into regulation, they believed that the government was likely to play a greater role in the industry in the future. Another important development they expected was the entry of foreign owned airlines. Richard Branson, founder of the UK-based Virgin Group, was considering setting up a domestic airline in the US in the early 2000s, and analysts expected that by 2005-2006, the government would lift the restrictions on foreign ownership in the industry, giving it a much needed boost...

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Exhibit I: Layoffs by Major Airlines Immediately After September 11
Exhibit II: Categories of Airlines in 2003
Exhibit III: Market Share and Profit of Major Airlines in the US in 2003
Exhibit IV: Rising Market Share of LCCS
Exhibit V: Q2 2004 casm for U.S. Airlines
Exhibit VI: 2004 Airline Quality Ratings: 14th Annual National Study on Airline Quality Ratings
Exhibit VII: Fuel Prices Trend
Exhibit VIII: Hedging By Airlines in 2004
Exhibit IX: Breakup of Operating Cost in the Industry
Exhibit X: Labor Cost as a Percentage of Operational Cost in Q2 2004
Exhibit XI:
Exhibit XII: Features Of Airline Alliances

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