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Airline Industry A Study Essay

2269 words - 10 pages




Since the inception of flight in 1903, air travel industry has been a crucial means of transportation for people and products. The invention of the first aircraft hundred-plus years ago brought about a revolution of how people travel. It has been a dynamically changing industry. Air travel remains a large and growing industry. It facilitates world trade, economic growth, tourism and international investment, and is therefore central to the globalization of many other industries.
This paper will discuss the characteristics of airline industry in the United States with more focus on passenger ...view middle of the document...

Low-cost carriers (LCC) are airlines, which offer lower fares and less comfort. They are also called as budget airlines, cheap flights and discount carriers. These airlines may charge extras like food, pillows, and priority boarding and seat allocation to make up for the lost revenue for discounted ticket price. The low-cost airlines are Allegiant Air, Frontier Airlines, JetBlue, Southwest Airlines, Spirit Airlines, and Virgin America. Currently, the world’s largest low-cost carrier is Southwest Airlines.

Airline business is fundamentally a service industry. Airlines perform a service for their customers, transporting them and their belongings from one place to another for an agreed price. It is similar to other businesses like banks, restaurants, and insurance companies. Customers are not given a product in return for the money they spend. There is no inventory created and stored for sale at some later date.

The American airline today is an oligopoly; with four major carriers dominate the industry, with a combined market share of 61.2%. These airlines are American Airlines, Delta Air, Southwest Airlines, and United Continental. An oligopoly exists when a market is controlled by a small group of firms. These firms have price making power. The industry is highly competitive and capital-intensive. Because of its capital-intensive nature, fixed costs and barriers to exit are high.
But can we characterize it as a traditional oligopoly? As barriers to entry are low due to liberalization of market access, a result of globalization. According to the IATA (International Air Transport Association), about 1,300 new airlines were established in the last 40 years. The seemingly unprofitable routes that the big carriers cut from their networks have attracted smaller carriers. This can also be due to the availability of leasing options and external finance from banks, investors, and aircraft manufacturers.

United Airlines, Delta Air Lines, American Airlines and Southwest Airlines are the top ranked airlines based on 2014 domestic market share, with a combined market share of 61.2%.
Southwest Airlines leads with 16.9%, followed by Delta at 16.8%, United Continental 15.1% and American Airlines 12.4%. The list continued with US Airways at 8.3%, JetBlue 5.1%, Alaska Air 4.3%, ExpressJet 2.3%, SkyWest 2.3%, and Spirit at 2.1%. Other airlines comprised the remaining 14.4%

The airline industry requires a large amount of money to operate effectively. It is a capital-intensive business. They need an enormous range of expensive equipment and facilities, from airplanes to flight simulators to maintenance hangars. It is very different from other service businesses, which only need a storefront and a telephone to get started.

More than one-third of the airline revenue generated each day goes to pay its workforce. Computers have enabled...

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