The Airline Industry In 2001 2004

1166 words - 5 pages

Plane Wreck: The Airline Industry in 2001 - 2004

Between 2001 and 2003, players in the global airline industry lost some $30 billion, more money than the industry had made since its inception. The losses were particularly severe among the big six airlines in the United States (American Airlines, united, Delta, continental, US Airways, and Northwest). In 2002 these major airlines lost $7.4 billion and another $5.3 billion in 2003. Both US Airways and United were forced to see Chapter 11 bankruptcy protections. Although forecasts suggest the six major airlines will break even in 2004, a return to the boom years of 1995-2000, when the airlines posted record profits, seems unlikely anytime ...view middle of the document...

In 1998 the budget airlines held a 16 percent share of the U.S. market, and by mid 2004 their share had risen to 29 percent.

The key to the success of the budget airlines is their business model, which gives them a 30 to 50 percent cost advantage over traditional airlines. The budget airlines all follow the same basic script: They purchase just one type of aircraft (some standardize on Boeing 737s, other on Airbus 320s). They also hire nonunion labor and cross-train employees to perform multiple jobs (for example, to help meet turnaround times, the pilots might help check tickets at the gate). As a result of such flexible work rules, Southwest needs only 80 percent employees to support and fly an aircraft, compared to 115 at the big six airlines. The budget airlines also favor flying "point to point" rather than through hubs, and they often use cheap secondary airports rather than major hubs. They focus on large markets with larger traffic volume (such as up and down the East Coast). To cut costs further, they offer no frills on the flights: no in-flight food or complementary drinks. Finally, prices are set low to fill up the seats.

In contrast, the business model of the six major airlines is based on the network or hub-and spoke system. Under this system, the network airlines route their flights through major hubs. Often a single airline will dominate a hub (thus United dominates Chicago O'Hare airport). This system was developed because it was a way of efficiently using airline capacity when there wasn't enough demand to fill a plane flying point to point. By using a hub-and -spoke system, the major network airlines have been able to serve some 38,000 city pairs, some of which generate fewer than fifty passengers per day. But the budget airlines seem to have found a way around this constraint by focusing on a few hundred city pairs where there is sufficient demand to fill their planes and flying directly between them (point to point). The network carriers also suffer from a higher cost structure because of their legacy of unionized work force. In addition, their costs are pushed higher by their superior in-flight service. In good times, the network carriers can recoup their costs by charging higher prices than the discount airlines, particularly for business travelers, who pay more to book late and to fly business or first class. In the weak...

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