Southwest Airlines – the USA airline industry

The DATA, the worldwide association of airlines, showed that the global airline industry had consistently failed to earn returns that covered its cost of UAPITA. (Grant) In the US airline industry, approximately 100 certificated passenger airlines operate over 11 million flight departures per year, and carry over one-third of the world’s total air traffic – US airlines enplaned 745 million passengers in 2006. US airlines reported over $160 billion in total revenues, with approximately 545,000 employees and over 8,000 aircraft operating 31 ,OHO flights per day.

The economic impacts of the airline industry range from its direct effects on airline employment, company profitability and net worth to the less direct but very important effects on he aircraft manufacturing industry, airports, and tourism industries, not to mention the economic impact on virtually every other industry that the ability to travel by air generates.

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Commercial aviation contributes 8 percent of the US Gross Domestic Product, according to recent estimates.

The economic importance of the airline Industry and, in turn, its repercussions for aircraft manufacturers, makes the totality of airline profits and their dependence on good economic conditions a serious concern for both industries. This concern has grown dramatically since airline deregulation, as stable profits and/or government assistance were the rule rather than the exception for most international airlines prior to the asses. As shown in Figure 1, the total net profits of world airlines have shown tremendous volatility over the past 1 5 years.

After the world airline industry posted 4 consecutive years of losses totaling over $22 billion from 1990 to 1993, as a result of the Gulf War and subsequent economic recession, it returned to record profitability in the late asses, Ninth total net profits in excess of $25 billion being reported by world airlines from 995 to 1999. Even more dramatic was the industry plunge into record operating losses and a financial crisis between 2000 and 2005, with cumulative net losses of $40 billion.

MIT) Synopsis of the Case ere problems of the airline industry could not be attributed to the specific circumstances of the time: international terrorism, high fuel prices, or the financial crisis and its aftermath. Dismal profitability had been a near constant feature of the US airline industry since deregulation. And the situation was little different in other countries: almost all European airlines were losing money. Nor could poor industry performance be attributed to inept management. Despite criticism of the managerial effectiveness of the legacy carriers, the Lacks were also weak financial performers.

Even the much-lauded Southwest Airlines had failed to cover its cost of capital during 2008-2011. “We Eve been here before, many times,” observed one industry veteran. Grant) Relevant Factual Information about the Problem or Decision the Organization Faced A key doctor intensifying competition in the industry NAS been the barriers to exist that prevent the orderly exit of companies and capacity from the industry. The indecency for loss making airlines to continue in the industry for long periods can be attributed to two key exit barriers: first, contracts (especially with employees) give rise to large closure costs.

A critical problem for otherwise financially healthy airlines was meeting competition from bankrupt airlines, which had the benefit of artificially lowered costs. (Grant) Explanation of Relevant Concepts, Theories and Applications Derived from Course Materials Since the deregulation of US airlines in 1978, the pressure on governments to reduce their involvement in the economics of airline competition has spread to cost of the rest of the world. The US experience with airline deregulation is perceived to be a success by other countries, as the overall benefits to the vast majority of air travelers have been clearly demonstrated.

While US domestic air travel grew at rates significantly greater than prior to deregulation, average real fares declined since deregulation and today remain at less than half of 1978 levels. Several successful new entrant and low-fare airlines had a great impact both on airline pricing practices and on the publics expectations of low-priced air travel. And, spite worries at the time of deregulation that competitive cost pressures might lead to reduced maintenance standards, there is no statistical evidence that airline safety deteriorated.

At the same time, the US deregulation experience had some potentially more negative impacts.

The pressure to cut costs, combined with increased profit volatility, mergers and bankruptcies of several airlines led to periodic ebb losses, reduced wages and airline labor unions with less power than they previously enjoyed. (MIT) Recommendations ere development of large connecting hubs by virtually all US major airlines also eased concerns about the pricing power of dominant airlines at their hub cities. The management strategies and practices of airlines were fundamentally changed by deregulation, liberalizing and, very simply, competition.

Cost management and productivity improvement became a major focus of US airlines for much of the past twenty years, and non-US airlines have more recently been forced by competitive realities to face up to this challenge as well.

A by-product of the quest for lower costs and increased productivity has been the pursuit of economies of scale by both US and non-US airlines. In the past, internal growth and/or mergers were the primary Nays in which airlines hoped to take advantage of scale economies.

With growing government concerns about industry consolidation, further mergers have become less likely. The response of airlines has been to expand their networks and to achieve at least some economies of scale through partnerships and “global alliances” designed to offer a standardized set of products and to project a unified marketing mage to consumers. (MIT) Alternative Recommendations To meet the requirements of their increasingly discerning customers, some airlines are having to invest heavily in the quality of service that they offer, both on the ground and in the air.

Tickles travel, new interactive entertainment systems, and more comfortable seating are Just some of the product enhancements being introduced to attract and retain customers. (Unknown) By doing this they are establishing customer loyalty which brings back their most important resource, money. Conclusion Reviewing the airline industry shows us that no organization is perfect but through careful strategic planning they can be successful.