Us Airline Industry Analysis
The 2013 global passenger airline industry is estimated to be a $539 billion industry with an additional $68 billion generated by these same firms through cargo transport9. The key measure of units for the industry is expressed as revenue passenger kilometer or RPK. This is defined as the actual kilometers flown by revenue paying passengers 10 and is estimated to be approximately 5.
6 trillion for 20136.A final primary measure of the industry size is scheduled number of passengers. This is forecasted to be 3. 1 billion9. These passengers are carried through more than 2000 airlines utilizing over 23,000 aircraft to complete more than 28 million flights to over 3700 locations 9. Global Airline Performance and Growth The industry will transform this $539 billion into $22.
3 billion of operating profit (3. 3%) and $10. 6 billion in net profit (1. 6%)9. An additional measure of efficiency performance is passenger load factor or PLF.
This is the measure of % of available seats used (in kilometers).The 2012 global PLF was 79. 1% which is a result of a continued steady improvement in efficiency for the past five years (2008 = 75. 0%)2. The industry has grown steadily in RPK at a CAGR of 4. 7% over the past 20 years6 and 5.
1% over the past five years9. As population, air travel per capita and globalization continues, the industry is forecasted to double in RPK over the next 15 years 6,8. Total revenue growth for the past 10 years has been steady at 7. 6%, outpacing general GDP, while net profits are highly varied year over year, ranging from net losses to returns of 4. 0%9.The most significant drivers to profitability are cost side elements and specifically jet fuel costs.
As industry has become both more efficient in general costs and more effective at hedging variable fuel costs, the past three years have demonstrated stable, favorable and growing profit returns2,6,8. To be sure, the industry is far from secure with 41 bankruptcies filed by US based airlines alone in the past decade12. Industry Segmentation In addition to aforementioned segmentation by cargo and passenger mileage, the industry can be segmented geographically and by service area.Geographically, the global market share is divided (via RPK) as Asia-Pacific 31. 1%, North America 25.
3%, Europe 25. 1%, Middle East 9. 1%, Latin America 6. 8%, Africa 2. 6%2.
The industry is also defined by international versus domestic travel. Domestic travel is often further subdivided into regional versus national or major airlines. Within the 5. 3% growth in RPK, international travel represented an RPK growth rate of 6. 1% while domestic travel represented 4.
0% growth2. Within each region, the Middle East has represented the largest 20 year growth of 7. % while North America represented the slowest at 3. 3%. Within each traffic flow, the US domestic travel market remains the world’s largest at over 14% of the current RPK share.
However, projections are that domestic travel within the People’s Republic of China will attain the dominant global share by 2031 based on its CAGR of 7. 0%. Additional notable growth in travel flow is domestic travel within Inida, a CAGR of 9. 9%6. US Air Market The US Airline market is a $174. 7 billion dollar industry generating a net profit margin of 2.
% and employing over 514,000 people1 while representing an estimated 8% of the US GDP8. Over one hundred certified airlines operate in the US with competitors largely classified into two categories: legacy majors and low-cost carriers3. Recent economic pressures relative to travel volume losses associated with national economic conditions and cost increases tied to jet fuel spikes, post- September 11th security measures and federal taxes and mandate compliance costs have created a pattern of consolidation within the industry10.The industry is not significantly removed from the period of terrorist attack induced economic shock that ran from 2001 to 2005 in which the US airline industry posted net losses of $40 billion3. Most dramatically, this consolidation has occurred through mergers which have created four dominate players controlling more than 75% of the total addressable market3. These include: Delta (with Northwest), United (with Continental), Southwest (with Airtran), and American (with US Airways).
Additionally, establishment of partnerships and alliances have been utilized to create competitive advantage through cost sharing and increasing flexibility3. Major examples include the Star Alliance of United, US Airways and Continental and the Sky Team Alliance of Delta, Northwest and Air Alaska4. With continued competitiveness and cost efficiency improvements, today’s mean airfares remain at approximately half of 1978 fare values4. This has led to a significant market share shift from the legacy majors operating hub and spoke strategies to low cost carriers operating point-to-point strategies.Low cost carrier share has increased fourfold throughout the first decade of the 2000s now comprising more than 25% of the total market3.
Airtran, JetBlue and Southwest are clear examples of players succeeding at this type of strategy. With low-cost carriers operating at utilizations as much as 46% higher than legacy majors and employee cost per available seat mile as much as 25% below, network carriers have had to utilize Chapter 11 or the threat of it to downsize, renegotiate labor contracts and perform other significant cost cutting measures to remain viable3. ThreatsMany external influences continue to threaten the viability of the industry. Most notably, these include the aging infrastructure of both airports and the fleets.
With demand outpacing the capacity of runways and air traffic control systems, airlines face allocation restrictions, congestion charges and increased cost from taxes levied to upgrade the system. Additionally, the increased hassle factor associated with current security measures combined improvements to telecommunications in business meetings present risks to travel choices within the business customer segment3.Maintaining the business traveler base is critical for airlines as the average business traveler ticket is five times that of the leisure travel while remaining significantly more inelastic to price increases4 . Regulations Several key regulations pepper the dynamics of the US airline industry. The first is the FAA dual purpose mandate which charges this national organization both with overseeing the safety of the industry and promotion of the industry itself. This creates a conflict of interest that can leave loopholes for competitors to exploit without rigorous self policing of safety standards.
Additionally, the Railway Labor Act, which has jurisdiction over the airline, industry prevents industry workers from striking. However, this does not preclude them from taking collective bargaining measures4. Lastly, US government regulations require that airline ownership be limited to companies or individuals within the United States3,4. As airlines continue to globalize, federal sources have indicated intentions to relax this standard which could have significant effects on the industry. Similar national regulations exist throughout the worldwide market.Works Cited
mit.edu/airlines/analysis/analysis_airline_industry.html”>http://web. mit. edu/airlines/analysis/analysis_airline_industry. htm
