Lizzy Bits asked: Turmoil in the Airline Industry
Even before the September 11 terrorist attacks, the major airlines were flying into stiff head winds. Slim to nonexistent profits, bankruptcies and buckets of red ink, poor service, late arrivals, overexpansion, frequent air-traffic control breakdowns, some of the worst labor-management relations in business, high fuel costs, a full-blown economic downturn, and the collapse of business travel had cast this industry into one of the worst periods in aviation history.
Road Warriors Get Smart
For years, the major airlines had succeeded in getting business travelers (road warriors) to pay premium fares by pampering them with special business-class seats and other perks. Business travel was their lifeblood. Sales of unrestricted fares and last-minute tickets generated about two to three times as much as economy fares and contributed about 70 percent of a major airline?s revenue. But with corporate profits hitting the skids in late 2000, companies put the brakes on travel spending.
The corporate exodus hit the major airlines hard. Resourceful business travelers used substitute products such as videoconferencing or other transportation modes ? even if it meant putting up with inconveniences ? to reduce travel expenses. Some turned to the Internet to find cheaper airfares. Others moved their business downstream to discount airlines such as Southwest and Jet Blue. Major airlines tried to raise round-trip leisure tickets to make up for their lost business revenues, but fierce competition from discounters prevented them from doing so.
Air Travel is ?Wal-Marted?
Just as Wal-Mart did in retailing, the discounters of the air such as Southwest and Jet Blue are squeezing the major airlines from all ends. Low-cost carriers now account for nearly 20 percent of the U.S. domestic air capacity, up from 6 percent in the early 1990?s. They can afford to sell travel tickets for less because they have many cost advantages over full-service rivals. To begin with, they have younger fleets, which require less maintenance, and younger labor forces that aren?t tied to complicated, inefficient labor contracts. Moreover, low-fare carriers typically fly one airplane model, thus minimizing maintenance, operating, and training costs. By contrast, big carriers typically fly six or seven types of aircraft. And unlike the big guys, the discount airlines don?t operate expensive hub-and-spoke systems.
Caught Between a Hub and a Hard Place
Using a hub-and-spoke route system, major airlines scoop up traffic from smaller cities (the spokes) and funnel it through a few gathering points (the hub). This practice allows airlines to serve small markets and offer passengers more destinations and more frequent flights. But is also presents a logistical nightmare. It forces major airlines to schedule lots of flights to arrive and depart within narrow windows of time in order to minimize passenger layover times. This means that ground crews, such as gate attendants and baggage handlers, often sit idle between waves of connecting flights. By Contrast, point-to-point carriers, such as Southwest and Jet Blue, schedule flights as if passengers are moving to their final destinations. Instead of having planes and crews sit around and wait for passengers, point-to-point carriers maintain fast-paced schedules, which means minimal downtime for aircraft and fewer personnel on the ground.
Turbulent Skies for the Bid Carriers
Today, one in four tickets sold is on a discount airline. As pressure from low-fare carriers mounts, major airlines are reevaluating every aspect of their operations. The major carriers are undergoing radical change just to stay in business. They are experimenting with changes in costs, capacity, pricing, and product features in ways they haven?t seriously contemplated since the industry was deregulated in 1978. They are stripping billions of dollars from their operations by revamping their hub system, cutting jobs, eliminating flights, ending food service, and removing first-class seats, and by simplifying their fleets to cut training and maintenance costs, Some are replacing agents with self-service kiosks. Others are wrangling concessions from unions for huge pay cuts to reduce labor costs ? a major differentiating factor when you consider that in 2002 a United Airlines captain earned $9,000 to $11,000 more a month than a Jet Blue captain. Still others, such as U.S. Airways and United Airlines have filed for Chapter 11 bankruptcy protection to reorganize their outstanding debt and lower their operating costs.
In spite of their efforts, questions loom as to whether all the major airlines can survive. Even with huge cost cuts, all airlines remain susceptible to possible terrorist attacks, economic turns, or employee unrest. As experts claim that this is just the beginning of an industry-wide shakedown. After all, no airline can fly forever losing billions of dollars.
Critical Thinking Questions
1. What s
1. What supply and demand factors have changed the equilibrium point for airline tickets?
2. How has information technology affected the airline industry?
3. How are complimentary products affected by problems in the airline industry?
4. Take a closer look at the airline industry by logging on to http://www.hoovers.com, and type in Airlines for your search. List six domestic (U.S.) airlines and their locations and six international (global) airlines with their locations as well.
5. Why do U.S. airlines form alliances with overseas partners?
Scott
