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Airline Industry Analysis

Airline Industry Analysis

Team Eight
Yang Hui
Runhui Wan
Wenjie Wu
Jingyi Wang
Wen Zhao

University of North Alabama


MG640-I03
Dr. Balch
October 7, 2013

Airline Industry Analysis

Abstract
During 2013, the global economic is recovering from the latest recession. However,
although global economy is turning back to the right track, most people believe this world is
different no matter how people examine it from whichever points. Given that, it will be an
interesting and attracting topic to insight into an industry that contains most characters reflecting
global business and economy. Airline industry, stemming from a large number of factors that
have huge influence on this industry, including economic cycle, policy changes, and business
merges, is such a market highly related to macro-economy and international business that might
be a proper sample to determine what is different from usual in the Post Financial Crisis Era.
To keep the structure clear, this analysis report is organized in six sections; each part is
assigned to a certain teammate.
In the Macro-environmental section, several economic indicators will be focused on and
examined to determine how much they are linked with the overall airline industry, nationally,
regionally, and locally. Furthermore, other respects such as policy, society, legal and technology
will be put under the light individually as well.
In the Porters forces analysis, a big picture describing how much competition companies
are facing in airline industry will show potential investors what they are supposed to know to
enter this industry smoothly, compete with rivals aggressively and negotiate with partners and
customers successfully.
In the Segment-strategy Analysis, the whole airline industry will be divided into different
sections and examined through several distinct views to help investors understand each slices of

Airline Industry Analysis

the whole market and the access to attracting target customers and grab market shares by
different strategies.
In the current issue section, the aim is to determine what and how recently happening
events would affect the airline industry, partially or totally, helping people to efficiently and
effectively to forecast what might happen further and what issues should be focused on.

Airline Industry Analysis

Table of Contents
Macroenvironmental Analysis ...................................................................................................... 1
Political Factors ............................................................................................................................................ 1
Economic Factors ......................................................................................................................................... 2
Social Factors ................................................................................................................................................ 3
Consumers Consciousness Being Promoted ................................................................................................................3
Tourism Taste and Tendency Changed ............................................................................................................................3
Technological Factors .................................................................................................................................. 4
Maturity of Internet and Videophone ...............................................................................................................................4
Accelerated Construction of High-Speed Railway .....................................................................................................4
Legal Factors ................................................................................................................................................ 5

Porters Five Forces ......................................................................................................................... 6


Threat of New Entrants .............................................................................................................................. 6
Threat of Substitution ................................................................................................................................. 8
Rivalry ......................................................................................................................................................... 11
Power of Buyer ........................................................................................................................................... 12
Power of Supplier ....................................................................................................................................... 14
Summary ..................................................................................................................................................... 16

Segments/Strategic Groups Analysis......................................................................................... 17


Segments Analysis ...................................................................................................................................... 18
Size Segment Analysis ........................................................................................................................................................18
Locations and Demographic Analysis...........................................................................................................................20
Passenger or Air Cargo ........................................................................................................................................................21
Strategic group analysis ............................................................................................................................ 23
Internal and External Environment ................................................................................................................................23
Competitor's Performance ..................................................................................................................................................23
Supply and Demand..............................................................................................................................................................24

Current Issues ................................................................................................................................. 24


Merger ......................................................................................................................................................... 24
Geopolitical Events Affect Fuel Price ..................................................................................................... 27
Security, Terrorist Attack, And Aircraft Accident ................................................................................ 29
Government Regulations .......................................................................................................................... 30

Conclusion ...................................................................................................................................... 31
Corporations: ............................................................................................................................................ 31
Investors ..................................................................................................................................................... 33

Reference ......................................................................................................................................... 35

Airline Industry Analysis

Macroenvironmental Analysis
If we want to run a very successful company, managers have to focus on the micro and
macro environment. However, many managers only concentrate on their companys
microenvironment such as profit. The macroenvironment is also very important part to influence
an organizations decision making and performance. In this paper, we are going to use PESTEL
framework to analysis the macro environment of the airline industry. Many factors will be
considered which affect this industry including political factor, economic factor, social factor,
technological factor and legal factor.

Political Factors
Political factor is the first significant role for the airline industry, especially in PESTEL
analysis. If a country without stable and powerful government to support, the less profit and
fewer flights they will have. However due to countries with vibrant tourist industries, more
flights will be considered to cater to the needs of enormous tourists. There are several important
political measures that have occurred recently.
In the international level, the United States plays a very significant role in the international
airline industry. In the conference in Chicago, the United Stated has advocated open skies, and
after half of the century the government advanced this aviation liberalization, in early 1944. In
the late 1970s, this deregulation policy caused the redundancy of the market capacity, so the
policy maker changes mind to encourage domestic air transport enterprises to enter the

Airline Industry Analysis

international market and try to encourage the foreign governments give airways more operating
rights. Of course, this kind of open skies is not completely equivalent, therefore America is
firmly opposed to the traffic exchange, which will damage domestic airlines. Such as the free
transport through Atlantic and the European Union countries. Although the U.S. government
announced that the open skies policy will be prompted to create a truly open to the international
air transport services environment, the actual effect of the policy for the U.S. aircraft carrier has
created a huge competitive advantage.
In the internal level, The United States established a strict censorship for the foreign airline
companies who apply the U.S airline route rights and also the government controls the aviation
rights for foreign carriers to ensure the interests of the American airlines are inviolable.

Economic Factors
With the rapid development of the economy, it brings a lot of opportunities and enormous
challenges for the airline industry. Although the world economic recovered from the economic
crisis and air transport market expanded clearly, the growth rate increases imbalanced. In the
global market of the airline industry, the Asia-Pacific routes market is growing rapidly, but the
original business model of Atlantic routes is shrinking. This is a direct reason why some of the
backbone airlines have to restructure, to expand new network to reduce the risk. For the market
of Chinas airline industry, Chinas civil airline enterprises complete transportation total turnover
4.904 billion ton kilometers in August 2010. However it increases about 22.8% than the same
month of the previous year. And of course the transportation increases more because of the World

Airline Industry Analysis

Expo and some other large activities.

Social Factors
Consumers Consciousness Being Promoted
Taking a plane being universal, the consumers awareness about airline transportation has
been significantly promoted. It is especially the events frequently occurred recently such as
compensation for flight delays, violence in airports and planes taken over by passengers that
reflect the consumers strengthened consciousness to preserve their legal rights. The details of
transportation has been known by more consumers, which gives them more consciousness of
their rights and what they should do other accidents. This has been airline companies biggest
motive to provide more humanized services to meet their standards and in the meantime to
persuade consumers to put themselves in the companies place so that they can understand the
specificity of this job.

Tourism Taste and Tendency Changed


Since most seats are consumed by travelers, airline transportation is closely related to
tourism. There are more and more passengers with education, plentiful tourism experience and
individual requirements. This trend compels airline companies to put more emphasis on the
market analysis and to devise products which better satisfy consumers requirements.

Airline Industry Analysis

Technological Factors
Maturity of Internet and Videophone
Internet is always exerting a subconscious influence on peoples lifestyle in modern society
since its first appearance. Airline companies established their own websites, one after another, to
promote their products. Electric tickets extensive use in airline transportation brings possibility
to B2C, a direct business model based on Internet. Besides, technologies which reflect
individuation and participation, such as electric boarding check and self-help charging system
online, are among airline companies efforts to follow the rapid development of Internet.
Moreover, videophones gradual maturity and its lower and lower price bring profound impact
on the airline transportation. But what influence most is the business travel market which is
regarded as a resource of high quality by the airline companies. To cope with the financial crisis
in 2008, many transnational corporations established teleconference system to cut travel expense.
Together with more users reducing the per-unit cost, it made these corporations more
competitive.

Accelerated Construction of High-Speed Railway


It is generally acknowledged that railway is the most environmentally friendly means of
transportation. In recent years, China has got significant breakthrough in high-speed railway
technology, which makes it possible to construct high-speed, efficient railway network of the
next generation. The drastic boost in miles of high-speed railway nationwide will finally

Airline Industry Analysis

construct railway transportation network which can be compatible with domestic airline network.
Airline will be in obvious inferior position in the competition with railway if the journey takes
less than 3 hours. Although passengers who need a connecting flight or a long distance journey
will continue to take a plane, the market including most journeys with a distance of 1000 to 1500
kilometers will be occupied by railway, instead of airline.

Legal Factors
Antitrust laws in the United States have a history of more than 100 years. The <Sherman
Act> of 1890, the< Clayton Act> of 1914 and the <Federal Trade Commission Act> of 1914,
these three core laws become the foundation of the Americas antitrust regulation legal system
(Havel, 2009). This system simplifies the course of entry and exit formalities and pushes the air
transport market to other countries. This marked that American airline industry began to break
monopoly industry. Furthermore, it began to reform with free competition as the core of the
marketization. The United States encouraged the bankruptcy and mergers at the same time. Now
the number of U.S. airlines companies from 234 in 1987 reduced by more than 30. The top 10
airlines carve up the national market share of 97.4%. At the same time, the United States
strengthen the anti-monopoly regulation, so as to adapt to the development of civil aviation after
deregulation.
Though this analysis, I draw a conclusion that we do not only focus on economic factors
but also pay more attention on social factors. To protect the profit of the airline industry, the
government needs to prevent monopoly and unfair competition.

Airline Industry Analysis

Porters Five Forces


Porters Five Forces Analysis is a useful tool to examine the competitive intensity within
the industry and also determines the attractiveness of a market. In order to analyze airlines
industry, we have to look at each of these forces.

Threat of New Entrants


In our previous data analysis section, we picked 74 airline companies and did the analysis.
The table 1 frequency of formation provided below is good for analysis the frequency of new
entrants into the industry. It is clear to see that before 1980, the airline industry has experienced a
long period of a slow growth. From 1980 to 2009, the industry has expanded rapidly. In the
decade of 2000-2009, the new companies founded rate reached a peak of 28.38%. After the year
of 2009, the formation rate declined very substantially from the peak. To combine the frequency
of formation chart with product life cycle, we may conclude that before 1980, airline industry
was in the introduction stage. During 1980 to 2009, the airline industry was in the growth stage.
And after 2009 until now, the airline industry is experiencing maturity stage. In the maturity
stage, the market shares are held by a few majority companies. In addition, based on the
experience curve, the mature airlines have extreme advantage of unit cost (fixed plus variable
cost per mile). Thus, these two significant advantages set up high barriers for new entrants and
lead a low threat of new entrants in the airline industry.

Airline Industry Analysis

Table1: Frequency of formation

Source from airlines industry data analysis


The U.S. airline industry may give a good instance for the threat of new entrants. After the
Airline Deregulation Act implemented in 1978, the barrier entry into the airline industry
decreased significantly, and many new entrants entering the market. As a result, there were as
many as 52 new entrants into the airline industry between 1980 and 2000 (Bamber, 2011).
However, according to Maynard, the industry incurred losses of more than $30 billion from
2001 to 2006 and has gleaned only scarce profits since then. Persistently high fuel costs are
driving airlines into bankruptcy court, or one anothers arms, something proponents of
deregulation did not foresee, said Alfred E. Kahn, who led the air board when deregulation took
place (Maynard, 2008). According to Desai, many airlines that used to dominate the industry
ended up filing for bankruptcy, merging with other carriers, or simply disappearing from the
radar screen (Desai, 2002, p.4). The table 2 below listed U.S. airlines ranked by sales in 2012.
The top 5 companies hold over 85% of total U.S. airline industry revenues presented a highly
concentrated industry and pushed the entrants away from the door.

Airline Industry Analysis

Table 2: U.S airlines ranking

Data form airlines industry data analysis

Threat of Substitution
Generally, the flights in the airline industry can be divided as domestic flights and
international flights.
On domestic flights, bus shuttles, cars, and trains can be considered as substitutes. The
threat of substitution depends on many factors, such as the purpose and distance of travelingthe
price of substitution or complementation, etc.
For the purpose of traveling factor, keep all else factors being equal, business passengers
have less flexibility in time than leisure travelers, and they are less sensitive to price changes
than leisure travelers as well, so the threat of substitution for business passengers is lower than

Airline Industry Analysis

leisure travelers. For the distance of traveling factor, the threat of substitution for long-haul
routes is generally lower than that for short-haul routes. Taking a flight for a long-haul route can
save substantial time comparing with bus shuttle, car, or train. Based on the Expedia search
result, it only takes four-hour flight from Los Angeles to Atlanta with no stop. Normally
passengers need around three hours to check-in, baggage handling, security, boarding, and
taxiing, so the amount of time will be around seven hours. However, if someone wants to drive
from Los Angeles to Atlanta, it takes as much as thirty-one hours without a stop based on the
calculation from Google Map. Furthermore, driving a car for a long journey is more dangerous
than taking a flight. For the price of substitution or complementation factor, decrease the
substitution price or increase the complementation price will decrease the demand for air travel.
In a few countries, such as China, high-speed rail is now making an earthquake in the airline
industry. It takes only ten hours from Beijing to Shenzhen and reduces about fourteen hours by
taking high-speed rail instead of train. Flight from Beijing to Shenzhen may cost around six
hours including flight time and preparation time. Thus, the airlines in China have to offer deep
discount fares in order to match the high-speed rails price. The threat of substitution of the
airline industry is higher in the cities offered high-speed rail than not; however, in reality, the
countries that tails of high-speed rail are very limited and the actual mails are really low. The
chart 3 and 4 below are from Boeings 2013-2032 Current Market Outlook Report. Up to 2013,
only three countries have the high-speed rail over 2,000 Km, and the total track length of rail is
only 2.5% of the airline routes. Thus, the threat of substitution is about medium to low level in
domestic.

Airline Industry Analysis

Table 3: Top high-speed rail by country

Source from Boeings 2013-2032 Current Market Outlook Report


Table 4: Rail track vs. air routes

Source from Boeings 2013-2032 Current Market Outlook Report

10

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On international flights, there is no competitive substitution for the airline industry, so the
threat of substitution is extremely low.
Looked from the overall, the threat of substitution in the airline industry is in low level.

Rivalry
The degree of rivalries intensity highly influences the profitability of the industry. In the
airline industry, due to the nature of the industry, the fixed costs of planes, fuel, equipment, and
salaries for pilots, engineers, and other staffs for carrying baggage and customer service are
extremely high.
Dasai and Pater (2002) have described the rivalry within airline industry as follows:
The product differentiation among airlines and switching costs for passengers also magnify
rivalry. An example of switching cost is the cost incurred if individuals or corporations change
airlines and forgo the benefits of adding frequent flier miles onto previously accumulated miles
on another airline. The decision to go with a new airline becomes burdensome since miles
between airlines cannot be transferred. Even though the introduction of frequent flier programs
was intended to increase customer loyalty, low cost airline strategies have diminished the
effectiveness of these membership plans (Desai, 2002, p.3).
The table 5 and table 6 are from our previous data analysis. From the table 5, it is obvious
to see that the industrys revenue keeps a stable growth from 2008 to 2012. The table 6 is year on
year growth trends. It shows the industrys growth rate declined significantly from 18% down to
7%. High fixed cost, low industry growth, low product differentiation, and low switching costs

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make the airline industry suffering a high intense rivalry.


Table 5: Airline industry revenue

Source from airlines industry data analysis


Table 6: YOY growth trends

Source from airlines industry data analysis

Power of Buyer
As we discussed in rivalry section, the switching costs and product differentiation in the

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airline industry are really low. These make the airlines suffer in a price war to attract customers.
Price seems to the one of the most factors determine the customers decision and others such as
service quality does not do a very important role in decision making. In addition, since the
capital requirements for an airline is very large and starting an airline business requires
professional engineers and staffs in various fields, the threat of backward integration by buyers is
really low. All of these factors lead the buyers have high powers to reduce the airlines industrys
profits; however, the concentration of buyers market is extremely low. The global airlines had
over 815 million scheduled passengers traveled in 2012 based on the Department of
Transportations Bureau of Transportation Statistics reported. Therefore, it is hard to determine
the power level of buyers.
Another way to analyze power of buyers is looking at demand elasticity. Buyers normally
have more power when buyers are price sensitive or air travel is elastic, and less power when
buyers are price insensitive or air travel is inelastic. According to IATA, the elasticity of air
travel demand varies according to the coverage and location of the market in which prices are
changed and the importance of the air travel price within the overall cost of travel (International
Air Transport Association [IATA], 2008)
Following are the estimated price elasticities of passenger demand matrix. From the level
of aggregation point of view, the average of route level (where competition between airlines or
city- pair markets is high) is 1.4, the average of national level is 0.8, and the average of
supra-national level is 0.6. The route level is elastic because the high competitions exist. Buyers
easily switch to the airline that offers the lowest fare, and buyers in route level have high

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bargaining powers. The national level and supra-national level are inelastic since the buyers have
less choices or substitutions, and for those buyers they have low bargaining powers. In the
geographic point of view, Intra Sub-Saharan Africa and Trans Pacific are inelastic, buyers that
flight to these places may have to afford high prices and have low bargaining powers. Flight intra
Europe is elastic and buyers have high bargaining powers in this region. Taking an average
calculated from the matrix below, the average price elasticity in the airline industry is 0.97 which
showing a low bargaining power for airline passengers.
Table 7: Price Elasticities of Passenger Demand Matrix

Source from IATA air travel demand report (IATA, 2008)

Power of Supplier
The suppliers of the airline industry are numerous and varied, such as aircraft

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manufacturers, food suppliers, airports, electronic systems, laborers, fuel providers, etc. In order
to simplify our analysis, we only pick one of the major aspects to analyze in this section that are
aircraft manufacturers.
The table 8 below is the list of the world's aircraft manufacturers involving in the
commercial aircraft business based on the Hoovers search result. Compared to the number of
airline operators, the suppliers of manufacturers market are extremely concentrated. In addition,
the switching costs of the airlines are extremely high. If an airline terminates a long-term
contract with Boeing and switch to Airbus, it may get up a benefit of favorable credit terms or
spend a lot of extra money to hire engineers and train pilots. The availability of substitute
products is really low since we cant find a perfect substitute product outside the airline industry
and switching costs are very high among the aircraft manufacturing industry. These three factors
make the suppliers bargaining power pretty high. However, in the airline industry the inputs are
extremely standardized. Airline companies only seem to differentiate with airfares and amenities
provided by the services. The planes are very similar and the functions are similar as well. The
importance of customer is extremely high for the manufacturing industry because Airline firms
are the only source of income for these manufacturers. Furthermore, because the nature of
complicated and professional operation, and large capital investment, the suppliers may not
consider to be involved in the airline operating industry. Low threat of forward integration, low
differentiation of the products and high importance of the customer make the bargaining power
of suppliers very low. Thus, the overall power of suppliers is medium.

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Table 8: list of worlds aircraft manufacturers

Source from Hoovers, arranged by Wen Zhao

Summary
In airline industry the threat of new entrants, the threat of substitute products, and the
power of buyers is low, the power of suppliers is medium, and the intensity of competition is
high. Based on this landscape, how to survive in this highly competitive industry is crucial.
Based on the Porters generic strategies, there are three directions can be considered.
First one is cost leadership. The airlines employing cost leadership have to minimize the
costs and pass the saving on to its customers. They focus on fast, no-frills service. Southwest
Airlines has never served meals, does not have advanced seat reservations, and flies only Boeing
airplanes (Analyzing Southwest Airlines, 2012). They only use the low price to attract
passengers and survive in the price war. Southwest Airlines is a typical example in the airlines
that implement cost leadership strategy. They minimize the time that their planes spend on the
tarmac in order to keep them flying and to keep profits up, claimed Scilly (Scilly, 2013). In

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2012, the sales of Southwest Airlines were $17.1 billion. The sales volume is ranked the fourth in
U.S airline industry and the sixth in the world airline industry. The second strategy is
differentiation strategy. The airlines employing differentiation strategy focus on fantastic and
enjoyable service as well as maximum comfort for passengers. The airfares for these airlines may
be much higher than cost leadership airlines, but they are more profitable. Singapore Airlines is
the best example for differentiation strategy. Singapore Airlines is one of the leaders in the
passenger airline industry. In the words of Roll (2013), they replace their airlines every 4-5
years, taking advantage of new technology. The company is always the first to introduce new
innovative ideas for example hot meals, free alcoholic and non-alcoholic drinks, hot towels,
personal entertainment systems, and video on demand. Singapore Airlines will also be the first to
own the new Airbus Super jumbo A-380 in 2006 (Roll, 2013). All of these make the Singapore
Airlines awarded the worlds NO. 2 best airlines in 2011, and NO.3 best airlines in 2012 (The
world's top airlines, 2013). The third strategy is focus strategy. The airlines employing focus
strategy may only offer a few routes or pick up small near city airports.
In concluding, business strategy is the main and crucial factor surviving in the airline
industry, and it will be crueler in the future with the development of new technology.

Segments/Strategic Groups Analysis


In the airline industry market, not all the companies are the same; each might have distinct
targeted customers and diverse operating strategies. Thus, for better analyzing the whole industry,

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we divided the airline industry into several segments to compare each one of those companies.
Given so, the results we received might beyond our expectations.
Nowadays, the competition in the airline industry and between most industries is becoming
more and more severe, requiring investors to be cautious and companies to be sensitive to any
changes, and therefore making segment analysis necessary.

Segments Analysis
Two different forms of segmentations are being used in this analysis, which are generally
defined as external factors and internal factors. The external factors are main refer to the
companies sizes compare, locations and geographic analysis, and business or cargo type analysis;
while the internal factor analysis the industry from psychographic ways, such as, the service type,
social class, as well as the market promotions.

Size Segment Analysis


In the previous data collection part, all the companies sizes were generally divided up to
six types based on the operating assets, which are >$20 B, $10-$20B, $5-10 B, $1-5 B, $. 5- 1B,
and <. 5 B. By analysis the 2012 revenues of all the companies, the market share according to the
company sizes are shown in the following tables:
Table 9 and Table 10: Year 2012 and Year 2011

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\
Source from airlines industry data analysis
From the data of year 2012, the market share of the industry generally has the positive
relationship with the company size, which means the larger the company is, the more market
share it owns. This refers that the larger companies may have more airline routes, offer longer
distance travel, and the security satisfaction rates in customer survey are also higher than others,
therefore, they have comparative advantages than those smaller companies in acquiring market
share.
For more accuracy, the market share analysis of year 2011 also calculated as above, the two
charts have a high similarity on the conclusion. However, the companies which sizes between
$1-5 B seem share more market than those whose size between $5-10 B. The reason why this
phenomenon consistently happens may contain one reason is that the company size between
$5-10 B, is positioned in the middle of the whole industry, they can compare neither to the very
low fare of the small companies, nor to the larger companies which have more aircrafts and
routes in total. This gives the relatively smaller companies the opportunity to enter into the
market and share the profit.

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Locations and Demographic Analysis


The Airline industry is one of the minor industries that deeply affected by changes in the
international and domestic regulatory environment. By comparing the global major airline based
on the geographic segments may better help the companies make the further strategies in the
competitive environment. Whether they have related to each other or not become an interesting
question before the starters want to enter the industry. In this paper, we adopted the net income to
make an analysis based on the major global geographies. The following charts show the domestic
and international net income from the period Jan 2000 to Jun 2013:
Table 11:

Source from airlines industry data analysis


From the chart we can conclude that the macroeconomic environment has a strong
influence on the domestic airline industry net income, in other words, the domestic airlines net
income has the elasticity relationship with the whole airline industry net income. However, the
international airline seems relatively stable than any other segments. The high volatility of the

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domestic airlines may bring the barrier for the investors who want to enter the airline industry.
A look back to the last four years regional growth in passenger-kilometers performed ratio,
shown as Table 12,
Table 12:

Retrieved from: ICAO NEWS RELEASE on MONTRAL, 5 July 2012

In terms of PKPs on total scheduled services, the world ratio was generally increasing in
these years, which means the economic recovery contributed to the development of the airline
industry. Among all the areas, the Asia/ Pacific, North America and Latin America and Caribbean
segments PKPs ratio have a significant growth, combing the former profit analysis of each area,
may help the companies establish the further strategy.

Passenger or Air Cargo


The passenger service airlines differ from the cargo airlines no matter the operating ways
or the management procedures. Nowadays, in terms to maximize the profit in an unstable
economic environment, most airlines are starting their business both on passenger and the cargo
service. In this part of the analysis, we would like to use the analysis of each type service to

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determine which one is more profitable during the past years and how it will perform in the
future years.
Table 13:

Data from IATA, arraged by Wenjie Wu


Table 14:

Data from IATA, arraged by Wenjie Wu


From Table 13 and Table 14, even though the revenue passenger miles are much larger than
total revenue ton miles of cargo services, the two charts trends indicate the total opposite
relationship. Especially at some significant points, such as the Sep 2002 and May 2009, when
passenger miles declined the cargo ton miles increased, and the total cargo revenue ton miles
perform an consistently increasing trend during these years, this would give us the sign to

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balance the manage of two type services.

Strategic group analysis


Strategic in the long run plays a core role in the company to survive among the fierce
competition, segmentation analysis no doubt assist the company to clear the mist of the future.
It is always better to acknowledge the position of the company before entering an industry.
Strategic analysis may concern the internal and external problems than might influences the
industry, the competitors performance as well as the supply and demand from the customer.

Internal and External Environment


The starting point of the internal and external environment aim to let us better knowing the
market current situation and find out an opportunity point to enter the industry. Based on the
investors capital and determine the company position, such as, the larger companies owned
more market share, but they may have a higher ticket price, which would lose the customer that
below the middle class. Conversely, the small companies have the comparative advantage of the
ticket price, but the total routes and the available seats may much less than others. Thus,
according to the size segment analysis, we might be able to choose the company that size
between $5-10B to invest.

Competitor's Performance
Since all the industry and economics turn to be more and more globalizing, the competition

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for the whole airline industry also broader than before. After analyzing the different region
airlines profit and volatility above, entering the domestic airline industry may be a good choice if
the risks can be better controlled, or the international airline part may be a relative stable way of
not losing capitals.

Supply and Demand


Supply and demand analysis not only limited to the customer, but also can consider the
cargo business as well as to offering better service for the final customers during their stay on the
airplane and in the airport. This analysis helps better accurate decide the future plan and
minimize the unnecessary costs and losses. The cargo business with passenger airplanes would
be a further comparative advantage for the companies to maximize the profit. The qualified
service will help increase the demand of the potential customers.

Current Issues
Merger
AMR Corp., the parent company of American Airlines filed for bankruptcy protection in
November 2011, and then it agreed to a merger offered by US Airway Group Inc., in February
2013. According to Checkler, a federal judge on Thursday confirmed AMR Corp.s plan to exit
bankruptcy-court protection through a merger with US Airway Group Inc., leaving a U.S.
antitrust lawsuit as the deals final, if formidable, barrier (Checkler, 2013).

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The merger process has not been completed so far, and there is no guarantee that it will
complete in the end. However, the airline industry seems to restructure through merger, alliance
and joint venture. Look back the history of domestic airline industry in the U.S., there have been
several mergers and takeovers in the past decade, including ValuJet purchased AirTran in 1997,
American acquired TWA in 2001, American West acquired US Airways in 2005, Southwest
Airlines purchased ATA Airlines in 2008, and the most recently Continental merged with United
Airlines while Delta merged with Northwest Airlines. Not only did the U.S. airlines have been in
the trend of mergers, the international airline industry has the same path as well. This includes
Air Canada acquired Canadian Airlines in 2000, Air France merged with KLM Royal Dutch
Airlines in 2004, Cathay Pacific purchased Dragonair in 2006, LAN merged with TAM in 2012
and so on (Brain, 2013).
The frequency of mergers, alliance, and joint venture suggests that the airline industry is
highly competitive and there are lots of risk factors could affect a companys performance and
profit. Based on the analysis about the frequency of foundation in airline industry, we see that
there were many new entrants after 1990s, which indicates that the industry is more competitive
than it was before. Besides the competition from new entrants, the merger, alliance, and joint
venture enables those companies to share their network and other resources so that they may be
able to cut down their cost. This could send other companies in competitive disadvantage. With
the increase and volatility of fuel price, economic recession in 2008, terrorist and aircraft
accidents, many airline companies are concerned about future performance and profit. As
historical data suggests, the airline industry suffered a great loss in revenue in 2001 and 2008

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because of terrorist attack and economic crisis respectively. Some airlines have failed to survive
through such a recession period and have to file for bankruptcy or to consolidate with others.
The benefit of merger, alliance, and joint venture is significant even though there are some
companies that have not cooperated well to gain the benefit they expected to. Companies that
involve in a merger, alliance or joint venture can be able to share their resources, including
access to new markets, reduce risk on the volatility of fuel price, plan a more efficient route, and
so on. If cooperate successfully together, it will help companies to reduce their cost. This cost
advantage will make them more competitive in the market and more profitable in the future.
Meanwhile, a merger means reducing two competing airlines to a monopoly in the market. The
new company may have better power control over the business such as fares.
The merger between AMR Corp. and US Airways Group Inc. is not done yet, and no one
can predict the result. If the merger fails, AMR Corp. may need to plan a new strategy to survive
in the industry. A strategy the company considers is to expand aggressively to compete against
others by cutting cost, renewing its fleet and increasing its departures with more flights. This
plan strayed from the industry trend of capacity cuts that has helped increased airline fares and
profits (Nicas, 2013). Therefore, it may destabilize the industry. If the merger completes, the new
company will be the largest airline in the industry, and it is possible to increase airline fares as
what Delta and Continental Airline did after merger. This may help to increase the profit margin
in the airline industry, but may hurt consumers benefits. Whatever this merger goes, the airline
industry needs to be profitable to keep in business.

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Geopolitical Events Affect Fuel Price


According to Macalister, prospects of a US-led military strike on Syria sent shock waves
through the energy and financial markets on August 8, 2013 with oil hitting its highest level for
six months and drawing predictions that it could reach $150 a barrel. Syria is not an important oil
producer but the wide area including Saudi Arabia produces 35% of the worlds supplies
(Macalister, 2013).
Table 15:

Source from IATA


Airline industry is energy intensive, and fuel price is the largest issue to airline industry.
From the table 15 of jet fuel and crude oil price, it is obvious that the fuel price has increased
gradually since the end of 2008. Though the fuel price has decreased a little recently, the
volatility of fuel price still has a significant impact to the airline industry and its profit. On

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September 23, 2013, the 2013 industry profit forecast was cut by 8 percent to $11.7 billion. On
its previous forecast, theres also $1 billion downgrade that reflected the increase in fuel price
driven by the Syria crisis (IATA cuts 2013,2013). Look at the performance and cost structure
of global airlines, most companies experienced significant increase in fuel and oil expense, leads
the fuel cost to be the largest operating expense for recent years. United continental Holdings,
Inc. has experienced an increase of fuel price from 30 percent of total operating expense in 2010
to 37 percent in 2012. The average price per gallon is also increased from $2.39 to $3.27. Deltas
fuel consumption increased from 30 percent of total operating expense in 2010 to 36 percent in
2012. Southwest Airlines fuel consumption increased from 16.5 percent in 2003 to 37.2 percent
in 2012. The worldwide industry has been through the same situation in the past few years.
The increase high fuel price and its volatility make the airline industry less profitable.
Besides the geopolitical events such as Syria crisis, there are many other factors, which are
beyond airline companies control, can affect the movement of fuel price in the future. Economic
growth expectation is one of the most important facts that affect fuel price. Due to the economic
crisis in 2008, fuel and oil price fell dramatically to the bottom. With the slow recovery of world
economy, fuel price also increased. The economic condition in the future is ambiguous, and it is
difficult to predict the fuel price. Even though some companies have the strategy to reduce the
risk associate with fuel price, such as hedging trade, it is still rather risky for airlines due to the
volatility of fuel price and its high price level.

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Security, Terrorist Attack, And Aircraft Accident


On April 15, 2013 during the Boston Marathon, two bombs explored and killed 3 people
with more than two hundred people get injured. Security concerns were raised worldwide again
after the terrorist attack in September 11, 2001. More recently on September 16, 2013, a gunman
shot twelve people and injured three others inside the Washington Navy Yard. An aircraft crashed
at San Francisco International Airport on July 06, 2013, and two passengers were killed with 182
injured.
The airline industry is sensitive to security problems. Market demands for flight will
decrease if security concerns were raised. Look back the history, the global airline industry has
declined a lot since the terrorist attack in September 11, 2001. Passenger demand declined about
30 percent during the initial period after that. The industry has lost a total of $55 billion since
2001 and has cut roughly 160,000 jobs. The recession in airline industry forced companies to
change in many ways. The industry has to reduce supply by cutting flights and departures so as
to raise fares to be more profitable. Some companies lost their business while others seek to
merge to be rival (Goldschein, 2011).
When theres security concern about the flight, market demand will decrease. If airlines
continue to offer the same amount of flight seats, it will drop the price down and the margin
profit will be definitely smaller. One strategy the industry used is to cut their capacity so as to
increase fares. This has been approved to help. However, since the demand decreases, the total
industry revenue will decrease as well and some companies are unable to survive through the

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recession period. The security problem will still be a large issue to airline industry in the future
because the world is not at peace at all and accident happens. A serious security problem is able
to destroy companies in the airline industry.

Government Regulations
The International Air Transportation Association (IATA) is urging governments across the
world to foster a more economically vibrant airline industry, with a focus on the U.S.
government. IATAs director general Tony Tyler criticized regulators in the U.S. for increasing
regulation of the airline industry, which raises the air travel cost (Bellamy, 2013).
Airline industry is subject to extensive regulation. For the U.S. domestic industry, it is
regulated by the Department of Transportation (DOT) and the Federal Aviation Administration
(FAA). It is also subject to the foreign regulation for international business. Any new rules and
regulations could affect a single companys operations and performance. For example, on
January 16, 2013, the FAA announced an emergency airworthiness directive to require operators
to cease Boeing 787 aircraft operations until the FAA finishes its review of the 787 aircrafts
critical systems. The redesigned 787 battery system has been approved, but theres still a lot
comprehensive testing before it can return to flight (Brown, 2013). This could adversely affect
airlines business. If the government extends its regulatory grip on issues such as security
measures, environmental concerns, aircraft operation and safety, and taxes and fees, it will
increase the cost of airlines operations. The airline industry risky as it is subject to the
uncertainty of government regulations.

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Overall, the airline industry is extremely competitive, energy intensive, and highly
regulated, and there are lots of factors can affect the airline industry. The environment can
change immediately and affect the industry. Therefore, companies should be able to change to fit
the new environment so as to survive in the industry.

Conclusion
Based on the above analysis on different aspects reflecting various current situations in the
airline industry, a clear picture is given to evaluate things happening in this domain and estimate
what will happen in future. Specifically, team 8 provides different suggestions for corporations in
this industry and advices for potential investors who might enter this industry. In other words, we
offer advices from the view point of both firms and investors.

Corporations:
Team 8 offers following suggestions for companies on size level, since airline firms in
different size segments are competing with their rivals by unique competitive advantage.
For Huge scale companies (>$20B): Cut cost, or purchase others
In airline industry, top 7 firms are controlling up to 41% the world market and the top three
ones are controlling 65% market shares in the U.S., indicating a strong capital advantage over
their rivals. However, net incomes, on the other hand, are not as promising as revenues. Analysis
on this part reveals that increase in oil price partially explains why cost for this size segment is
rocket high recently, and further provides convincing evidence for the severe drop of net incomes

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following a weak but still stable trend in long-run pattern.


Therefore, the recommendation for these large scale companies is to cut down their cost as much
as possible in short-term to pull back their track into right direction. A possible solution
happening recently is illustrated by the merger decision between AMR Corporation, the mother
company of American Airline, and US Airway Group Inc. Through combining their resources
and competitive advantage together, these two companies will cut redundant resources and
personnel to reduce cost and increase operating efficiency.
For Large scale companies ($10~20B): Cut cost and expand to profitable markets.
In airline industry, 10 firms considered as middle scale corporations are controlling up to
30% the world market, and among them, two firms are controlling 20% market shares in the U.S.
Although suffering a slight drop of net income hurting the profits in this size segment, middle
scale companies still have proved their ability to earn a market average profit under the burden
from recession and high oil price.
Moreover, except for Southwest and US Airways, other companies in this segment are all
Asian companies that are trying to expand their business into other regions like North America
and the Pacific Rim.
Therefore, a reasonable recommendation is to cut cost, improve efficiency and expand to
profitable market like middle-east, which has been growing since 2001at 10% annual rate
compared to world average rate at 5% during the same period.
For medium scale companies ($1~10B): Focus on current regions to build competitive
advantage over enters and ally with each other

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In airline industry, 37 firms considered as middle scale corporations are controlling 27%
the world market, and among them, 7 firms are controlling 13.52% market shares in the U.S.
Gaining a better profit compared to companies in other segments, middle scale companies still
faced by severe competition troubles from huge companies that might seize more market share
by raising capital and expanding into regional markets, since the market share a company can
obtain is determined by its capital size..
Therefore, a method to keep their position against those big sharks in airline industry is to
ally with others to build up enough capital to ensure their market shares and competitive
advantages on regional level, and if possible, purchase some smaller companies to expand into
profitable area during up-going macro-environment.
For small scale companies (<$1B): Grow up or die
In airline industry, 18 firms considered as middle scale corporations are controlling 2% the
world market, and among them, 6 firms are controlling 1% market shares in the U.S.
Suffering from their low capital scale, companies in this segment have to grow up as soon as
possible in case lose their market share by competing from big sharks or crushed down by
increased cost such as rocket high fuel price.

Investors
Generally, pursuing different aims, investors are divided into two distinct types: Some
investors would like to undertake high risk to seek high return; Other investors, on the other hand,
are reluctant to bear risk and prefer constant and stable returns in long-run. Considering the

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different appetites for investment, team 8 provides following suggestions.


For investors seeking industry average return, we would like to advise them to invest in
different size segments. In other words, covering huge, large and medium companies, a portfolio
is expected to be created to diversify investments in 98% market shares.
For investors seeking high growth rate and potential future cash flow, we would like to
advise them to invest in large and medium companies that are trying to expand into new area and
emerging market.

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