The US Airline Industry

1. Assess the overall financial performance of the US airline industry during the past 20 years.

The financial performance of the US airline industry has been somewhat of a roller-coaster, the industry has seen its structure change more than once. It being regulated and deregulated over the years. Many investors would agree that putting one´s money into the airline industry is a risky business. The woes of US airline industry during 21 century were typically attributed to the triple-whammy of the September 11, 2001 terrorist attacks, the high price of crude oil, and the 2008 financial crash.

This were strong events, but the financial problems of the US airline industry were previous to them. Even through the best years it still struggled, and was barely profitable.

2. To what extent can the industry’s low average profitability during this period be attributed to the structure of the industry?

Which of Porter’s five forces has had the biggest impact in depressing industry profitability? It is obvious that there was a big change in 1978 after the deregulation.

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A lot of things changed, the industry was opened to new competition and the structure changed completely. The previous strategy of companies on focusing on better quality services and goods was shifted to low price oriented strategies, even do the exit barriers were high the entry barriers were proven to be low, as the supposedly economies of scale in which the deregulation was based on for the coexistence of the big and small companies was not really the case. There was some entry barriers referring to routes and capacity but that didn’t stop entrepreneur airlines to enter the market.

So the biggest porters force to have the biggest impact is the threat of substitutes in the form of LCCS, as after deregulation passengers found little difference in the offerings between them and major providers.

3. What is the outlook for industry profitability during the next five years (2010-2014)?

4. At the end of may of 2012, the industry presented a mixed picture, the financial picture remained bad, credit position was also deteriorated with the exception of Southwest and the fuel prices still were high. Yet there were some positives, as a result of consolidation and the efforts to remove excess capacity, the industry appeared to be on a better structural footing than it had been for decades. Escalation of fares in recent years was a proof of it. Also major airlines had done a good job in reducing costs based in productivity and reductions in compensation and benefits.

5. Are there any strategies that the airlines have deployed which have influenced industry structure and moderated the intensity of price competition? Are there strategies that the airlines could use to improve future industry profitability?

Yes, major providers started to separate products offered inflight from the actual seating’s, baggage was also reduced from each person and also the in-flight entertainment and food. They also implemented Hub and spoke model which made the overall system much more efficient. LCCS lowered the wages; employee’s time schedule was more elastic and limited the service to basic seats and beverages. As we have seen major airlines have started to reduce cost improving productivity, this is a great way of improving profitability. Another thing they could do is pressure the manufacturers to invest in R&D so they can make the newer planes more fuel efficient.