Airlines

Airline Industry
Analysis
2017

BUS-498
Airline Industry Analysis 1

Contents
Industry Overview...........................................................................................................................2
Industry Analysis.............................................................................................................................2
Market Analysis and Forecast......................................................................................................2
Major Competitors...................................................................................................................4
Forecast Diagrams....................................................................................................................4
PESTEL.......................................................................................................................................7
Political.....................................................................................................................................7
Economic..................................................................................................................................7
Sociocultural.............................................................................................................................7
Technology...............................................................................................................................8
Ecological.................................................................................................................................8
Legal.........................................................................................................................................9
Porters Five Forces.......................................................................................................................9
SWOT........................................................................................................................................11
Conclusion.....................................................................................................................................11
Work Cited.....................................................................................................................................13
Airline Industry Analysis 2

Industry Overview

The Airline industry is an enormous industry that spans around the globe. Air travel

encourages growth between different economies and is essential in trade and tourism. It is the

centerpiece in the facilitation of globalization. The airline Industry analysis was formed to

examine the present trends to further develop an insight into the future progressions, which

consists of companies that provide air transportation services and cargo. This analysis will

primarily focus on airlines based out of the United States. This industry has changed the manner

individuals live and handle business by decreasing transportation time and changing the idea of

distance, allowing for travel, and business ventures in areas otherwise unreachable.

However, two main issues present a problem. First, a cut-throat market that decreases

profitability and competition that create high barriers to entry. Despite high amounts of annual

revenues, the working capital required to run and maintain operations within the industry seep

into financial profitability. A significant amount of competition coupled with a lack of

differentiation increase buyer power and decrease customer loyalty. Since most carriers deliver

the same service, there is little tying a consumer to specific airlines, creating unreliable consumer

audience. Strategically, carriers identify between two strategic groups that either focus on price

or route. The price, which is the primary purpose of low-cost carriers and route which has been

the historical center of established airlines. This analysis was formed to examine the present

trends and future developments of the airline industry.

Industry Analysis

Market Analysis and Forecast

In the United States, the airline industry has experienced a steady growth in revenue.

Between the period from 2011-15, the compound annual growth rate (CAGR) was 5.4%. In
Airline Industry Analysis 3

2015, the industry grew 7.9% increasing its value by $166.3 billion [CITATION Air16 \l 1033 ]. The

volume also increased with a CAGR of 2.3% with 794.2 million passengers. Domestic

passengers make up the US airline size with a total of 624.8 million passengers; a 78.7%

equivalence to overall volume. The leading airlines by market capitalization within North

America are American Airlines, Delta, Southwest, and United. In 2015, Southwest and Delta,

both saw an increase in revenues, 6.5% and .8%, respectively. On the contrary, American and

United both decreased, 4.5% and 2.7%, respectively. According to Statista, airline carriers make

fewer than $6 per traveler, creating around a 2.4% profit margin, which is low for a $700 billion

industry.

Although there is not a single airline founded during the 21st century that has even 2%

market share, forecasted outlook for 2015-20, indicate a 5.3% CAGR, driving up industry value [

CITATION Gre16 \l 1033 ]. Forecasted value of $215.1 million which shows a 29.4% increase since

2015 [ CITATION Air16 \l 1033 ]. Volume is predicted to grow by 11.9% with a CAGR of 2.3%.

These forecasted values indicate the continued competitiveness of the airline industry. Although

major airlines reported a revenue decrease, the industry is continuing to grow. This growth is due

to the emergence of Low-Cost Carriers (LCC’s) which increase buyer power and changing the

business model of the large dominating airlines. “There is solid growth in the market, and the

United States has seen increasing market share being captured by low-cost carriers[ CITATION

Air16 \l 1033 ]. Overall, the airline industry is highly competitive with approximately 1,300 new

carriers established within the last 40 years [ CITATION Ter14 \l 1033 ].

Airline Industry Analysis 4

Major Competitors

Domestic Current Financial

Firm Age
Airline Firm size Market Share Performance
(Founding Age)
(2016) (Net Income 2016)
American 122,300
91 years 19.1% $2.6 billion
Airlines employees
Southwest 53,536
50 years 18.3% $2.4 Billion
Airlines employees
80,000
Delta Airlines 92 years 16.9% $4.3 billion
employees
United 86,000
90 years 14.5% $2.2 billion
Airlines employees

Forecast Diagrams

Figure 1: Revenues (2003-2017)

Airline Industry Analysis 5

Figure 2: (2a) Industry Value (2011-2015); (2b) Industry Value (2015-2020)

(2a)

(2b)
Airline Industry Analysis 6

Figure 3: (3a) Industry Volume (2011-2015); (3b) Industry Volume (2015-2020)

(3a)

(3b)
Airline Industry Analysis 7

PESTEL

The airline industry typically conveys luxury, convenience, and independence. However,

below the surface the airline industry has seen a staggering drop in profits since the 1980s. This

can be attributed to multitude of factors and PESTEL methodology is a valuable tool to analyze

the current condition of the airline industry. The PESTEL analysis breaks these factors into the

following: Political, Economic, Sociocultural, Technology, Ecological, and Political [ CITATION

Fra17 \l 1033 ].

Political

The airline industry is highly regulated to enhance passenger safety. These regulations

are one-sided and favor the passengers over the airlines. According to Marketline, “airlines are a

highly regulated industry, governments regulate on safety, security, staff training, and aircraft

procedures.” Additionally, due to the international nature of the industry, “certain globally

agreed standards are upheld, and airlines can live or die on their safety records” [ CITATION

Air16 \l 1033 ].

Economic

Economic conditions are a deciding factor in determining the financial outlook for airline

companies. Economic recessions, volatility of oil prices, global slowdowns, and other factors

contribute to the overall financial strength of the airline industry. Traditional airlines now have to

deal with the onset of competition from LCC's, increasing labor demands, and increasing

operation and maintenance costs.

Sociocultural

With expanding air travel, there are more opportunities to take advantage of the diverse

customer market. Rising popularity of tourism is due to decreasing costs of air travel and
Airline Industry Analysis 8

increasing holiday travel. “Passengers from various parts of the world have unique preferences

due to their cultural distinctions. Service preferences also vary according to length of the trip and

the purpose of travel” [ CITATION Ter14 \l 1033 ]. Airlines that can meet these preferences will be

able to create a stronger competitive advantage. The sociocultural difference according to

MarketRealist, "international business travelers, seat comfort is a priority when traveling long-

haul distances. It’s different for business travelers from China who are more willing to pay a

premium for services" [ CITATION Ter14 \l 1033 ].

Technology

Technological improvements to the design of airplanes have increased fuel efficiency

over time. These improvements should boost margins, but due to decreasing prices of airline

tickets, impact on increasing profit margins have been slim. Technological innovations such as

Magna lift rail systems and the Hyperloop could pose a large threat to the current nature of

domestic travel. Both of these proposed methods of travel offer speeds as high as air travel. With

the introduction of such systems, airline companies may face tougher challenges ahead.

Ecological

Aviation emissions affect both air quality and the global climate. Increased EPA

regulations mandating a reduction of fossil fuel emissions can create a meaningful financial

impact on airline companies. "Aviation emissions occur in the climatically sensitive upper

troposphere and lower stratosphere where they may have a disproportionate impact on climate.

They also occur at high altitudes where their impact may be felt at large distances away from

where they are released" [ CITATION Avi15 \l 1033 ]. Compared to other sectors, commercial

aviation is a small contributor to emissions of concern for air quality and climate change. On

average, emissions from the airline industry contribute approximately 12% of total worldwide
Airline Industry Analysis 9

CO2 emissions [ CITATION Fac17 \l 1033 ]. Over the past, the four decades’ airlines have increased

fuel efficiency by 80% due to the implementation of innovative technologies to improve fuel

efficiency.

Legal
Tighter legal regulations on airlines have further strangulated profits. Regulations

imposed by the Federal Aviation Administration are implemented to increase passenger safety,

while EPA regulations are created to increased awareness of climate change.

Porters Five Forces

Threat of new entrants: Threats of new entrants in the airline industry are weakening due to thin

profit margins, high cost, high regulation, and recent merger acquisitions. Fixed costs are high

primarily due to acquiring high-cost assets such as planes, staffing, and maintenance slots. A

new entrant would have to gather necessary permissions, airport space and market share

aggressively for customers that would be willing to travel with an unknown airline. Recent

mergers of airlines have resulted in the industry dominated by four major carriers. “Because of

substantial economies of scale and economies of scope, such as frequent airline travelers’

programs, a new entrant would need to achieve substantial size to be able to compete effectively”

[ CITATION Ame16 \l 1033 ]. Due to these factors, a new entry into the airline industry is low

because the barrier to entry is high.

Threats of Substitutes: Threats of Substitutes for the airline industry is low. Examples of

substitutes will be travel by train, car, or bus. The availability of alternatives will be dependent

on the route and cost. “United States is a large country geographically and flights are the only

viable option on many routes across the country” [ CITATION Air16 \l 1033 ]. Although there has

been an investment in the high-speed rail system and the tradition of driving long distances, these

substitutes are limited compared to the convenience of flying domestically within the country.
Airline Industry Analysis 10

Unless the route is shorter in distance with an alternate substitute conveniently available, the

threat of substitution in the airline industry is low. More likely than not, alternative travel means

are costly and time-consuming. The emergence of new technology could threaten the industry

but until then, air travel is the fastest and most convenient way to travel longer distances.

Bargaining Power of Customers: Buyers have moderately strong bargaining power over airliners

because the barrier to switching between carriers is minimal. Switching cost are low if

competing airlines fly the same route or similar routes. “Customers have a high propensity to

switch airlines if the same (or similar) route is offered” [ CITATION Air16 \l 1033 ]. Although

airlines have frequent flier programs to encourage customer loyalty, buyers are preceding these

perks to shop flights through low-cost alternative and third-party applications. With the

accessibility and gaining popularity of booking websites and smartphone applications, this

worsens the issue for airlines. When booking through travel sites, customers can compare rates

across all airlines, enter trip details, and choose the best low-cost option that fits their schedule

[ CITATION Gre16 \l 1033 ]. Also with high demand routes being available amongst a majority of

airlines, customers again gain buyer power.

Bargaining Power of Suppliers: Bargaining power of the suppliers is high. The airline industry

has two major suppliers of planes, fuel companies dominated by OPEC, and labor which is

controlled by labor unions. The providers of planes are Airbus and Boeing, which hold power by

forcing long-term lease agreements. “Because of the oligopoly in commercial aircraft

manufacture the business of a single airlines is not as important for these manufacturers. The

purchasing of aircraft is reliant on a quality product and suppliers” [ CITATION Air16 \l 1033 ].

Aircraft fuel is sold by major oil companies resulting in airlines entering long-term contracts for
Airline Industry Analysis 11

fuel sourcing. Similarly, unions control the labor needed to maintain their fleet. Therefore,

airlines have little bargaining power with its suppliers.

Industry Rivalry: The degree of rivalry in the airline industry is strong. Both large carriers and

LCC’s share similar flight routes and operate out of the same airports for similar prices. The

emergence of LCC’s has changed the full-service business model, with large carriers adopting

LCC’s business models. Adoption of LCC business practice helps to drive down airfare pricing,

contributing to the lack of differentiation. Carriers identify between two strategic groups that

either focuses on price or route. Each airline also offers amenities, frequents flyer miles, and

incentive programs to create brand loyalty. According to Seeking Alpha, “There is very little

differentiation between the available choices and loyalty programs such as flyer miles and

benefits are rarely a preference over factors such as available flight times, prices and routes.”

This lack of differentiation allows consumers to switch between players, creating a highly

competitive industry and a decrease in customer loyalty.

SWOT
Strengths Weaknesses
 Creating economies of scale to lower cost  Over-saturation
 Increase diversification  Small market caps
 Adapting new technological innovations  Low profit margins
Opportunities Threats
 Locking in low priced oil futures  Changing economic environments
 Technological innovations  Government regulations
 Brand loyalty  Increasing competition

Conclusion

The progression of the airline industry from inception to its modern day undertakings have

shaped the advent of globalization. However, the over saturation of airline companies has caused

two substantial problems. First, a cut-throat market that decreases profitability and competition
Airline Industry Analysis 12

that creates high barriers to entry. The airlines industry grosses over $700 billion in revenues

annually, despite high revenue profit margins remain low. These are attributed to high capital

requirements, operating costs, and declining ticket prices. Overall, the industry attractiveness is

low. Industry specific reasons due to political, ecological, and legal requirements have hindered

the financial strength of the airline industry. Slow economic growth have reduced the overall

outlook.
Airline Industry Analysis 13

Work Cited
American Airlines: Porter's 5 Forces Predict A Smooth Flight. (2016, June 17). Retrieved from Seeking
Alpha: http://seekingalpha.com/article/3264035-american-airlines-porters-5-forces-predict-a-
smooth-flight
Aviation Emissions, Impacts, and Mitigations: A Primer. (2015, January ). Retrieved from Federal
Aviation Administration:
https://www.faa.gov/regulations_policies/policy_guidance/envir_policy/media/Primer_Jan2015.p
df
Bureau of Transportation Statistics . (2017). Retrieved from United States Deparment of Transportation :
https://www.transtats.bts.gov/
Cederholm, T. (2014, December 29). Low-entry barriers intensify competition in airline industry .
Retrieved from Market Realist : http://marketrealist.com/2014/12/low-entry-barriers-intensify-
competition-airline-industry/
DePersio, G. (2016, January 28). Analyzing Porter's Five Forces on Delta Airlines (DAL). Retrieved from
Investopedia: http://www.investopedia.com/articles/markets/012816/analyzing-porters-five-
forces-delta-airlines-dal.asp
Facts and Figures. (2017). Retrieved from Air Transport Action Group: http://www.atag.org/facts-and-
figures.html
Gaffney, S. (2017). Tailwinds 2016 Airline Industry Trends. PWC.
Is a Critical Economic Engine. (2017). Retrieved from Airlines for America :
http://airlines.org/industry/#economic
(2016). Marketline: Airlines in the United States. London: John Carpenter House.
MIT . (2017, 03 01). Massachusetts Institute of Technology . Retrieved from Global Airline Industry
Program : http://web.mit.edu/airlines/analysis/analysis_airline_industry.html
Rothaermel, F. T. (2017). Strategic Management . New York: McGraw Hill.
Statista . (2017). Retrieved from Revenue of commercial airlines worldwide from 2003 to 2017 :
https://www.statista.com/statistics/278372/revenue-of-commercial-airlines-worldwide/