What Is the Airline Industry?

The airline industry is a global market based around the transport of goods or passengers by air. Airline corporations range in
size from huge multinationals, making hundreds of flights daily, to a tiny regional company that depends on a single plane.
Airlines provide crucial support to
to businesses, governments and individuals who depend on international
international travel or commerce.
Despite some rocky financial
financial periods, the airline industry plays an
an essential role in maintaining
maintaining a global economy.

History
 Commercial flights began within a decade of the invention of aircraft in the early 20th century. World wars I and II left a surplus of
aircraft and pilots worldwide. By the 1950s, airline companies created the framework of international
i nternational travel and commerce that
exists to this day. While some airlines are state-owned, independent companies are vulnerable to economic uncertainties. Changes
in government regulations and an intensely
i ntensely competitive market have created hardships in the industry, as did the terrorist
hijackings of Sept. 11, 2001.

Passengers

Internationally, airlines transport more than two billion passengers annually. Passenger transport creates more than $400 billion in
annual airline revenue. Passengers fly for a variety of reasons, including corporate and government business. But the majority are
tourists; international tourism is a $900 billion-a-year
billion- a-year industry. While some passengers experience discomfort and anxiety, others
enjoy flight so much they fly for its own sake, including in specialized aircraft like gliders and hot-air balloons.

Cargo
 Air freight accounts for between $40
$40 billion and $60 billion in airline revenue annually. Express delivery service
servicess such as FedEx, the

largest cargoof
for a variety airline, depend
cargo that on their
requires worldwide
speedy network
delivery, such asoffood
aircraft, which aresupplies.
or emergency in constant
Airuse. Shipping
cargo customers
can range use air transport
from non-essential
luxury items, such as live lobsters, to life-saving materials, like organs for transplant.

Economics
 Air travel demands a high level
level of specialized labor and equipment that cannot be safely compromised by such
such corporate cost-saving
measures as budget cutbacks and employee downsizing. Consequently, most large airline corporations operate at a far slimmer
profit margins than other companies of comparable size. Bankruptcies and mergers have been commonplace since airline
deregulation in the 1970s, even among storied companies like Pan Am and Eastern, two pioneers that no longer exist in any for m.

Security
 The nature of air travel creates security scenarios that demand special attention. Hijackers sometimes seize passenger aircraft, for
reasons ranging from political extremism to simple theft. Criminals often employ cargo shipments to transport dangerous or illegal
materials, with or without the knowledge of airline employees. Most countries have enacted security measures to counter these
activities, including checkpoints equipped with X-rays and metal detectors, air marshals and drug-sniffing dogs. Other safety
concerns include accidents, mechanical failure and environmental dangers. Security has been a primary concern of airlines for
decades, and especially since 2001.

Market Structures of the Airline Industry

Airlines take passengers across the country and across the world. They
They service business passengers,
passengers, tourists and leisure travelers,
travelers,
as well as commercial enterprises. Airlines are structured to service the types of passengers
p assengers and products they transport. The
structure of the industry is based on the geography, the people, the types of products that the airline is in business to transport and
the revenue potential.

International
 Airlines must have stringent licensing
licensing and approvals in place to travel
travel across borders. In the United
United States, an airline must obtain
approval from the Department of Transportation (DOT) and the Federal Aviation Authority (FAA) ( FAA) to cross U.S. borders. The airl ine
must also receive permissions, licenses and approvals to fly
f ly and conduct transportation business from the governing agencies of the
respective country where they plan to land. Obtaining international licenses and permissions to market international air
transportation services can take years for a n ew or non-established carrier to achieve, if at all.
 National
 In the United States, an airline must receive approvals and pass testing to transport passengers to and from states, coast to coast.
Once approved, an airline has “national” status. The FAA and DOT are the governing bodies to grant licensures and approvals. The
airline must meet a comprehensive base of requirements, including passenger seating and safety, to become a national airline. In
addition, the airline must obtain, license an d purchase “gates” from the airports that it
i t plans to arrive and depart from. Ty pically, a
national airline must have airplanes that seat between 100 to 150 people and generate revenue of $100 million to $1 billion a nnually
to qualify as “national” airlines, and market themselves as such.

Regional
 Airlines with revenues less than
than $100 million are categorized
categorized as regional airlines. Local airlines are ofte
often
n developed to offset travel
travel
and provide alternatives to major carriers. Major airlines will often acquire regional carriers or set up partnerships with other
airlines to complete routes, thus servicing cities and markets outside of their major hubs.

Commercial Cargo
 Transporting cargo is a major revenue source for airlines. Companies, such as FedEx and United Parcel Service, rely on air
transportation to provide overnight delivery services to businesses and consumers. In addition, cargo capabilities are important
revenue sources for airlines. Companies rely on airplanes to transport everything, from imported flowers, parts and supplies, to
animals. Companies develop and market their facilities for cold storage, customs inspections, FDA and USDA certification to market
these additional services to commercial enterprises for importing and exporting products, perishables and even livestock.

Challenges for the Airline Industry

Many airlines found themselves in dire straits during the decade of the 2000s. This is attributed to both internal changes within
the industry and external events such as the September 11, 2001 terrorist attacks on the World Trade Center and the rise in the
price of oil, as noted by academic Peter W. Jones of the Economic Development Institute. Those airlines that have survived
through this turmoil now face a rocky road to recovery that includes a number of substantial challenges.

Cash Reserves
 Airlines must carefully manage the amount of cash they have to support
support themselves
themselves to avoid going bankrupt. These cash
cash reserves
can be heavily drawn upon and drained in the event of another external shock, such as the aftermath of the 9/11 terrorist attacks,
which caused a worldwide slump in air travel.
travel. According to Global Times, airlines in 2009
2009 were in a more positive position
position in terms
of cash reserves than in 2001, with airlines reserving 13 percent of their revenues in case of an emergency. However, the Director
General of the International Air Transport Association (IATA), Giovanni Bisignani, has warned that even these cash reserves may
not last if the airline industry continues to have a slow, drawn-out recovery.

Security
 The need to protect its passengers from threats such as further terrorist attacks has necessitated that airlines the world over increase
the level of security that they employ. All this extra security is costing the industry some $5.6 billion per year, according to "USA
Today" in 2007. The airline industry needs a way to pay for all of this, and these costs therefore have
have been borne out by airline
passengers through extra fees and other charges, something that's not pleasing frequent airline users. The airline industry is i s seeking
ways to provide security to passengers
passengers without passing these
these extra charges to its customers.
customers. As reported in "USA Today,"
Today," one
suggestion by the IATA involves persuading governments to handle these security measures by spreading the costs through the tax-
paying citizens of each country.

Climate Change
 Climate change is very much a concern for many governments throughout the world in 2010. According to "USA Today," some
governments have targeted the airline industry in a bid to cut down on the carbon emissions that cause climate change. The United
Kingdom, for instance, has placed a tax on aircraft arriving and departing from the country, adding up to some $2 billion in tax to
travelers per year. The airline industry
i ndustry must come up with more money to pay these new taxes, or else convince worldwide
governments that such taxes are unjust.

Economics in Airlines
 Economics is an important part of any business venture. No business, large or small, can succeed without taking into account the
various aspects of business and industry that affect its profitability. There are a number of different economic factors that affect
the airline industry and the amount of profit that airlines can earn.

Airline Revenue Sources

 Airlines make money by transporting people
people and goods from one location to another.
another. All of the revenue generated
generated by airlines is
generated for transportation purposes. Airlines sell their services rather than a physical product.

Airline Expenses

All airlinessalaries,
employee have expenses that
that
leasing of are associated
business with
locations doing
inside business.
ai rports
airports andExpense
Expenses
s include
insurance for boththe
thecost of airplanes
passengers and and related
relat
goods ed are
that equipment,
transported. Expenses also include maintenance and the ever-increasing cost of fuel.

Internal Economic Factors that Affect Profit

 Economic factors that affect airline profits include
i nclude internal aspects such as whether or not each flight
fli ght is filled to capacity, how much
passengers pay for their tickets and what services, such as complimentary food and drinks , are provided.

External Economic Factors that Affect Profit

 Economic events that occur outside the airline industry can affect airline profits. Rising fuel costs due to political or economic events
reduce airline profit. Weather conditions, such as snowstorms, can negatively affect air travel. Events such as airplane crashes can
affect people's willingness to travel by air. All these may cause a temporary loss of profits.

Forecasting
 Airlines have to be able to accurately
accurately predict trave
travell demand several years into the future in orde
orderr to be able to provide enough route
routess
and airplanes to handle the needs of passengers. The economic success of an airline will in part depend on its ability to accurately
make such predictions and plan accordingly.

Airline Industry Key Success Factors

In the service industry, particularly
p articularly the volatile, capital-intensive airline industry, success factors cover a wide spectrum--people,
service product, route system, revenue/cost control and financial management.

People
High-caliber staff is critical in this service-oriented business. Training programs focusing on front -line communicative skills with
customers and internal employee-management problem solving with customer-focused continuous-improvement objectives are
essential ingredients.

Service Product/Pro
Product/Promotions
motions
The actual product--aircraft seating space, aircraft type, class of service offerings and booking ease--must be at least industry-
competitive for success. Promotions, particularly those targeted to frequent high-revenue travelers, create loyalty and repeat
business.

Route System
An airline's route system is perhaps
perhaps the most consistent success
success factor. Where
Where to fly and how often are factors that
that must be matched
to customer demand, and at the same time, scheduled to maximize aircraft utilization.

Revenue/Cost Control
Maximizing revenue through competitive and innovative pricing schemes to attract and maintain a customer base is critical for
success. Just as important is cost management, notably fuel procurement and price hedging during volatile periods.

Financial Management
Net-unit revenue is the measure of profitability, representing all revenues minus all costs divided by the total seats flown. Successful
management of this key indicator enables airlines
ai rlines to tap investment for growth.

Strategic Analysis of the Airline Industry

 Performing a strategic analysis of the airline industry involves
involves some thinking not just about
about the airlines but the factors
factors that
impact them, both directly and indirectly. The best approach to lay out the strategic implications is to map them by factor type.
Once you've gone through the exercise, then the strategic issues become apparent and potential directions for the airlines in the
future become clearer.

Assess the Marketplace

 The airlines' marketplace is their bread and butter. The ups and downs of the economy directly affect these companies' bottom lines.
Both short-term and long-term implications have direct impact on cash flow and profits. The trick is to determine how and when the
economy will rear its head with impacts.
Use Porter's Five Forces Template
 A clean, simple way of assessment
assessment for the airlines is to use Michael
Michael Porter's five categories of
of market force in an industry. These
include the substitute problem, suppliers, buyers, new players and competition. Combined, all five categories create the roller
coaster environment an airline must function in. Some categories will be stronger than others, depending on the company and its
own strengths and weaknesses.

Supplier Power
 Look at the resources that the airlines need to function, aside from personnel. These could include repairs, equipment and
consumables. When oil prices shot up in 2007, suppliers had significant power over airlines that had to buy jet fuel on the open
market. Alternatively, airlines like Southwest that locked in prices with long-term contracts suffered little impact from such
suppliers.

Buyer Power
 Clearly the airlines have to jockey for buyers in ongoing price wars. However, buyers have strengths and weaknesses depending on
how the airline industry is structured. Some airlines dominate certain regions and types of trips. Others only deal with long-range
travel and charge expensive prices for having to arrange short hops. Buyers will only be as strong as an airline is weak in a particular
area.

The Risk of New Players

 In the airline industry, almost all the players are well-established. So the risk of a new entry is minimal. While small regional carriers
will try to expand to bigger status, few
few survive long enough to matter.
matter. Only two have been able toto function in recent years as new
players: Jet Blue and Virgin Airlines. As a result, an analysis should be looking for new players with significant cash flow to pay for
high entry costs, otherwise it's a moot point.

Substitution
 For the airline industry as a whole the substitution factor is almost nil. An analysis would have to compare the practical benefit
b enefit of
car, boat and train vs. plane. In most cases beyond 500 miles, the plane wins out on every factor: cost, distance, speed, and
efficiency.

Competition
 An industry analysis could spend chapters
chapters on the airline industry's competition
competition issues. Price battles
battles are stiff and fierce. Well-
developed airlines constantly encroach on each others' turf. Millions of dollars are spent on marketing and advertising, particularly
on holidays and toward business
bu siness clients. There are plenty of statistics available on consumer flow and comparisons between players
in different regions, cities, markets and distances.

Conclusion
 A strategic analysis of the airlines should, at a minimum, cover the above
above factors. Plenty of data and research
research is available both from
the press, industry reports, and from the airlines' trade industry association. A good analysis will use all of these resources and then
anticipate issues outside of the conventional projections for the i ndustry.

Strategies for the Airline Industry

 No-Frills Airlines
 Travelers are very sensitive to cost, particularly for short flights. No-frill airlines can offer
very low prices by
by eliminating unnecessary luxuries,
luxuries, like in-flight meals or business-class
business-class
seating. Given the high level of congestion at most hubs, low-cost airlines can also take the
less expensive late-night and early-morning slots to further drive costs down.

Network Airlines
 Network airlines and mainline carriers follow a more traditional strategy, offering
comfortable flights with a relatively high level of amenities. What customers value in an
airline depends considerably on the length of the flight, and mainline carriers may be
perceived as a better proposition for long-distance flights. Network airlines that decide to
cut costs by reducing the quality of in-flight amenities and service risk becoming stuck in an
undifferentiated middle ground. But at the same time, cost reductions can be achieved by
means of improvements in processes and logistics. For example, in a hub and spoke system,
services from smaller airports are fed into a central hub, increasing coverage and seat
utilization while keeping costs down.

Regional Airlines
 Regional airlines can compete by providing service in areas where there is not sufficient
demand to attract service from major network or no-frills airlines. Those carriers tend to
operate shorter sectors using low-capacity aircraft. They can either deliver passengers to the
hubs of major airlines or fly in mainline markets during times and days where the demand
does not warrant the use of the larger planes operated by mainline carriers.

Charter Airlines
 Charter airlines tend to differentiate by using a vertical integration
int egration strategy. Their low-cost
flights are integrated to a chain that includes travel agencies, hotels and ground
transportation providers. While some can compete directly with low-cost carriers, most will
use their vertical integration to generate demand in areas where seat-only service would not
be competitive.