US Airline Industry

By: Rachel Andersen, Joe Bossert, Jarvez Hall, Jeff Hensley, Brandon Kirkbride and Adam Tolman

Sector Information

The United States Airline industry is comprised of US based firms that transport people via air originating or concluding within its borders.

Major Competitors

Choice of Competitors

Largest 3 in America*

Largest (non American company)*

The up and comer

* in terms of passengers

Delta Air Lines Inc

Headquartered in Atlanta, Georgia

Second Largest in the world (AA) Largest Domestically Fourth Largest in Revenues

Operations in North America, South America, Europe and Asia

Bankruptcy?

AMR Corp (American Airlines)

Largest in the worldSecond in revenues

Headquartered in Fort Worth, Texas

Operations in North America, South America, Central and Latin America, Europe and Asia

Southwest Airlines Co.

Operates In Unites States only

Headquartered in Dallas, Texas

Bring a Scale

“The Unknown Flyer”

Air France - KLM

Largest in total revenues Part French, Part Dutch Operate with a Profit

Air France KLM

Jet Blue Airways

Headquartered in New York City Founded in 2000 DirectTV at every seat

Cost Structures

Macroeconomic Impacts

Minimal substitutes Ex. Car, train, boat Rivalry among competitors due to barriers to exit Price wars

Market size and growth

Expected growth rate according to the FAA is 4.2% each year for the next 12 years

Market capitalization of 34 Billion-South west leading with 11.2 billion

Scope of Competitive Rivalry Competition (ADD pictures of rivals) Indirect competition

Business JetsSmall commercial airlinesCar, Train, Bus, Boat

Issues

Sept 11th Internet helping to cut the costs Fuel prices Number of seats

Macroeconomy

Passengers Per Year

600,000,000

620,000,000

640,000,000

660,000,000

680,000,000

700,000,000

720,000,000

2000 2001 2002 2003

Year

Nu

mb

er o

f P

asse

ng

ers

Sector Health

Not attractive to new entrants Capital needed Oil prices

Very attractive to new investors Major players control the market share

Delta, AA, Southwest Jet Blue, NWA, United

Cost StructureLay offs

Sector Success Factors

Major Hubs Carriers can offer travelers more choices while tying up less capital

through their hubs.

Customer Loyalty Frequent flyer miles

Established industry

Winners

Southwest

Jet Blue

$-

$50,000,000.00

$100,000,000.00

$150,000,000.00

$200,000,000.00

$250,000,000.00

$300,000,000.00

$350,000,000.00

$400,000,000.00

$450,000,000.00

$500,000,000.00

2002 2003 2004

$-

$20,000,000.00

$40,000,000.00

$60,000,000.00

$80,000,000.00

$100,000,000.00

$120,000,000.00

2002 2003 2004

Net Income

Losers

Delta

Northwest Airlines

$(6,000,000,000.00)

$(5,000,000,000.00)

$(4,000,000,000.00)

$(3,000,000,000.00)

$(2,000,000,000.00)

$(1,000,000,000.00)

$-

2002 2003 2004

$(1,000,000,000.00)

$(800,000,000.00)

$(600,000,000.00)

$(400,000,000.00)

$(200,000,000.00)

$-

$200,000,000.00

$400,000,000.00

2002 2003 2004

Net Income

Fuel: Travelers are back from 9/11 but surging jet fuel costs are forcing

many airlines to seek bankruptcy protection. Every penny increase in the price of jet fuel adds $186 million in

additional annual expenses for the industry,

Federal taxes and fees: According to the Air Transport Association, the industry will pay $15

billion in federal taxes and fees this year. Air traffic control, security, and other government services to name a

few.

Pension obligations: During the next four years, the Government

Accountability Office (GAO) said the carriers face $60 billion in fixed obligations, $10.4 billion of which are for pensions.

The airline industry is currently seeking pension reform to avoid the risk of bankruptcy.

Competitor Actions and Reactions

Airlines have already been reducing rates competitively but others quickly follow suit. To the average customer, most airlines seem the same.

Brand differentiation might be the key to success. Customers may be more loyal or willing to pay a premium for an airline that sets them apart. JetBlue: Cheap flights and airplanes equipped with

leather seating and DIRECTV. Southwest: Cost leader on routes and great customer

service.

Impact of Change

Working together, airlines are pushing Congress to change legislation to relieve some of the taxes, fees and pension obligations.

Reducing some of these high fixed costs will contribute significantly to increased profits.

Porter’s 5 Threat of New Entrants - strong brand name and incentives

Power of Suppliers - dominated by Boeing and Airbus.

Power of Buyers - high costs of switching airplanes,

Availability of Substitutes - What is the likelihood that someone will drive or take a train to their destination?

Competitive Rivalry - highly competitive industries generally earn low returns because the cost of competition is high.

Questions?

Bibliography

Bureau of Transportation Statistics Federal Aviation Administration Yahoo Finance (Reuters) The Dallas Morning News Air Transport Association