The Airline Industry And Its Economic Implications
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The Airline Industry and its Economic Implications! Group Assignment
Clark McNeel Cheristena Bolos *Name Aya* *Name Danny* *Name Jason*
Air travel is both a marvel of modern science and a booming economic industry in the entire world. Air travel helps promote main things such as world trade, international investment, economic growth, and tourism. However there is a big drawback to the airline industry that causes them to face many difficulties. Many global issues that are faced are escalating costs, limited growth in revenue, increasingly dissatisfied customers, and environmental hazards. The air line industry affects the macro economy in the United States heavily. Some of the topics covered in this paper are: History of The Airline Industry, Industry Overview, SWOTT Analysis, the impact of Real GDP, and various economic indicators from the industry. During the pioneering years of the aeronautics, travel in airplanes was not a viable option, the general consensus is was that flying was too dangerous and it was not worth risking your life for. As time and technology advanced, around the time period of the 1920’s to the 1940’s, the airline industry saw an expansive opportunity for growth. One of the main reason the technology was advanced and growth opportunities was brought to the airline industry by the postal industry. Airplanes where started to be used to transport mail through such companies as the U.S. Postal Service, UPS, FedEX, and DHL. With bigger airplanes, better technology, and a new since of comfort the airline industry took off the ground. Later on, during the 1980’s the industry was marred by the deregulation of the industry, which resulted in the growth of smaller carriers
and the mergers of larger airlines. This saw a dramatic increase in the number of passengers, as prices were cut and cities served by airlines increased. At the opening of the 21st century, the Federal Aviation Administration (FAA) shifted its emphasis toward enhancing air traffic control systems through manageable step by step improvements – such as global positioning system satellite technology to civil aviation to deliver benefits that added to the efficiency of air transportation. Even many years later the airline industry is dealing with difficulties from costs raising sky high. From 2008 through 2008 airlines in the US lost more than $29 billion. Most of the non passenger airline sectors started seeing a down turn in the late 1990’s. While passenger traffic was still good at the given time, when the frightening events of September 11 occurred passenger numbers started getting lower and lower. As a result of the scare, many airlines where cancelling flights, laying off employees, and reducing the number of surplus aircrafts making their rotation. Many factors combine together to slowly drive the price of air travel very high. One of these things is fuel for the jets. This constitutes the second-largest expense since the rising price of oil imposes over an additional $425 million for standard operations to proceed uninhibited. Secondly is the price of Security. In 2004 the airline industry in the U.S. spent approximately $4 billion alone on security, which along with taxes and fees accounts for nearly 26% of total expenses. These costs are responsible
for the huge losses that have occurred despite major improvements in operating efficiencies in the airline industry.
SWOTT Strengths Since the 9/11 terror attacks, the federal government has hired thousands of people to screen passengers and to guard the country against terrorism. This has opened thousands of jobs to residents around the United States, which has been a great opportunity for the unemployed, and persons stuck in lower paying jobs. With increased pro-activeness in preventing security threats, airlines have been able to make travelers feel safer to by employing more security aids. Even to today, 8 years later, there are many more jobs and people feel much safer riding the airways. Weaknesses With all the new improvements in security technology, the only problem is that passengers are now faced with longer waits going through security check points and mechanisms, which creates longer time periods to board a plane.
Additionally, airlines are heavily bombarded with operational inefficiencies. Such weaknesses include baggage-handling mistakes, and fewer on-time flights. In fact, according to the 17th annual report by the Aviation Institute, University of Nebraska at Omaha reported; that “on-time arrivals dropped to 75.5 percent in 2008, down from 77.3 percent in 2006. Not only were passengers late to destinations, but fewer found luggage once arriving to the destination. Opportunities With all the new and emerging technological advances the airlines are given a great opportunity. There is no doubt that the airline industry will prosper throughout every function (e.g. security systems, check-in, baggage services, etc.) from the incorporation of enhanced technology. Such technological benefits include: electronic tickets over paper tickets; internet check-in; and passenger self-service kiosks. These changes drastically reduce operating and labor costs for airlines. Through improved technology, airlines are able to reduce manual labor and optimize efficiency. Threats A major threat that the industry faces is a spike in oil prices, which could worsen airline sales and future expectations. Today, oil prices are up 62 percent from last year alone, and are projected to rise significantly by the year 2025 ". Oil inventories continue to deplete despite this price hike, and will continue to push crude oil to record prices. As such, this supply and
demand imbalance supports higher prices, causing major operational expenses to all airlines and is ultimately a threat. Trends Ever since September 11, 2001 the Federal government has been increasing security and adding new technology in every U.S. airport to avoid another terror attack. The federal government has hired agents to avoid any bridging by the terror groups that try to attempt to work for any airline by adding new screening tools (like the thermo heat sensor, x- Rays, and bomb sniffing dogs). As such, many airports now employ CTX machines to replace the old X-ray machines to check passenger’s luggage, and people themselves. CTX machines checks persons for explosives, contraband, and any item that is in violation of the law. ECONOMIC INDICATORS In a speech by the President and CEO of the Air Transport Association of America, he reported that at the end of 2004, there were “1.9 million jobs at U.S. airports, and another 4.8 million related jobs created in local communities. These 6.7 million airport-related jobs translate into earnings of $190 billion dollars. Commercial aviation also is at the center of America’s just-in-time economy, and is broadly responsible for more than 10 million jobs in the U.S. travel and tourism industry and more than 8 percent of U.S. GDP” (May, J. C., Sept. 2007).
When you break it down, the costs and security pressures on the airline industry are still very high in spite of these conditions, the International Air Transport Association (IATA) has forecasted international air passenger traffic to increase “at an average annual growth rate of 4.8% between 2006 and 2010, but lower than its AAGR of 6.5% experienced between 1995 and 2005. Over the same period, international air freight traffic is forecasted to increase at an AAGR of 5.3%, lower than its AAGR between 1995 and 2005” (IATA, September 2007). Due to the international growth of the airline industry the United States also are experiencing growth not online in the airline industry but because the industry is so large, it effects the entire countries economic performance. Even though air freight makes up a much smaller section of the industry compared to passenger transport, it is one of the most important and rapidly increasingly revenue source for the airline industry. It includes both freight handled by dedicated air cargo handlers and air cargo shipped on combined passenger and air freights. This utilization is measured by unused ton miles, which is the difference between available ton-miles and revenue ton-miles utilized. The changes in the level of spare capacity may be an indicator of timely availability of air freight services. As such, in order to calculate overall aircraft load, passenger and freight factors are combined to find the metric of ton-miles needed or used (U.S. Department of Transportation, January 2005).
With Domestic flights, the revenue passenger miles are a measure as the volume of air passenger transportation. Then the unused seat-miles (the difference between available seat-miles and revenue passenger miles) are then used as the most appropriate measure of airline capacity utilization. A revenue passenger mile is also equal to one paying passenger carried per mile. Available seat miles for an individual are the number of seats multiplied by the distance traveled. Between 2007 and 2008, airline capacity stood at: Domestic Revenue Load Factors (percent) Passenger revenue load factors Change from same month previous year Overall aircraft revenue load factors Change from same month previous year Freight revenue load factors Change from same month previous year
Sep-07
Sep-08 67.61
70.73
4.29
3.12
52.75
56.82
2.82
4.06
31.59
36.37
2.45
4.77
(U.S. Department of Transportation, January 2008).
In the time period of 2001 – 2003 almost every airline, both domestic and international, where facing hard financial times. With the sole exception to this Southwest Airlines, most US major airlines posted net losses exceeding $23 billion. The crisis that had happened was mainly put to blame on the events of September 11, 2001. Because of this immediate laoffs occurred and cutbacks of almost 20% in passenger traffic due to safety concerns. The Airlines however were in serious trouble before 9/11 as part of the economic downturn that had already negatively affected the nation on a whole.
Even though there have been many malicious setbacks for the airline industry, just like everything else that has a downfall, it will pick back up and return into a golden age, almost. The Airline Industry has made serious comebacks. To date, the Bureau of Transportation Statistics (BTS) of the U.S. Department of Transportation reported in a release of preliminary data, that a group of 21 selected passenger airlines had reported a system operating profit margin of 8.8 percent in the second quarter of 2007. This is an outstanding amount of profit; comparatively this was the highest reported profit margin since 2000. This is also the first time that any airline has had five consecutive profiting quarters (U.S. Department of Transportation, September 17, 2007). These statistics prove beyond any reasonable doubt that the industry has indeed recovered from the pitfalls that preceded the attacks of 9/11 and not only is striving itself, but helping pick up the U.S. economy at the same time.
Works Cited Airline Performance Drops, Says 2007 Airline Quality Report. (n.d.). Retrieved January 2009, from Meetings Net, Targeted Meeting Intelligence: http://meetingsnet.com/news/airline_report/
Boyd, L. (n.d.). Digital Sciptorium Rare Book. Retrieved January 2009, from Brief History of the U.S. Airline Industry: http://scriptorium.lib.duke.edu/adaccess/airlinehistory.html
FAA. (n.d.). A brief History of the Federal Aviation Administration. Retrieved January 2009, from Federal Aviation Administrator: http://faa.gov/about/history/bried-history
IATA. (n.d.). IATA Economic Briefing: PAssenger and Freight Forcasts 2006 to 2010. Retrieved January 2009, from The International Air Transport Association: http://www.iata.org/NR/rdonlyres/D4F7A43D-DE5B-4FFF-BE7216731F286402/0/0traffic+forcase+2006_2010.pdf
May, J. (n.d.). Air Transport Association of America. Retrieved January 2009, from Airlines to Airports: We Have a Problem": http://airlines.org/news/speeches/speech.htm
The Airline Industry and Current Challenges. (n.d.). Retrieved January 2009, from MIT: http://spacestation.mit.edu/airlines/the-airline-industry/
United States Department of Labor. (n.d.). Bureau of Labor Statistics. Retrieved January 2009, from Career Guide to Indsutries - Air Transportation: http://www.bls.gov/oco/cg/cgs016.htm
Clark McNeel Cheristena Bolos *Name Aya* *Name Danny* *Name Jason*
Air travel is both a marvel of modern science and a booming economic industry in the entire world. Air travel helps promote main things such as world trade, international investment, economic growth, and tourism. However there is a big drawback to the airline industry that causes them to face many difficulties. Many global issues that are faced are escalating costs, limited growth in revenue, increasingly dissatisfied customers, and environmental hazards. The air line industry affects the macro economy in the United States heavily. Some of the topics covered in this paper are: History of The Airline Industry, Industry Overview, SWOTT Analysis, the impact of Real GDP, and various economic indicators from the industry. During the pioneering years of the aeronautics, travel in airplanes was not a viable option, the general consensus is was that flying was too dangerous and it was not worth risking your life for. As time and technology advanced, around the time period of the 1920’s to the 1940’s, the airline industry saw an expansive opportunity for growth. One of the main reason the technology was advanced and growth opportunities was brought to the airline industry by the postal industry. Airplanes where started to be used to transport mail through such companies as the U.S. Postal Service, UPS, FedEX, and DHL. With bigger airplanes, better technology, and a new since of comfort the airline industry took off the ground. Later on, during the 1980’s the industry was marred by the deregulation of the industry, which resulted in the growth of smaller carriers
and the mergers of larger airlines. This saw a dramatic increase in the number of passengers, as prices were cut and cities served by airlines increased. At the opening of the 21st century, the Federal Aviation Administration (FAA) shifted its emphasis toward enhancing air traffic control systems through manageable step by step improvements – such as global positioning system satellite technology to civil aviation to deliver benefits that added to the efficiency of air transportation. Even many years later the airline industry is dealing with difficulties from costs raising sky high. From 2008 through 2008 airlines in the US lost more than $29 billion. Most of the non passenger airline sectors started seeing a down turn in the late 1990’s. While passenger traffic was still good at the given time, when the frightening events of September 11 occurred passenger numbers started getting lower and lower. As a result of the scare, many airlines where cancelling flights, laying off employees, and reducing the number of surplus aircrafts making their rotation. Many factors combine together to slowly drive the price of air travel very high. One of these things is fuel for the jets. This constitutes the second-largest expense since the rising price of oil imposes over an additional $425 million for standard operations to proceed uninhibited. Secondly is the price of Security. In 2004 the airline industry in the U.S. spent approximately $4 billion alone on security, which along with taxes and fees accounts for nearly 26% of total expenses. These costs are responsible
for the huge losses that have occurred despite major improvements in operating efficiencies in the airline industry.
SWOTT Strengths Since the 9/11 terror attacks, the federal government has hired thousands of people to screen passengers and to guard the country against terrorism. This has opened thousands of jobs to residents around the United States, which has been a great opportunity for the unemployed, and persons stuck in lower paying jobs. With increased pro-activeness in preventing security threats, airlines have been able to make travelers feel safer to by employing more security aids. Even to today, 8 years later, there are many more jobs and people feel much safer riding the airways. Weaknesses With all the new improvements in security technology, the only problem is that passengers are now faced with longer waits going through security check points and mechanisms, which creates longer time periods to board a plane.
Additionally, airlines are heavily bombarded with operational inefficiencies. Such weaknesses include baggage-handling mistakes, and fewer on-time flights. In fact, according to the 17th annual report by the Aviation Institute, University of Nebraska at Omaha reported; that “on-time arrivals dropped to 75.5 percent in 2008, down from 77.3 percent in 2006. Not only were passengers late to destinations, but fewer found luggage once arriving to the destination. Opportunities With all the new and emerging technological advances the airlines are given a great opportunity. There is no doubt that the airline industry will prosper throughout every function (e.g. security systems, check-in, baggage services, etc.) from the incorporation of enhanced technology. Such technological benefits include: electronic tickets over paper tickets; internet check-in; and passenger self-service kiosks. These changes drastically reduce operating and labor costs for airlines. Through improved technology, airlines are able to reduce manual labor and optimize efficiency. Threats A major threat that the industry faces is a spike in oil prices, which could worsen airline sales and future expectations. Today, oil prices are up 62 percent from last year alone, and are projected to rise significantly by the year 2025 ". Oil inventories continue to deplete despite this price hike, and will continue to push crude oil to record prices. As such, this supply and
demand imbalance supports higher prices, causing major operational expenses to all airlines and is ultimately a threat. Trends Ever since September 11, 2001 the Federal government has been increasing security and adding new technology in every U.S. airport to avoid another terror attack. The federal government has hired agents to avoid any bridging by the terror groups that try to attempt to work for any airline by adding new screening tools (like the thermo heat sensor, x- Rays, and bomb sniffing dogs). As such, many airports now employ CTX machines to replace the old X-ray machines to check passenger’s luggage, and people themselves. CTX machines checks persons for explosives, contraband, and any item that is in violation of the law. ECONOMIC INDICATORS In a speech by the President and CEO of the Air Transport Association of America, he reported that at the end of 2004, there were “1.9 million jobs at U.S. airports, and another 4.8 million related jobs created in local communities. These 6.7 million airport-related jobs translate into earnings of $190 billion dollars. Commercial aviation also is at the center of America’s just-in-time economy, and is broadly responsible for more than 10 million jobs in the U.S. travel and tourism industry and more than 8 percent of U.S. GDP” (May, J. C., Sept. 2007).
When you break it down, the costs and security pressures on the airline industry are still very high in spite of these conditions, the International Air Transport Association (IATA) has forecasted international air passenger traffic to increase “at an average annual growth rate of 4.8% between 2006 and 2010, but lower than its AAGR of 6.5% experienced between 1995 and 2005. Over the same period, international air freight traffic is forecasted to increase at an AAGR of 5.3%, lower than its AAGR between 1995 and 2005” (IATA, September 2007). Due to the international growth of the airline industry the United States also are experiencing growth not online in the airline industry but because the industry is so large, it effects the entire countries economic performance. Even though air freight makes up a much smaller section of the industry compared to passenger transport, it is one of the most important and rapidly increasingly revenue source for the airline industry. It includes both freight handled by dedicated air cargo handlers and air cargo shipped on combined passenger and air freights. This utilization is measured by unused ton miles, which is the difference between available ton-miles and revenue ton-miles utilized. The changes in the level of spare capacity may be an indicator of timely availability of air freight services. As such, in order to calculate overall aircraft load, passenger and freight factors are combined to find the metric of ton-miles needed or used (U.S. Department of Transportation, January 2005).
With Domestic flights, the revenue passenger miles are a measure as the volume of air passenger transportation. Then the unused seat-miles (the difference between available seat-miles and revenue passenger miles) are then used as the most appropriate measure of airline capacity utilization. A revenue passenger mile is also equal to one paying passenger carried per mile. Available seat miles for an individual are the number of seats multiplied by the distance traveled. Between 2007 and 2008, airline capacity stood at: Domestic Revenue Load Factors (percent) Passenger revenue load factors Change from same month previous year Overall aircraft revenue load factors Change from same month previous year Freight revenue load factors Change from same month previous year
Sep-07
Sep-08 67.61
70.73
4.29
3.12
52.75
56.82
2.82
4.06
31.59
36.37
2.45
4.77
(U.S. Department of Transportation, January 2008).
In the time period of 2001 – 2003 almost every airline, both domestic and international, where facing hard financial times. With the sole exception to this Southwest Airlines, most US major airlines posted net losses exceeding $23 billion. The crisis that had happened was mainly put to blame on the events of September 11, 2001. Because of this immediate laoffs occurred and cutbacks of almost 20% in passenger traffic due to safety concerns. The Airlines however were in serious trouble before 9/11 as part of the economic downturn that had already negatively affected the nation on a whole.
Even though there have been many malicious setbacks for the airline industry, just like everything else that has a downfall, it will pick back up and return into a golden age, almost. The Airline Industry has made serious comebacks. To date, the Bureau of Transportation Statistics (BTS) of the U.S. Department of Transportation reported in a release of preliminary data, that a group of 21 selected passenger airlines had reported a system operating profit margin of 8.8 percent in the second quarter of 2007. This is an outstanding amount of profit; comparatively this was the highest reported profit margin since 2000. This is also the first time that any airline has had five consecutive profiting quarters (U.S. Department of Transportation, September 17, 2007). These statistics prove beyond any reasonable doubt that the industry has indeed recovered from the pitfalls that preceded the attacks of 9/11 and not only is striving itself, but helping pick up the U.S. economy at the same time.
Works Cited Airline Performance Drops, Says 2007 Airline Quality Report. (n.d.). Retrieved January 2009, from Meetings Net, Targeted Meeting Intelligence: http://meetingsnet.com/news/airline_report/
Boyd, L. (n.d.). Digital Sciptorium Rare Book. Retrieved January 2009, from Brief History of the U.S. Airline Industry: http://scriptorium.lib.duke.edu/adaccess/airlinehistory.html
FAA. (n.d.). A brief History of the Federal Aviation Administration. Retrieved January 2009, from Federal Aviation Administrator: http://faa.gov/about/history/bried-history
IATA. (n.d.). IATA Economic Briefing: PAssenger and Freight Forcasts 2006 to 2010. Retrieved January 2009, from The International Air Transport Association: http://www.iata.org/NR/rdonlyres/D4F7A43D-DE5B-4FFF-BE7216731F286402/0/0traffic+forcase+2006_2010.pdf
May, J. (n.d.). Air Transport Association of America. Retrieved January 2009, from Airlines to Airports: We Have a Problem": http://airlines.org/news/speeches/speech.htm
The Airline Industry and Current Challenges. (n.d.). Retrieved January 2009, from MIT: http://spacestation.mit.edu/airlines/the-airline-industry/
United States Department of Labor. (n.d.). Bureau of Labor Statistics. Retrieved January 2009, from Career Guide to Indsutries - Air Transportation: http://www.bls.gov/oco/cg/cgs016.htm
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