Financial Distress & Air Line Industry

The Airline industry is a large and constantly growing industry. It facilitates economic growth, international investment and world trade and is therefore central to other industries as well for globalisation. There are various forces which lead to globalisation in airline industry. Key drivers of change are forces likely to affect the structure of an industry; sector or market. (1).

Overall, the five forces model suggests that the overall intensity of competition in the airline industry is likely to be severe. Back in the early 1980 's competition was very intense. During the late 1980 's the monopolization of major routes by a few major carriers, the limited availability of free landing spots at major hubs and the emergence of limited brand loyalty and tacit price agreements have all helped reduce the intensity of competition. However, as already mentioned, slumping demand in the early 1990 's plunged the industry once more into a severe price war. Airline travel is a commodity-type product, with limited potential for differentiation.

While it is difficult, to some extent, to evaluate the success of a merger that is only just now entering its final implementation phases, it is known that the objective of that merger was to use the larger route network to attract more business, and that the combined airline would also extract cost savings as the result of increased operational efficiency. The airline had struggled in 2009, with its sales declining, but it recovered in 2010 and 2011. Sales last year were $33.678 billion, up from $21.068 billion the year before. In the past two years, the company has turned a profit, going from $253 million in net income in FY2010 to $840 million in net income in FY2011. Some of this improvement may stem from the impact of the merger. However, the airline industry is highly cyclical, and the past two years have represented economic improvement. Likewise, the losses the company faced in FY2008 and FY2009 were as much the result of the economic downturn as they were internal business factors.

Rising fuel prices has a huge impact on the airline industry. In an article published by the New York Times in 2007, oil prices were hovering ‘near $100 a barrel’ which caused the International Air Transport Association (IATA) to ‘slash’ their predicted profits for 2008 from ‘$7.8 billion to $5 billion’ (Clark, 2007). In 2008 high fuel prices were ‘dominant factor’ in the losses that faced the industry, and continued to same effect in 2009 (Dunn, 2009). Diagram 2 shows how fuel price has increased and fallen over the last 5 years.

In my opinion the most important challenges that the airline industry has to deal with are the volatility caused by air plane accidents or terror attacks, the economic crisis and the competition from low cost airlines. Firstly , some terror attacks could have a significant decrease in the demand for air trips. For example after the attacks of the September 11,2001 the flights in U.S.A. were decreased more than 20 percent and despite this, most of the planes travelled with half of their passengers capacity ( Raymond et al., 2003, p.178). Secondly, the world economic crisis has forced the companies to adjust the cost of fares , therefore and their earnings. Finally the low cost airlines had managed

Because of the deregulation of the government policy, there are a number of new airlines that entered the industry at first. However the most significant barrier to entry that new entrants face is significant post-entry competition from existing major airlines. The existing market is already saturate. In order to open market the new entrances have to lower the price of their limited routes. But they are facing the stronger competitor who can provide lower price on the same routes while create profit on the other non-competing routes.

Five major passenger airlines dominate their industry by size (Grant, 2013, p. 479). But their size, legacy costs and hub and spoke business model created significant exit barriers (Grahm & Vowles, 2006, p. 108). New competitors not only started with no entry barriers but also few if any exit barriers. Legacy carriers had to identify new innovative strategies to augment their core business models to profitably compete.

The airline sector had already been suffering a slowdown as a result of lower economic growth and cutbacks in business travel. Then, at the moment the

A drop in fares has been the best result of the Airline Deregulation Act of 1978. It has been the impetus for the increase in the number of flights, which in turn has spurred a drive for greater safety in airlines. But with the current airline market, this development has given us one negative. Since ticket prices have dropped to new lows, the realities of an industry which operates on such economies of scale dictates that only a few competitors have the capacity to operate within the market. This is not the desired effect of either political side on this issue, but it is an economic necessity with the environment that has been created, very similar to that of public utilities and phone companies.

Airlines must operate within a low-margin, high-fixed-cost environment, making profitability particularly sensitive to decreases in volume, either from environmental factors (e.g., the September 11,2001 attacks) or from competition. Moreover, the airline business is labor-intensive. Labor costs as a percentage of revenues ranges from a low of about 25 percent for the low-fare airlines to almost 50

Surprisingly enough, the corroboration that the real cost has not declined after the act does not relate to airlines profit. Steven A. Morrison, the chair of the Department of Economics at Northeastern University, discusses the deregulation affects in his article. Although he evaluates deregulation to be good for the consumers, he argues that the deregulation act has been detrimental to the airlines despite the increase in load factors. Deregulation has created ever-increasing competition that even after mergers, increased efficiency and load factors, the continuous pressure of keeping fares low has resulted in losses for the airlines. His remarks address the airlines’ concerns over the costs. This emphasizes that deregulation has not only harmed the consumers, but also the airlines.

In this paper I will be analyzing the airline industry using Porter’s Five Forces. Porter’s Five Forces is a business management tool that allows firms to possess a clearer perception of the forces that shape the competitive environment of an industry, and to better understand what these forces indicate about profitability with regard to the microenvironment. The forces include Competitors, Threat of Entry, Substitutes, Suppliers, and Customers. When firms are able to widen their conception of competition beyond their direct competitors, and consider the broader economic fundamentals of their industry, they are able to form better strategy to better optimize their profitability. The airline industry is one characterized by low

The airline industry provides services for passenger and cargo transport. Over the years the airline industry has faired fairly decent. That is, until the September 11 tragedy in 2001. From 1995 through 2000, the airline industry earned about $23 billion then lost about $35 billion from 2001 through 2005 (McCabe, R., 2008). There are many factors that indicate the economic downfall of the airline industry after the September 11 incident. The purpose of this paper is to discuss some of these factors and their impact the airline industry. Issues for discussion include: (1) shifts and price elasticity of supply and demand, (2) positive and negative externalities, (3) wage inequality, and

This would mean higher economic growth for the airline companies and with higher economic growth, it means expectations and thus the demand for airline tickets will also increase due to this fact and thus the supply will increase and if the demand’s increase is more than the supply’s increase, prices will go up as demand is more than supply.

Since The Altman’s model widely used among the investors, though it is not an intuitive model, once a firm is predicted having a financial distress next year, it has been treated as it has been financial distress currently (whtaker, 1999).