Airline Industry - a Need to Reduce Costs and Adjust Changes Made during Financial Decline - Case Study Example

Running head: RESEARCH ESSAY Research Essay [Writer’s name] [Institution’s name Research Essay Introduction The airline business is one oldest industries, it has been around for 75 years. It has gone through a lot of rough patches. Currently the airline industry in a major financial crisis. The airline industry crisis seemed to become worse due to the September 11th attacks; the increasing prices of gasoline and the most recent cause is the shortage that was caused by Hurricane Katrina. Every one of these major events cause the industry to experience a ripple effect that to this day is still being felt. These events sent shock waves through an industry that was already troubled. The severe impact it had on world travel exacerbated existing problems. Consolidation in airlines and markets, labour troubles and increasing gas prices are some of the most glaring issues impacting the industry. Analysis The first five years of the twenty first century have not been a happy time for the world’s airlines (Doganis 2005) The slowdown had already reduced business travel by 30%. Labour costs were increasing by nearly 10%, gas prices were increasing, and business decisions needed serious attention (Steiner 2009). Only a few airlines were proactive in restructuring their business plan to react to the failing economy. Those airline carriers who chose to do nothing have will or have to either filed chapter 11 or are very close to doing so. The industry is at a major turning point. There could be major restructuring, bankruptcy, liquidations, or consolidations of major network carriers. Some airline carriers have done very well to just break even over the course of existence. Southwest Airlines is the only major carrier that has shown a profit over the past four years and in the same timeframe, the other major carriers show a combined total loss in excess of 25 billion. The downward spiral cannot be attributed solely to the September 11th disaster, many other factors contributed to their downfall. Numerous other factors including soaring gas prices and labour conflicts have plagued the airline industry. The airlines as we have known them are being forced to change. Assuredly, the government will play a major role in reshaping the future of the airline industry and the national air transportation system. In an effort to head off a decreasing in the number of passengers and rising costs for increased security, companies started to lay off staff and reduce other services. This has had a great effect on the international and domestic services the ability to generate sufficient revenues that cover operating costs has hampered the airlines ability to be profitable. Another factor that has a major impact on the airline industry is the gas prices; the gas prices are at an all time high. A one dollar increase per barrel of crude oil translates to anywhere from 50 to 80 million dollars annual increase in gas prices, depending on the airline’s fleet size. With crude oil topping 50 dollars a barrel, a sluggish economy, and another major airline filing chapter 11, the entire industry has taken a fall (Steiner 2009). Also the ticket pricing structure is in total chaos. The government and lenders are enabling bankrupt, financially unstable airlines to continue operations by extending loans to keep them in the air. One result is a glut of empty seats in the market. Additional seats are flooding the market with start-up airlines and supply is outweighing demand. While these bankrupt airlines continue to fly they reorganize under bankruptcy protection and lower costs through cuts in worker benefits. Important carriers have really tried to raise ticket prices only to cancel them after customers flocked to low-fare carriers offering the same ticket for as little as one dollar less. This slow economy has forced potential business travellers to look at alternatives such a teleconferencing, less travel, and alternative travel modes (Global airline industry progrme 2009). A weakness for the airline industry is related to replacement and maintenance of aircraft as the planes age. Current issues are directly related to high cost and sagging revenue. Other limitations the airline industry faces are restrictions in the global market of ownership of foreign carriers and where the planes may fly. In an already intensely competitive market, another factor that contributes to the decrease in air travel is that more passengers continue to look at “deals” and cheap fares. This has made it almost impossible for the airlines to attract premium passengers. Airlines are now in the commodity business as the public demands low-priced transportation. It has moved from elite to a common form of transportation. The airlines faces challenges for the future to control energy costs, maintain low airfares that consumers favour and not the cost of jet fuel in the surcharge (Cento 2008) Many customers do not understand the breakdown of expenses and fees covered by the price of their ticket including the use and wear of airport facilities, labour costs, fuel expenses, landing fees, maintenance fees, aircraft insurance, advertising expenses, utilities, general and administrative expenses, and security surcharges. The rates between the lowest and highest airlines increased irritating business travellers (Belobaba etal 2009). An important factor that affected the GDP of the airlines was Hurricane Katrina, which made fuel prices rise an additional 20% affecting the market profitability of airlines (Prakin etal 2007). With such a significant impact of this industry on the GDP, a modification in the operating procedure, recruiting of employee and benefit packets may be a more practical way to help the airline industry in finding a way out of this financial decline Conclusion In conclusion in future, the airline industry has to carry on reducing their costs and invest in solution that can help out the industry to adjust easily changes made during their financial decline. The relevance of each economic indicator for the airline industry serves as a way to validate or predict the eventual growth or decline of the industry. As consumers and airlines continue to repair the damage that was caused by the many events that have had a huge impact on them, indicators show that the industry should have a strong and balanced economic future. The future success of the industry depends on its ability to change. The airline industry is going through a tough time and it does seem to improve at all. Without doubt, the industry will have to make a lot of changes so that it can survive. Reference Belobaba Peter, Odoni Amedeo, Barnhart Cynthia (2009); The Global Airline industry Wiley p4 Cento Alessandro (2008); The Airline Industry: Challenges in the 21st Century Physica-Verlag Heidelberg; 1 edition Doganis Rigas (2005); The Airline Business, Routledge; 2 edition p1 Global airline industry progrme (2009) Airline Industry Overview retrieved from web.mit.edu/airlines/analysis/analysis_airline_industry.html on 6th August 2009 Parkin Michael, Powell Melanie, Matthews Kent (2007); Economics, Addison Wesley; 7 edition Steiner Christopher(2009) $20 Per Gallon: How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Better Grand Central Publishing; 1 edition p24 Read More