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The Airline Industry - Case Study Example

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Summary
Airlines operating in the Americas. Despite a global recess in airlines industry, Southwest carried "78 million revenue passengers in a recent year, about 75 per flight, and flew 60 billion revenue passenger miles (RPM)." (Airlines: Industry overview, 2009).
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The Airline Industry
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This achievement is indeed remarkable against the backdrop of escalating fuel prices, rising operating coats and fierce competition in the airlines industry, either leaving many airline companies to close shop, or seek mergers and strategic alliances with larger airlines, to save themselves from virtual extinction.
Business strategy in terms of quick, short and multiple entry and departures from secondary airports, or short haul flights, which not only add to revenues but also cut downs operating costs and saves fuel dramatically.
Larger airlines are committed to long haul services, especially over global skies, which, economically speaking, freezes revenues and incurred large burn-out of fuel. When a comparative analysis of short flights and long hauls are made, it is seen that the former serves profits and revenues more loyally and conscientiously than the latter. It is necessary for a no frill airlines like South West to work "with new schedule planning tools and processes and fleet flexibility," so that Southwest are " well-positioned to respond to a rapidly changing environment and have the flexibility to adjust our flight schedule, as necessary, to eliminate unproductive flying." (Berg, 2008).
The Company has entered into understanding for hedging 80% of estimated fuel needs with values assigned being approx. $ 61 /barrel. Based on this, the present market value of fuel derivatives for 3Q 2008 to 2012 works out to around $4.3B, taking into account the conspicuous hike in fuel prices in recent years.
The table shown below takes into account the futures hedging transactions scripted for forecast 2008 through 2011.

Serial

Year

Derivatives contract as percentage of fuel consumption
Aver Barrel Crude price US$
1.
4Q. '08
80% of fuel consumption
58
2.
2009
70% of fuel consumption
66
3.
2010
40% of fuel consumption
81
4.
2011
20% of fuel consumption
77
5.
2012
20% of fuel consumption

76
(Berg, 2008).
The future of airlines is dependent upon American economy:
The airlines industry in the US depends heavily upon the state of economic health prevailing in the country. This is because the predominance of good economy translates into greater economic activities, which could encourage air travel for business. In the present context, the world economy, and particularly, US is in a state of flux. Privatization of airlines had its share of economic prosperity, but is not without challenges. As a result of open skies policies, many small airlines companies came into the field, and more significantly, upturned the business prospects of large, established players, whose heavy overheads, spiraling operating costs and high ticketing structure resulted in unmitigated disasters.. Smaller, leaner and low cost airlines companies, with just the minimum infrastructure necessary, provided much better service at much lower costs. Larger companies were forced to merge or close operations. Moreover, it is also seen that the airlines industry in the US are highly concentrated, with 90% of the revenues generated from just "the ...Download file to see next pagesRead More
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