Questions for Discussion:

1. Assess the financial performance of the US airline industry during the past
30 years.
Between 1978 and 1981 deregulation, oil shock, world-wide recession and
Air Traffic Controllers strike have caused massive losses and decrease in net
incomes.
Moreover, higher operating leverages have caused bankruptcy and then
merger and acquisitions were established.
In 1990s The Gulf Crisis brought increase in oil prices and this caused
negative net incomes for 4 years.
In 2001 September 11 has caused huge increase in oil prices and security
measures which decrease in demands and customer loyalty, and end up with
negative net incomes for 5 years.
2. To what extent can the industrys low profitability be attributed to the
structure of the industry? Which of Porters five forces has had the biggest
impact in depressing industry profitability?
To evaluate the structure of the industry with Porters 5 forces it is needed to
look at the power of suppliers, threat of new entrants, power of substitutes,
power of buyers and threat of rivalry.
The Power of Suppliers
In airline industry, power of suppliers is high. In terms of jet suppliers, they
are few in number (which are mainly Airbus and Boeing), and passenger jets
are a vital component of the industry and a major source of financial strain
thus this limits the flexibility of airline companies. Also, because aftermarket
sales are a major cost, sticking with the same air jet supplier is important for
airline companies and this adds to the leverage held by major jet suppliers.
Another thing that adds to the power of suppliers is, the nature of the
product, which is highly differentiated. There are no close substitutes for air
jets. And because there are only two major suppliers, they can easily make
agreements about prices and benefits they will provide to airline companies
to increase their profits.
Also, airport facilities play a critical role as a supplier; they are limited in
number and charging high prices to companies.
Labor costs are very high because of low labor productivity and rigid working
practices agreed with unions. Most airline workers belong to one of a dozen
major unions like the association of flight attendants, the airline pilots
association and so forth. But recently, airline companies managed to

decrease labor costs by forcing employees to major concessions and

decreased

3. In what ways, and with what success, have the airlines strategies
attempted to counteract competitive forces depressing profitability in the
industry?
4. What is the outlook for the industry profitability during the remainder of
the decade?