Research Paper: Commercial Air Carrier

Pages: 5 (1508 words)  ·  Bibliography Sources: 5  ·  Level: College Junior  ·  Topic: Transportation  ·  Buy This Paper

Commercial Air Carrier: America Airlines Survival

The objective of this study is to choose a major U.S. commercial air carrier and to discuss the company in terms of its history and economic, structural and competitive characteristics both pre- and post-deregulation. Secondly, this work will identify the various route structure and product alternatives, the costs and benefits of each, and means for achieving product differentiation and will identify the various airline departments and the role of each in planning, development, and execution of flight operations. This study will describe airline cost structure, the nature of fixed, variable, and controlled costs, and methods employed by the selected carrier to obtain sustainable competitive cost advantages over other carriers. This study will discuss the methods of Revenue Management used by your selected air carrier and how it relates to other industries.

History, Economic, Structural, and Competitive Characteristics (Pre -- and Post-Deregulation)

It is reported that the first decade of deregulation resulted in the profit of the U.S. airline industry declining by 74% from levels that were already unsatisfactory. The American government deregulated the domestic airline market in 1978 under the Airline Deregulation act. The results of deregulation are reported to have included "increased competition, lower fares, new carriers, frequent-flyer loyalty programs, alliances, and networks." (Tolkin, 2010) the 'legacy' airline carriers following deregulation were up against much stronger competition from the new low-cost carriers the low-cost carriers are reported to have "leveraged the advantages granted under the deregulated market." (Tolkin, 2010)

II. Various Route Structure and Product Alternatives -- Cost and Benefits, & Differentiation

Frequent-flyer programs (FFP) were introduced which provided customer loyalty rewards including such as "…tickets, cabin upgrades, priority check-in, priority boarding, lounge access, and other benefits." (Tolkin, 2010) These programs were innovative and enabled customers to enroll in the FFP program of the airline and to accumulate mileage points based on the distance traveled and the class traveled with first and business class passengers receiving multiples of the base rate (36). Passengers can then redeem those miles for rewards such as free or discounted tickets and cabin upgrades." (Tolkin, 2010) in addition, nonairline companies are reported to have partnered with the airlines in offering awards and miles for nonairline services and goods. The reason for these partnership includes "the extensive membership rolls the airlines possess and the marketing opportunities as a result of these lists." (Tolkin, 2010)

Loyalty programs were reported to have been "pioneered by American Airlines in 1981 and to have been soon followed by "major carriers such as United Airlines, Delta Airlines, and others in introducing FFPs." (Tolkin, 2010) Loyalty programs were found to be more "Often more profitable than other forms of marketing such as comparing services, routes, and price (36). In addition to lower marketing expenses, FFP's provided airlines with great revenue…" (Tolkin, 2010)

Airline carriers are reported to have been characterized by a structure known as the "hub and spoke model. The idea is relatively simple, and revolutionized the industry at the time; an airline selects an airport with a central geographic location, relative to major traffic flows, and operates flights in-and-out of this central hub enabling more cities, or spokes, to be reached." (Tolkin, 2010) Benefits of the hub and spoke model are reported to be "numerous." (Tolkin, 2010) Airlines are stated to be able to "leverage the hub and spoke model to decrease labor and equipment costs. Rather than having support staff across many cities, airlines can centralize their operations, lowering costs." (Tolkin, 2010) These type of systems decreased unit costs and to have created high fixed costs that make a requirement of larger terminals, investments in information technology systems and intricate revenue management systems." (Tolkin, 2010) Negative aspects of the system were inclusive of passenger discontent due to the increases in delays and congestion.

III. Airline Cost Structure, Nature of Fixed-. Variable- and Controlled-Costs

It is reported that the cost-price disconnect arose from the rapid rising of costs following 911 in addition to the labor agreements of the 'bubble years' or the 1990s. It is reported that a confluence of the events, which includes war in the Middle East "led airline management to focus on liquidity and CASM and government assistance in the form of subsidies, insurance, and tax relief." (Dempsey, 2008) Costs have additionally be driven by the "megatrends of deregulation." (Dempsey, 2008) the revenue side of the hubs is reported to result in a geometric growth in the number of city-pairs marketed and results in creating "monopoly and duopoly pricing opportunities for origin and destination traffic to and from the hub, as well as certain connecting markets fed only by it." (Dempsey, 2008) in addition, airline carriers are allowed to "take advantage of the S-Curve relationship between revenue, along on axis and frequency along the other." (Dempsey, 2008)

There is also noted to have been a 'demand-capacity disconnect' and specifically stated is that the excess capacity that the North American industry has experienced is "a product of the desire of U.S. airlines to offer the frequency levels that attract high-yield business traffic. It is a tragedy of the commons phenomenon. The fifteen interior U.S. hubs are reported to "crate wasteful network duplication, driving competitive pricing down to variable costs in order to derive some revenue from seats that would otherwise fly employ." (Dempsey, 2008) Included in the variable costs of the airline carrier is that of the price of fuel, which may experience great fluctuations in price. Fixed costs are the absolute certain costs to the airlines which may include such as employee salaries, cost of maintenance and upgrading of flight equipment. Other variable costs include landing and airport frees. Airport charges are based on landing fees and these are formulated upon the basis of the aircraft weight and passenger levies charged. Ancillary fees are charged for such as "checked baggage, food and beverage, seat selection, priority boarding, ticket changes, reservation methods and carry-on baggage fees." (Dempsey, 2008)

IV. Methods Used by the Carrier to Obtain Sustainable Competitive Advantages

Sustainable competitive advantage among airliners is obtained in various ways. American Airlines has accomplished this through inducing its customers to "pay higher fares while keeping its airplanes full. In essence, it has found a way to sell as many high priced seats as efficiently as possible." (Dempsey, 2008) Sustainable competitive advantage involves "environmental changes, strategic change is emphasized as a critical antecedent to the survival of firms suffering significant environmental uncertainty." (Dempsey, 2008 ) Cited in differentiation of products of services in the drive towards sustainable competitive advantage. It is reported that the largest cost increase for the bankrupt airlines in 2001-2003 shows that United and U.S. Air "could not earn money even when flying 100% full because of their exorbitant unit costs. By contrast, the profitable group has steadily stayed below a 70% load factor, which explains why a low-cost carrier like Southwest can undercut the legacy carriers' airfares. Southwest is simply more efficient in controlling costs, enabling them to profit from flights, which are not 100% full. When looking at the legacy carrier's breakeven load factors for the past 4 years, one sees similar trends between airlines that recently filed for chapter 11 bankruptcy and airlines who have escaped filing" (Dempsey, 2008)

V. Methods of Revenue Management & Relation to Other Industries

The work of McGill and Ryzin report that revenue management is focused on profit maximization and this is understood against the background of the short-term costs, which for airlines are for the most part fixed in nature resulting in inherent difficulty to identify policies for booking that will serve to bring about the maximum possible revenue. It is reported that revenue management decisions are "highly interdependent with decisions made in other key areas of inventory optimization, however, pricing, forecasting, and booking control processes often operate at different levels… [END OF PREVIEW]

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