The Airline Industry
Introduction
Historically, air travel has survived largely through state support, whether in the form of equity or subsidies. The airline industry as a whole has made a cumulative loss during its strenuous history, the costs include subsidies for aircraft development and airport construction. Because of increasing fuel prices and new industry standards the airlines have raised ticket prices as a compensation for the high cost of operating. Going hand-in-hand with these increasing prices, the effects of 9/11 have added more strain to the already existing problem of debt the airline industry faces.
Airline Business Models
Traditional Model
The traditional operating model for large U.S. and European airlines has been the hub-and-spoke approach. This model enables airlines to virtually take anyone from any place to any desired destination. However, this model has been considered by many industry analysts as no longer competitvely substainable in its present form due to industry changes and exterior economic effects.
Low-Cost Model
Boeing vs. Airbus
Ticket Sales
In attempts to fully maximize profits the airlines focus on the price of tickets. Since everything in the last couple of years, especially since 9/11, has changed, the price of tickets has become a very confusing aspect of the airline industry and has changed rapidly.
Most airlines use differentiated pricing, a form of price discrimination, in order to sell air services at different prices and in different time segments to coop with the losses that would normally occur. There are many factors that contribute to determining the price of tickets. These factors include the days remaining until departure, the current booked load factor, the projected public demand and variations by the day of the week the departure is and the time of day. This price distribution is obviously done mostly by seating classes.
The beginning of advanced computerized reservations systems in the late 1970s allowed competing airline industries to easily perform cost-benefit analyses on different pricing techniques, which lead to almost perfect price discrimination by filling each seat on an aircraft at the highest price possible without driving the consumer elsewhere. This crazy aspect of the industry has caused airlines to compete for lower prices on same routes and because of this competition aspect, most airlines experience major losses as a result.
These ticket prices end up having the greatest impact in the industry because due to operating costs, the income that is distributed amongst providers, even at its highest, is only a small portion of the overall income. Basically in the end, if the ticket prices are too low, the revenue won't cover the operating costs and competing airlines would see decreased profits and won't be able to keep up with the market. United Airlines, US Airways (twice), Delta Air Lines, and Northwest Airlines have all declared Chapter 11 bankruptcy, and American has barely avoided doing so, just proving the effects of ticket sales.
Effects of 9/11
Group Members
Ted Sirvaitis (Sirvaitr)
Michael Outwin (Outwinm)
Alex Baranick (Baranica)
Kaitlin Van Wagner (Vanwagnk)
