Case Study Example: Problems in the U.S. Airline Industry

The U.S airline industry has faced many challenges in the past decades. There are two main causes of problems in the industry, global economic situation and the internal dynamics of the sector. Fluctuation in the prices of fuel is the greatest challenge facing the U. S airline companies (Sax, 2015). Economic recession which causes a major decline in business is also another major problem facing the industry. Seasonality and security are also major concerns that affect the operations of the U.S airline. The airline's management has little control over these two problems since they are caused by global economic forces.

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Internally the industry suffers from the entry of low-cost airlines which cause steep competition to the existing. The industry is also facing a severe price war which to a large extent hurts the airlines using traditional models to conduct business (Belobaba, Odoni, Barnhart, & Bamber, 2015 p. 488). Excess capacity caused by the entry of budget carriers and the model they use to determine their routes is also a major challenge. The management, however, can make strategic decisions to influence the impact of these problems.

Strategic analysis

The cost of fuel and price fluctuation for the product affects the operations of airlines massively. Fuel cost makes almost a third of the expenses incurred by carriers. A slight change in the price of fuel can cause a negative or positive impact on the profits of the company (Sax, 2015). Jet fuel like all other fuels is obtained from crude oil. The price of crude oil is controlled globally by a union of the countries that produce it. Airlines management have little influence on the price of fuel. They can, however, make decisions to minimize other expenses to mitigate negative impact caused by a random increase in the price of fuel. Airline companies can also enter into contracts with fuel providing companies to negotiate long-term deals to enable them to purchase the product at a predetermined price regardless of the market forces they would pass the risk of loss due to price fluctuation to another party.

Global economic challenges affect every sector of an economy. Usually, after financial crises, the economy goes into recession. During this period business slows down, the value of stock also decline, and there is limited growth. Since the airline industry depends on of the financial situation of its customers, it is highly affected by a recession. At this time the management should downsize its operations. During a recession, the airline companies should only operate flights that have the prospect of breaking even and making profits.

Price wars in the industry is a major challenge. Firms in the industry like other business propositions aim at making profits. The costs involved in air travel is, however, immense and to achieve their objective; airlines are forced to charge the customer more for air tickets. Budget airlines, however, have identified this as an opportunity and developed business models which allow them to charge customers low ticket fares and still make money. The low-cost airlines employ various strategies to manage cost. For example, they use non-union personnel to cut the cost of employees salaries which makes up a quarter of the expenses in many airlines. The budget carriers also maintain a bare minimum number of staff who are well skilled and trained (Belobaba, Odoni, Barnhart, & Bamber, 2015 p. 495). The low-cost airlines also try to utilize each aircraft they own to the maximum ensuring that it does more flight hours hence more revenue. Advancement in technology has also worsened the condition for airliners since customers can compare prices on different websites with minimal cost. Price war drives down ticket prices reducing the small profit margin the companies obtain due to the high expenses.

Solutions

For companies in the air travel industry to remain profitable, they need to embrace efficiency in their operations and fully utilize their resources. For carriers to achieve a high level of standards in efficiency, they must hire highly skilled staff who are determined to work extra hard to deliver results. A company should aspire to have a small team of highly dedicated and able personnel. Such an initiative would reduce the labor cost drastically together with repair and maintenance since such work will only be done by professionals.

Airline customers initially focused on wealthy clients who could pay for flight tickets inclusive of other amenities such as entertainment and beverages. The growing middle class has however led to the increase in the need to travel by air for business or other reasons. Airlines, therefore, should be willing to adapt to this change in the market and tailor customize their prices to accommodate such customers.

Mergers are probably one of the best ways for the airlines to reduce cost. If the different enterprises decide to come together and form one big company, then they will benefit in various ways. This initiative can largely reduce costs such as airport landing fees and training for technicians who maintain the crafts.

Recommendations

Airline companies need to realize the dynamism in the industry and make strategies that ensure their sustainability. Firms in this industry must become more cost conscious and work on reducing the expenses under their control such as personnel and maintenance costs. In addressing the challenges caused by global phenomena such as an increase in fuel cost or economic recession, the companies must adopt creative means to survive. Entering into a contract with a fuel supplying company to provide the product at a particular price can allow the airliner to plan with certainty. Technology also appears to be the next frontier of competition in the industry. Companies must invest in new means of advertising and offer their customers the flexibility and convenience to acquire tickets online and pay without involving an agent.

References

Belobaba, P., Odoni, A., Barnhart, C., & Bamber, G. (2015). The global airline industry (1st ed.).

Sax, I. (2015). The problems facing the airline industry. IR Magazine. Retrieved from https://www.irmagazine.com/articles/sustainability/15838/problems-facing-airline-industry/