report

MNG93002 Strategy and Case Analysis

Assessment 2 – Background Information

US airlines – Case Study

The United States Airline Industry

The U.S. airline industry has long struggled to make a profit. Analysts point to several

factors that have made the industry a difficult place in which to do business. Over the years,

larger carriers such as United, Delta, and American have been hurt by low-cost budget

carriers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and

Virgin America. These new entrants have used non-union labor, often fly just one type of

aircraft (which reduces maintenance costs), have focused on the most lucrative routes,

typically fly point-to-point (unlike the incumbents, which have historically routed passengers

through hubs), and compete by offering very low fares. New entrants have helped to create a

situation of excess capacity in the industry and have taken share from the incumbent air-

lines, which often have a much higher cost structure (primarily due to higher labor costs).

The incumbents have had little choice but to respond to fare cuts, and the result has been a

protracted industry price war. To complicate matters, the rise of Internet travel sites such as

Expedia, Travelocity, and Orbitz have made it much easier for consumers to comparison

shop, and has helped to keep fares low.

Beginning in 2001, higher oil prices also complicated matters. Fuel costs accounted for 32%

of total revenues in 2011 (labor costs accounted for 26%; together they are the two biggest

variable expense items). Many airlines went bankrupt in the 2000s, including Delta,

Northwest, United, and US Airways. The larger airlines continued to fly, however, as they

reorganized under Chapter 11 bankruptcy laws, and excess capacity persisted in the industry.

The late 2000s and early 2010s were characterized by a wave of mergers in the industry. In

2008, Delta and Northwest merged. In 2010, United and Continental merged, and Southwest

Airlines announced plans to acquire AirTran. In late 2012, American Airlines put itself under

Chapter 11 bankruptcy protection. US Airways subsequently pushed for a merger agreement

with American Airlines, which was under negotiation in early 2013.