CompetitionintheU.S.AirlineIndustry

Prior to 1978,theU.S.airlineindustry was tightly regulatedina way that made it difficult for newairlines to enter. Deregulation loweredthefloodgates and allowed a swarm of new players to enterthe industry, with 29 newairlines being established between 1978 and 1993. Amongthese new entrants was Southwest, which pioneeredthelow-cost business modelintheindustry. Other low-cost entrantsincluded Jet Blue and Air Tran.Thelow-cost players offered a bare-bones service, withouttheexpensive frills of traditional carriers (those frillsincludedin-flight meals, ample business and first-class seating, and loungesinairports for premium travelers).Thenew entrants had lower labor costs due toa flexible, nonunion workforcea crucially important factorinanindustry where labor costs account for one-third of operating costs.They flew point to point (which customers preferred), rather than routing passengers through hubs and requiringthem to change planes.They further lowered costs by standardizingtheir fleet around one model of aircraft (theBoeing 737inthecase of Southwest).

Theincumbents responded to new entrants by trying to lowertheir own costs, not always successfully. Prices tumbled, load factors declined (load factor refers totheaverage percentage of seats occupied on a flight), and high profits prior to 1978 were replaced by ongoing price wars and periods of heavy financial losses. Between 1980 and 2016,theaverage price for a round-trip flightintheUnited States tumbled from $653 to $367 when adjusted forinflation. As prices fell between 2001 and 2009,U.S.airlines lost $65 billioninnetincome asthey struggled to lowertheir costs and filltheir planes.

Theprice wars were amped up by several factors. First, consumersincreasingly came to seeairlinetravel as a commodity product.Thedevelopment of online price comparison sitesinthe1990s, such as Expedia and Price Line, contributed to this trend. Second,Chapter 11bankruptcy laws allowed bankruptairlines to continue operating asthey reorganizedtheir capital structure. Amongthebig carriers, United, Delta, and America have all operated under bankruptcy for a time since 2001. By allowing bankruptairlines to continue to fly,Chapter 11regulations continued to keep unprofitable capacityintheindustry, making it difficult for allairlines to gettheload factors to covertheir fixed costs. Third, adverse macroeconomic events such asthe2001-2002 and 2008-2009 recessions periodically exacerbatedtheexcess capacity situationintheindustry andintensified price competition.

However, after 40 years of transformation, by 2018theindustry seems to have achieved some degree of stability. Many ofthesmaller players have exitedtheindustry. A wave of mergers between largerairlines has resultedina more concentrated competitive structure. By 2017, fourairlines - American, Delta, United and Southwest - captured 70% of all traffic. Although prices remainlow,they are no longer falling. Moreover, undertheprotection of bankruptcy reorganizationthelegacyairlines have made improvementsinloweringtheir cost structure.Theairlines have also been helped by a declineinfuel costs since 2010 andtheintroduction of more fuel-efficient aircraft. As a result,thebreakeven load factor has fallen to 68% today from 81% duringthe2001-2010 period. Meanwhile, demand forairline travel has continued to expand. Between 1980 and 2016,thenumber of passengers flyingintheUnited Statesincreased from 400 million to 824 million. Higher demand and reduced competition have resultedinfuller aircraft. Load factors reached 84%in2017, up from 70%in2001. As a result, profitability has returned totheindustry. Between 2010 and 2016,U.S.airlines made $62 billioninnet profit, making up forthelosses ofthe2001-2009 period.

Questions : Identify and discuss two examples from either the SWOT Analysis or from Porter's Five Force Model that have impacted competition in the industry over the last 30+ years.