Profitability Analysis of the US Airline Industry: Key Challenges

This report delves into the challenges and issues confronting the US airline industry, employing Porter's Five Forces model to analyze various associated elements. It identifies the rise of low-cost carriers as a significant threat to premium airliners, impacting profit margins. The analysis covers the bargaining power of suppliers and buyers, industry rivalry, threats of new entrants and substitutes, and reasons for low profitability, such as fuel costs, duopoly in aircraft manufacturing, and online ticketing platforms. The report also discusses the advantages and disadvantages of the Five Forces analysis and concludes that the economic performance of the airline industry is cyclical, offering potential for future recovery and profitability through strategic enhancements.

Running head: AIRLINE INDUSTRY OF THE UNITED STATES
Airline industry of the United States
Name of the student
Name of the university
Author note

1AIRLINE INDUSTRY OF THE UNITED STATES
Executive summary
The aim of this report is to discuss about the issues and challenges being faced by the airline
industry in the market of the United States. Various associated elements of the airline industry
are also being discussed in this report using the porter five forces model. In addition, various
strategies had been discussed, which will enable an airliner to become profitable on a persistent
manner. One of the key challenges for the existing airliners being identified in this report is the
emergence of the low cost carriers, which pose a huge threat for the premium airliners in terms
of profit margin. This report concludes that, economic performance of the airline industry is
cyclical in nature and thus, the challenges can be overcome in future.

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Table of Contents
Introduction......................................................................................................................................3
Overview of the airline industry of United States...........................................................................4
Growth rate of the airline industry...............................................................................................5
Porter five forces analysis................................................................................................................8
Reasons for low profitability in the U.S. airline industry................................................................9
Advantages of five forces analysis................................................................................................11
Disadvantages of five forces analysis............................................................................................12
Economic performance..................................................................................................................12
Strategies to enhance the profitability of the airliners...................................................................16
Discussion......................................................................................................................................17
Conclusion.....................................................................................................................................17
Reference.......................................................................................................................................19

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Introduction
Being one of the leading and prominent developed countries in the world with having
favorable per capita income of the major section of the population, United States is one of the
profitable and largest ventures for the Airliners. Airline industry in the United States is having
good number of competitors ranging from premium carriers to budget carriers catering to
different customers segments. However, airline industry is one of the most vulnerable industries
with relation to risk and cost (Cannon 2014). This is due to the reason that, airline industry
involves huge operating cost and perceived risk regarding the safety of the internal and external
stakeholders. Thus, airline industry can be termed as highly profitable industry with having huge
operating cost.
In the recent years, airline industry is witnessing positive growth due to the increase in
the global economy. Mainly there are two key contributors for the increase in the industry
growth of the airliners. One of the contributors is the enhancement of the global economy and
another one is the reduction in the price of the air fares. This is due to the reason that, with the
inflow of more competitors in the market especially the budget airliners, the average fare got
reduced, which attracted more sections of the customers and provided them an effective
alternative over other available transportation options.
This report will discuss about the opportunities and challenges being faced by the airline
industry in the United States. Porter five forces model will be used to evaluate the industry trend
of the United States airline industry. In addition, the five forces model will also be critically
evaluated in order to determine its effectiveness. Moreover, various strategies will be discussed,
which will enable an airliner to become profitable on a persistent manner.

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Overview of the airline industry of United States
As discussed earlier, airline industry of United States is having one of the biggest market
and traffic in the world. As per the reports, commercial aviation of United States is generating
more than 10 million of jobs. Moreover, it is also been reported that, every dollar earned in the
gross domestic product (GDP), of United States is having the contribution of 5 cents from the
airline industry (Airlines.org 2017). Thus, the airline industry of United States is one of the key
economic drivers rather than just be a mere service sector. In addition, with the growth in the
market of the airline industry, more organizations are entering in order to gain the growing the
market share and opportunities in the United States.
Figure: 1
Market share of the airliners in the United States
Source: (Statista 2017)
Airline industry of United States is having huge number of competitors with having both
premium and budget carriers. Thus, the United States airline industry is having huge market

5AIRLINE INDUSTRY OF THE UNITED STATES
coverage across various customer segments. As of 2016, Southwest airlines are the market leader
in the market of United States followed by Delta and American airways. Thus, southwest being
the budget carrier and American airlines being the premium carrier is having the top two
positions in the market.
Growth rate of the airline industry
United States is having favorable economic growth with positive trend in the Gross
Domestic Product (GDP). Thus, with the increase in the economy of the country, the airline
industry is also showing positive trend.
Figure: 2
Growth of GDP of US and airline industry
Source: (Schmidt 2017)

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According to the above figure, the market growth rate of airline industry is going upward
with the growth in the gross domestic product of the United States. Moreover, it is also being
seen that, the rate of growth of the airline market is more compared to the growth of the GDP of
the United States. However, as per the report, the current growth rate of the airline market in the
United States is lower than the average of the last two years. However, with the increase in the
rate of airliners in this market, the market penetration and coverage is increasing, which may
have positive impact on the growth of the airline market in the United States (Brueckner, Lee
and Singer 2013).
Figure: 3
Classification of the air traffic in United States
Source: (Rita.dot.gov 2017)
The above figure shows that, domestic traffic is more compared to the international
traffic. Thus, the domestic airline market is going strong with having some impact due to

7AIRLINE INDUSTRY OF THE UNITED STATES
recession. However, international traffic is more immune towards the recession than the
domestic one.

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Bargaining power of the suppliers
The power of suppliers in this industry is high.
Aircraft, fuel and human resources are the three key
supplies required.
Fuel price determines the air fares.
Cost of human resources determines operation cost.
Having only two aircraft providers namely Boeing and
Airbus.
Bargaining power of the buyers
Having good number of competitors.
Emergence of low cost carriers.
Price comparison in the online ticketing system.
Bargaining power of the buyers is high.
Industry rivalry
Intense rivalry due to more number of competitors.
Regulated by supply force rather than demand force.
Hugely competitive.
Threats of entrants
Involves huge cost to enter.
Economies of scale.
Requirement of expertise.
Stringent rules and regulations.
Threat of new entrant is low.
Threat of substitutes
Less threat from alternative substitutes such as bus
roadways and railways.
Switching cost is low.
Moderate level of threat of substitutes.
Price and convenience determines the switching factor.
Porter five forces analysis

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Reasons for low profitability in the U.S. airline industry
From the above five forces analysis, there are various reasons being identified, which is
contributing in reducing the profitability for the airliners in the market of the United States. The
following sections will discuss about the various reasons for the low profitability.
 One of the key reasons is the increase in the cost of the fuel. As discussed in the above
figure, fuel is one of the key supply materials. However, in the recent years, the price of
jet fuel is gradually increasing, which is reducing the profitability of the airliners (Hui et
al. 2012). This is due to the reason that, airliners cannot able to increase the fare due to
high level of competition. Thus, incurring more fuel cost with having same fare is
reducing their profitability.
Figure: 4
Trend of jet fuel price

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Source: (Tverberg 2017)
 Another reason being identified is the duopoly market of the aircraft manufacturers. As
identified in the five force analysis, there are only two major aircraft manufacturers
namely Boeing and Airbus (Mei and Marcopoulos 2014). Thus, they are enjoying the
duopoly market with having the upper hand to determine the price of the aircraft. Thus,
the increase in the price of the aircraft is causing more cost for the airliners, which further
reducing their profitability.
 In the recent times, one of the key reason of the huge market penetration and coverage of
the airliners is the introduction of the low cost carriers. These airliners attracted the
customer segments, which are not the target customers of the premium airliners.
However, with the emergence of these low cost carriers, the average profitability of the
airline industry gets reduced (Aydemir 2012). This is due to the reason that, low cost
carriers operating on minimal profitability in order to offer the lowest possible fare. This
phenomenon is forcing other airliners to reduce their fare also in order to attract new
customers along with retaining the existing customers. Thus, reducing the fare while
incurring the increased cost of the operating cost is reducing their profitability.

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Figure: 5
Growth rate of the low cost carriers
Source: (Eurocontrol.int 2017)
 Moreover, with the increase in the rise of the online ticketing platforms, customers are
having the access to check the fares of different carriers prior to the booking of the ticket
(Bilotkach, Rupp and Pai 2013). Thus, it will be difficult for the airliners to charge
individually rather than charging by the market determined price.
 Another reason for the reduction in the profitability of the airliners is the huge cost being
involved for entering in the airline market. This includes cost of aircraft, facilities, human
resources and other resources. Thus, the airliners should have the enough market
opportunities along with favorable fare structure to recover the cost (Borenstein and Rose
2014). However, in the recent scenario of price wars, airliners are pressured to charge
lower price, which recued their profitability.