Airline Flight Industry

Nicole Kinney, Kelly Dwyer and Blaine Taylor

FrameworkBackground

Global Market

U.S. Market

Customer

Competition

Economics

Improvements

External Factors

Fuel

Supply

Demand

Why should you invest?

Background Information of Airline Industry

Dates back to 400BC, when Chinese invented the Kite.

1480’s- Leonardo da Vinci

1783- First recorded flight

1903

Global Market

After experiencing a slump for many years following 9/11 and the recession, the global airline industry has been experiencing very strong growth in the last 3-4 years.

When faced with a couple of major airline accidents, airlines continued to focus on increasing security and boosting features to ensure higher passenger safety.

The United States, China, Russia, United Kingdom and Germany had some of the world's largest fleets in the years 2013 and 2014. Emerging markets such as Latin America and Asia Pacific remained the high growth markets for aircraft manufacturers.

US Market Alaska Air Group

Delta Air Lines

JetBlue Airways

Southwest Airlines

United Continental

American Airlines

US airline industry saw strongest profitability reports in the 1st quarter of 2015

May 2015-traffic for airlines grew by 5.2% and capacity grew by 5.93% on average

Net income increased about 371%

Customer Customers have a high bargaining power since the industry deals with a perishable product with limited options

to differentiate their services from competitors’ products.

Various classes of seats:

Low-cost carriers such as Southwest Airlines provide low-fare options for travel,

Carriers such as Delta Air Lines, United Continental, and American Airlines provide more customer service and amenities for a higher price.

JetBlue Airways on the other hand, caters to the niche segment who look for better features and benefits that low-cost carriers don’t provide and at a reasonable price that network carriers can’t provide.

Passengers highly price sensitive

Airlines, however, will remain the only option for extremely long-haul distances.

CompetitionThe airline industry is highly competitive and capital intensive.

Competition increases when new airlines enter or when those in place expand services to new markets

Because of its capital intensive nature, fixed costs and barriers to exit are high.

“PwC US today released Tailwinds, its annual report on the airline industry, which reveals that the global airline industry is set to face more aggressive competition in the coming year, charged by expansion of the low-cost carrier (LCC) business model, the rapid growth of airlines in the Middle East, and a rise in joint ventures (JVs) to increase international flights. With a successful year in growth and operating income in 2013, the overall industry picture is favorable, but with competition on the rise, driving efficiencies by becoming a ‘connected airline’ can help airlines better navigate the landscape and stay ahead”

Economics (Profits)

The global airline industry is constantly chastised for its inability to earn long-term profit, let alone generate economic profit.

L.E.K. Consulting

Overall, publicly reporting airlines in aggregate generated a positive economic profit for the 2010-2014 period

It is worth noting that the sheer magnitude of the economic profit generated by the top 10 performers has never been seen by this industry before. Ancillary revenues have been vital to driving airline profitability yet many carriers still struggle to embrace this trend.

Improvements

Despite the recent tragic loss activity, flying is often said to be the safest form of transport, and this is at least true in terms of fatalities per distance travelled.

“According to the Civil Aviation Authority, the fatality rate per billion kilometres travelled by plane is 0.003 compared to 0.27 by rail and 2.57 by car.”

Positive Statistics

Engineering Excellence

Human Factors

External Factors

Political and legal

Economic-strength of economy helps determine level of air travel demand

Social and Demographic

Technological and Environmental

Fuel prices-26% of typical $300 airline ticket goes toward fuel

Fuel

26% of typical $300 airline ticket goes toward fuel

Spikes in fuel prices can damage profit

Prices recently have been higher

It is the largest expense for airlines

Supply of Airline Flights

High fixed costs

Very expensive for suppliers to buy their planes

Aircraft manufacturers

Air navigation services-direct flow and air traffic

Travel agents

Computer reservation systems -help book and sell tickets

Freight forwarders-organize shipments

Typically suppliers have high rates of return especially computer reservation system, travel agents and freight forwarders

Have great amounts of power

Demand for Airline Flights

Large Income Effect

Luxury Good

Expensive

Low Substitution Effect

Availability of substitutes, boats and trains

Substitutes are not very similar

Why should YOU invest?

Airline stocks have been among the best performers on Wall Street within the past 2 years

Will bring in almost $750 billion in revenue this year

Last year it carried 743 million passengers