Airline Industry Essay Research Paper airline industryThe

Airline Industry Essay, Research Paper

airline industryThe airline industry has been subject of intense price competition since it was deregulated, and theresult has been a number of new carriers which specialize in regional service and no-frills operations. These carriers typically purchase older aircraft and often operate outside the industry-wide computerizedreservations system. In exchange for these inconveniences, passengers receive low fares relative to theindustry as a whole. This research examines two low fare air carriers, ValuJet and Southwest Airlines. By investigating these air carriers, we can better understand the economic impacts of price versusservice in the airline industry as a whole, as well as, the impacts on passenger and investor confidence.Until 1978, air transport rates were approved by the government, which meant that price was not a primarycompetitive factor. Instead, airlines would compete on service and image. The airline industry wasdominated by giants (American, United, TWA) which offered nationwide and some international service, andby regional carriers, such as Southwest, which offered short trips between airports not served by thenationals. Deregulation of the airline industry brought about in 1978 introduced a situation in which thenational and regional carriers were suddenly able to compete in an environment that resembled a freemarket. Rate schedules were lifted, price fixing was eliminated and route management was removed. Themain factors that affected whether an airline could serve a particular city was whether or not that cityhad enough gates for the new carrier, and whether the carrier was able to afford to purchase them. Companies such as Southwest recognized potential for low fares, and began building a niche for themselvesby offering low fares with equivalent low levels of service. Southwest s success gave rise to a newgeneration of low fare airlines, with ValuJet entering the market in the early 1990 s. Unfortunately,ValuJet suffered a string of accidents which brought the future of this air carrier into question. ValuJet is a low-priced airline that offers inexpensive tickets for regional travel. Based in Atlanta,the airline serves the Southeastern United States and competes with Continental Airlines as well as withother small regional carriers. It serves 31 cities primarily in the southeastern United States. Theairline began its service with flights to Tampa and Orlando from Atlanta in 1993. The no-frills strategypaid off for the fledgling airline, which posted half again as many revenue passenger miles in April 1996as it did in April 1995. However, the company announced that it was slowing the expansion of itsservices, voluntarily, at the same time that it posted this impressive revenue mark (Cole & Pasztor,1996, p. A6). Perhaps due to overexpansion or to poor luck, Valujet experienced a series of mishaps in its shorthistory. In January 1994, a DC-9 skidded off a runway in Washington which resulted in the entire airportbeing shut down. In June 1995, a ValuJet flight went through an emergency evacuation after an enginefailed and shrapnel flew into the cabin. Additional incidents, including one where the landing gearcollapsed after a particularly forceful landing, led the FAA to begin an intense review of ValuJet inFebruary 1996. This review found that ValuJet was in compliance with FAA regulations, but cited concernabout pilot training and aircraft maintenance (Larson, 1996, p.30). In May 1996, Valujet flight 592 crashed in the Everglades, killing all aboard and resulting in a shutdownof the carrier for several months. When ValuJet began flying again, it did so with a reduced schedule,and considerable speculation about whether the company will be able to continue operations long-term. The company is also involved in litigation resulting from the crash, and the long-term prospects for thecompany are questionable. The following chart identifies key operating statistics for Southwest (seat miles are in millions, costfactors are in cents)(Shammas, 1996, p. 5541P):199519941993Revenue Passenger Miles (RPM)2,62494144Available Seat Miles (ASM)3,8131,47163Load Factor68.8 %64.0 %69.7 %Revenue per RPM13.413.813.1Cost per ASM6.86.89.8Because Southwest s flights are generally an hour or less in length, the airline saves money by nothaving to serve meals. It has a liberal work rule arrangement with its unions, so productivity is high,and overall costs are low. For example, Southwest gets 672 hours per year on average from pilots versus371 for American Airlines pilots, and 60 percent more passenger miles per flight attendant (Levinson,1993, p. 34). These figures enable the company to realize profits during years in which the industry asa whole was suffering. The following chart identifies key operating statistics for Southwest (seat milesare in billions, cost factors are in cents) (Klein, 1996, p. 2077):199519941993Revenue Passenger Miles (RPM)23.3321.6118.83Available Seat Miles (ASM)36.1832.1227.51Revenue per RPM11.8311.5611.77Cost per ASM7.077.087.25In addition, the company has a 70 percent average load factor in an industry that averages 63 percent,

and operating costs per passenger mile are 22 percent less than industry average. It has one of theyoungest fleets in the industry (6.9 years compared with an industry average of 12.9 in 1992), and thebest on-time and baggage handling records in 1992 (Gold, 1993, p. 29). Each of these factors