The US Airline Industry in 2007
1- What is the average profitability that can be expected from the industry in 2007?
First, the determinants of industry profits are demand and competition.
To analyze the profits earned by a firm, three factors must be taken into account:
- The value of the product to customers
- The intensity of competition
- The bargaining power of the producers relative to their suppliers
In this industry, profitability is usually measured by operating income per available seat mile (ASM). To determine it, we use three factors:
1) Yield which is the operating revenues divided by the number of revenue passenger miles (RPM)
2) Load factor which is the ratio between RPMs and ASMs
3) Unit cost which is total operating expenses divided by ASMs
Historically, the airlines have sought to optimize as many of these three factors as possible in order to improve their profitability.
The main factors that can be taken into account to determine the profitability expected in 2007 are the one shown above. Airlines put a stress on some of the factors seen below in order tor ecover:
• 2006 has shown an unprecedented high load factor for 2006 due to strong growth in demand together with the reluctance of the major airlines to add capacity
• In 2006, most of airlines have succeeded in reducing operating costs cutting on headcount and levels of employee pay and benefits
• Consolidation is likely to be a continuing trend. At the beginning of 2007, the US airline industry comprised about 56 airlines companies together with about 50 local carriers. The trend towards consolidation is likely to continue as a leading group of airlines is clearly defined and many others are in great financial troubles. Consolidation is likely to increase profitability as it will provide more pricing power to airlines and will limit seat capacity
• They are high entry and exit barriers in the airline industry, which ensures less competition...