Since its inception in the 1920’s, the U.S. airline industry has been filled with great uncertainty and tumultuous travels. The main thread that flows through this case is the argument of regulation versus deregulation. Every time that a problem arose in the industry, the question that soon followed appeared to be, “Would regulation/deregulation provide the solution?” Throughout the case, certain situations dictated that one policy was better suited for the problem at hand. Once again in 1995, the question of if re-regulating the industry would restore its structure and profitability, arises.
A main building block concerning competition and the effects that it has on consumers must first be addressed. If a large, well-known airline (United Airlines, for example) was initially the only carrier for customers to fly on, they would be able to set the price that would generate the highest amount of revenue possible (number of seats available multiplied by highest airline ticket Prices">ticket price that would fill all of the seats; suggesting elasticity of demand, which will be covered shortly).
What would happen if a start-up airline offered lower rates? The question of customer preferences now comes into play. Everyone is attempting to save money, so this no longer a question of if people will try the new airline, it is a question of how many people will try the new airline. The answer depends on a few factors, including brand loyalty, United’s response to the new airline, and most importantly, current economic conditions. Another position that must be considered is time. If the new airline can sustain low prices, a good reputation, and quality services for a lengthy time frame, they will increasingly draw a larger market share. The case refers to this occurrence as the “Southwest Effect”.
Current SituationA.Financial Performance – The Company had a 26% market share of the cruise line industry. It's gross profit margin increased by 4.69% from the previous year. Carnival is using its assets effectively. Their sales increased by 10.62% from the previous year. The company is financially strong.B.Strategic Posture1.Mission – To consistently exceed guests expectations in all areas of ...
As the number of airlines increase, so does the pressure of decreasing ticket prices in order to attract a greater market. Many times this can lead to “cutthroat competition”. This practice is the result of airlines trying to “under price” each other in order to attract more customers. This leads to shrinking profits and in many instances, red ink. Obviously, a business will cease if they continually lose money. Congress realized that many airlines would fail unless some regulation was enacted, prompting the creation of the Civil Aeronautics Act in 1938.
Another building block concerning the elasticity of demand for the industry must also be addressed. The airline industry has an overall elastic flavor to it. However, the elasticity cannot be considered to be perfect because there are two main factions that have to be considered: the business customer versus the non-business customer. With regard to the non-business customer, the demand is quite elastic. This statement is true because when ticket prices increase, the number of tickets purchased decrease. The overall elasticity decreases when the business customers are added to the equation. The basic concept is that when someone must fly for business reasons, they will not cancel the ticket if the price is too high. The demand for this faction is inelastic because when the price of the ticket increases, the demand will be constant. They will fly even if the price is relatively high, therefore adding an inelastic flare to the mix. A significant reason that a business will almost always disregard the price is because it can be written-off for tax purposes (which contributes to inelasticity).
The Price of A Ticket My response to The Price of A Ticket, is that the documentary about James Baldwin's life was well stated. In the beginning of this video the narrator introduced James Baldwin as well as his family. They told how Baldwin progressed from a boy to a man in Harlem, and James Baldwin himself illustrated his thoughts of the time. I believe his father played a bigger role in making ...
This whole idea of elasticity of demand is very important because it leads to the aforementioned “cutthroat competition” situation. If the airline industry were composed solely of business customers (suggesting inelastic demand), the ideal of “cutthroat competition” would be a non-factor. The basic premise behind this is that even if an airline lowered its ticket price, it would not attract more customers. Because of the elasticity of the industry, “cutthroat competition” can, and does, become a significant obstacle to overcome.
Because the demand for airline travel is elastic, substitutes could add another dimension to the mix. Business and non-business consumers could both utilize substitutes, but it would be more commonly found in the non-business sector (because business people are solely looking for the fastest method of transportation).
Other methods of travel and the transportation of goods are two instances that substitutes could come into play. Examples of substitutes include automobiles, trains, and boats. Many factors are involved when deciding on which method of transportation to choose from, including cost, time consideration, and consumer preference. If the price of an airline ticket increased dramatically, then alternative forms of travel (the substitutes) would become more desirable. Conversely, if the price of an airline ticket decreased, then alternate forms of travel would be less desirable. In this way, the presence of substitutes adds to the elasticity of the airline industry.
The asset specificity must also be taken into consideration. The assets involved are highly specific to the airline industry. The assets could not be used outside the airline industry, but they could easily be sold within the industry. Many upstart airlines would buy planes in the second-hand market at reduced prices. As the case stated on page 7, “People Express, for instance, started out with B-737’s purchased from Lufthansa at $4.5 million apiece, compared to $40 million for a new plane.”
The Airline Deregulation Act of 1978 was implemented with the hope that it would “allow pricing flexibility, which would stimulate new and innovative offerings; allow passengers the range of price and service options dictated by consumer demand; enhance carrier productivity and efficiency; and increase industry health.” Initially, the Act succeeded as carriers were filled to capacity because of lower fares; which attracted new customers and resulted in healthy profits. However, this trend did not last long. Many of the most profitable routes were being invaded by low-fare, upstart airlines. Additionally, factors including the fuel crisis of 1979, the air traffic controllers’ strike of 1981, the severe recession of the early 1980’s, and the tight price competition combined to cripple the airline industry. A positive aspect that evolved was that management started to “cut the fat” out of the industry. Management became more innovative as they developed new routing policies (including hub-and-spoke networks), new labor policies, better asset management, and new marketing strategies. These innovations allowed the airline industry to evolve into a more cost efficient structure.
Introduction The airline industry is a large and growing industry which is, because of the great everchanging environment it operates in, forced to constantly adapt and enhance business models in order to survive, compete and to generate profits. In this context this report will investigate the developments and trends and their importance in the airline industry that influence its future the most. ...
As supported by historical evidence, the airline industry cannot successfully operate under a fully deregulated scheme. It has also been evidenced in the case that too much regulation “strangled” the industry. The industry had become too inflexible to operate smoothly. I believe that the airline industry must be as deregulated as possible in order to allow the flexibility needed to operate efficiently. With that in mind, however, there are some areas of the industry that must be regulated or problems are sure to arise. If I were the head of a large carrier (United Airlines), I would ask Congress to enact resolutions that would prohibit too many airlines into the industry. Additionally, I would want the number of airlines flying the same route to be restricted. These two suggestions would greatly reduce the problem of “cutthroat competition” and would increase profits at the same time. A more radical idea that I would think about presenting would be a “price floor” on all routes. All airlines would have to abide by the floor that Congress sets. To calculate the floor price, I would take the average cost of all airlines to fly that specific route and divide it by average number of seats on the plane of the airlines. This would give us a break-even point. Obviously some airlines would be above this point and some would be below it, but overall, the industry would be able to break-even by charging the “floor price”. This would also increase profits dramatically, as many of the airlines at this time were in red ink. In many areas, the airline industry must be allowed to flow as a free market through regulation, but the restraints of regulation must be flexed in key areas so that many of the detrimental problems of the industry’s past do not re-surface. To answer the opening question of whether regulation or deregulation would be the answer to our present (1995) problems, I would say, “yes”, to both.
1. The Malaysian Domestic Airline Industry In Peninsular Malaysia, the main cities are served by an efficient network of highways and major roads. In most cities and big towns, the road network is relatively good, with the exception being the less-developed rural and interior areas. Here, possibly the only way to get around would be by river transportation. A good and reliable train service runs ...