Synopsis of the Case
Even though it may be very evident that there has been an increase in the number of customers in a business in a given time period, it is also of importance to note that the profits that are being realized in an industry may be to some extent very low. This is a phenomenon that is currently being experienced by U.S. airlines. This trend was noticed in 2010 which was a year that was considered to be dismal in terms of it performance in the financial sector. The number of passengers increased drastically and also there was an increase in the revenues that were realized but the profits that were realized were down as compared to the other financial years. This trend did continue due to the fact that in 2012, there was very little improvement. The revenues that were collected in this financial year went up by 8.2% as compared to 2012 but even though this was so, the profits were still down. This was mainly attributed to the high costs that were encountered by the airline and thus net income went down by 73.6%. In addition, the net margin went down from -3.2% to -5.2%.
Explanation of Relevant Concepts
Several factors were seen to be working hand in hand to bring about the woes and troubles that the U.S airline industry experienced during the 21st century. These factors include the terrorist attacks that were experienced in September 11, 2001, the 2008 financial crisis or crash experienced in the country as well as other regions, and the high prices as well as increasing prices of crude oil . Financial analysts and economist have gone forward to point out that these factors played a very big part in depressing demand and at the same time boosting costs. This problem was not only experienced by the US airline industry but also other airlines around the globe.
According to IATA which is a worldwide association of airlines, airline industries in the globe or globally had failed to earn returns which would be able to cover the cost of capital. Even though this was in play; i.e. the low profits and a number of difficulties experienced in the industry, a number of airline executives were very optimistic of the future. Several factors also played part in their optimism. In 2012, John Rainey who was the CFO of the United Continental Holdings Inc. Put forward that as compared to the past, the airline industry had become more financially oriented as well as disciplined. This was due to the fact that many of the airlines put forward the strategy of cutting capacity rather than competing for market via capacity growth. Major airlines cut capacity from 3% up to 10% . On top of this, consolidation of the industry was seen as a key factor in the reduction of the number of competitors thus supporting fares. More so, unbundling fares were seen to be part of revenue generators due to the fact that there were charges for baggage services, seat reservations, and onboard refreshments. Supporting evidence that this was part of revenue generator was provided by the US Bureau of Transportation Statistics whose research showed that airline yield went up from 14.4 cents to 16.8 cents a year (revenue per occupied seat per mile).
Even though optimism amongst some of the airline CFO’s was high, questions arose whether the new strategies of reducing capacity during times when demand was low would bring in with it a new era of prosperity. This was argued by many but statistics as brought forward by US Bureau of Transportation Statistics show that this is a strategy that would indeed continue to increase the revenue realized as well as profits and as such it should be put in place by the airline industry so as to ensure that the industry is profitable enough.
Putting in place the above stated recommendations would play a big part in ensuring that the airline industry in US is profitable.
- Ivan L. Pitt, . R. (2012). Economics of the U.S. Commercial Airline Industry. London: Blackwell Publishers.
- Peter Belobaba, . O. (2009). The Global Airline Industry. New York: Oxford.