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English 112 - Final Paper

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Siddiqui 1 Aneeq Ahmed Siddiqui Student ID: 58183138 Course: English 112 Instructor: Joanna Cockerline 21 st March 2014 The Evolution of the North American Airline Industry: Impact of Airline Deregulation and Foreign Competition Although North American Airlines may be going out of business due to host of factors including but not limited to the perpetually rising oil prices, precarious domestic economy as well as changing consumer behavior; tough compet
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  Siddiqui 1 Aneeq Ahmed Siddiqui Student ID: 58183138 Course: English 112 Instructor: Joanna Cockerline 21 st  March 2014 The Evolution of the North American Airline Industry: Impact of Airline Deregulation and Foreign Competition Although North American Airlines may be going out of business due to host of factors including but not limited to the perpetually rising oil prices, precarious domestic economy as well as changing consumer behavior; tough competition from fast emerging Persian Gulf airlines on account of their state subsidization and access to resources is an integral factor contributing to the demise of the North American aviation industry. The United States, for instance, has been a  pioneer in the field of aviation for over a century with the Wright Brothers first flight in 1903 to the launch of St Petersburg-Tampa Airboat Line, the worlds first scheduled airline service, as early as 1914 (Tucker 2)(Kane 1). While the world was still in awe of the possibility of human flight, the U.S companies were already designing and testing fixed-wing aircrafts, as they knew the revolution it was about to bring. In essence, the 1930’s were the aviation revolution of Nor  th America with many companies specializing in designing aircrafts opening operations and amongst them was the Boeing Company. However, not all those companies survived due to the competitive nature of the industry and amongst those, which did, was Boeing. The company at  present is the largest global aircraft manufacturer with over 12000 commercial aircrafts in  Siddiqui 2 service and is the largest exporter by dollar value in the United States (Senguttuvan 1) (Defense  News 1). The United States unlike Canada is a large economy with a high population density as such there are far greater airlines in operation in the United States but for the purpose of this  paper, the focus will be on the international majors such as American Airlines, United Airlines and Air Canada as these airlines operate on the domestic as well as international front and as a result are affected by the macroeconomics of other countries. Managing an airline is not everyone’s cup of tea and in the words of C.E. Woolman, founder of Delta Air Lines, “Run ning an airline is like having a baby: fun to conceive, but hell to deliver ” (Ridgers 1). Airline travel was considered a luxury few years ago but now it’s  merely a mode of transport for the common man and this has been made possible by the competitive nature of the industry. The United States had strict rules concerning airlines in its formative years as it was an untried format and therefore there were strict government controls over fares, routes and market entry of new airlines which not only prevented competition but made airline travel unaffordable for the common man. However, in 1978, after constant lobbying the Airline Deregulation Act was passed by Congress, which led to a removal of these authoritarian regulatory powers, eventually allowing consumers to be exposed to the competitive forces in the airline industry. The airline industry has witnessed spectacular growth ever since with passenger numbers increasing from 207.5 million in 1974 to over 800 million last year, but at the cost of flight-choked northeast corridor, massive flight delays and overcrowded airports and terrorism associated risk making air travel cumbersome. The perfect competition mechanism has pinched heavily into the profitability of the airlines with airline revenue per passenger mile substantially decreasing from 33.3 cents in 1974 to a meager 13 cents in 2010. As per a recent business week report, the cheapest inflation-adjusted fare between New York-Los Angeles in the regulated  Siddiqui 3 market in 1974 would have been around $1442.However, today one can fly the same route for as low as $268 which is why the industry has experienced a substantial increases in passenger numbers ( Airline Deregulation, Revisited 1). The bill intended to make the industry more competitive has made air travel cut- rate from the society’s point of view , but as a consequence  pinched heavily in to the profitability of the airlines. American Airlines, once a powerhouse in the aviation industry, and the only international major in the United States to never have filed for  bankruptcy recently filed for bankruptcy in 2011. Another critical problem for the airline industry is the perpetually rising oil prices, which in recent years have increased significantly  putting downward pressure on the profits. The United States, for instance, refines over 60  percent of jet-fuel at home with the remainder being imported from the oil rich Middle Eastern countries, price of which is determined by the international macroeconomic environment and is usually very volatile. The issue is further complicated by the export of home-refined jet-fuel to other countries by domestic refineries for higher profits exposing the domestic airline industry to supply chain problems (Young 6). The airline business model is based on capturing minuscule  profit margins and with jet-fuel prices being the major cost center; a slight change can substantially turn the tide for any airline. To reduce risk, some airlines have hedging programs in  place, which like insurance protects against an unprecedented increase in oil prices but even then the risk is not eliminated and makes planning extremely difficult. An increase in the marginal costs due to increase in oil prices without an increase in fares due to competition makes it an extremely difficult industry to operate in and hence the evolution of the airline business model from full service to no-frills (Heimlich 5). Although airline fares have substantially decreased over the years, globalization and the advent of information technology have made the average  person more aware and more cost-conscious. This change in consumer behavior is also due to the  Siddiqui 4  precarious, debt ridden, economy of the United States whereby the expectation of another global meltdown induces the consumer to save as much as possible due to fear of uncertainty. The no-frills airline system more commonly known as Low- cost carriers (LCC’s) has been adopted by airlines like JetBlue and Southwest in the United States. These carriers have been able to do so  by “leveraging their costs efficient and inn ovation to remain in a leading position, even in a disconcerting market ” ( The Evolution of the Airline Business Model 1).   “Over the past 20 years, competition from LCCs has increased dramatically. More than 60 percent of US passengers in 2010 traveled on routes with LCC presence, and the aggregate LCC share of passenger miles has tripled since 1990, to roughly 30 percent”(Ro se 376). The success of the LCC’s in the US has  been at the cost of the profitability of the international majors such as United Airlines, which due to their business model can not compete with these LCC’s at the domestic front and yet remain  profitable. T he LCC’s focus on short -haul flights and greater frequencies within North America thereby allowing them to earn a positive rate to return at the end of the day. Whereas the international majors usually, focus on long-haul flights, across countries with connections to destinations within the United States. In essence, they compete with other foreign carriers on the international sector as well as with the domestic LCC’s on the connections within the country thereby being pressured from both sides. The U.S airline industry, as a result, has lost over $40  billion dollars in the last decade alone with over 100,000 job losses with many air carriers filing for bankruptcy and seizing operations, the ramifications of which can be seen by worsening economic conditions of the United States (Bamber 24). Most of the world relies on Oil exports from the Middle Eastern countries such as the United Arab Emirates (UAE). The UAE has been endowed with over six percent of world oil reserve’s which given its small land size and  population is a substantial amount. The

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