Click here to read the original article, “Airline Industry Key Success Factors.”
The original article presented 12 key success factors for the United States domestic airline industry and suggested they might have to be expanded as the industry matures, as rivalry increases, and consolidation continues. That assertion is still true, but as of early 2012 it is not yet clear what new key success factor(s) should be added. While international expansion had been advantageous, the world airline industry is more chaotic than the U.S. airline industry today, and for international business (about one-third of U.S. airlines total business in available seat miles[1]) margins have declined. And U.S. domestic airlines have a “dominant national home” in the United States because of cabotage laws.[2]
Rivalry has continued to increase in the U.S. domestic airline industry, driving most U.S. airlines to reduce capacity in the last few years. Too much excess capacity was keeping costs up. Revenues fell, largely due to the worldwide economic recession. Prior to the pressures of the economic recession airlines felt capacity expansion would lead to increased revenues.
Annual capacity peaked in 2007 at 1.06 trillion available seat miles (asm’s). In 2008 and 2009 capacity declined to 1.04 and 0.98 trillion asm’s respectively. In 2010 capacity climbed to 0.99 trillion asm’s and based on data through October 2011 (0.85 trillion asm’s) whole year 2011 capacity may climb to about 1.02 trillion asm’s. The effect of reducing capacity is indicated by the “load factor,” which is the capacity utilized (revenue passenger miles) divided by the available capacity (asm’s). For the peak year (2007) the load factor was 79.4%. It declined in 2008 to 79.2% then rose to 79.9% in 2009 and 81.6% in 2010. Through October 2011 the load factor for 2011 was 81.7.[3] Generally the reduction in capacity helped the load factor, which was the intention.
Consolidation has continued beyond the America West/U.S.Airways merger noted in the original analysis. Of the airlines included in the original analysis, Delta and Northwest combined in 2008 and Continental and United combined in 2010. And Southwest is now combining with AirTran (not in our original analysis). Further consolidation has been discussed since the bankruptcy filing of American Airlines in late 2011. Consolidation is a typical response to maturation of an industry. However it raises the question: Is bigger better?
In many industries there are economies of scale to be derived by growing an organization in those industries. But there are several industries where scale has its limits. The article “Exploring Scale” questions scale in the airline industry.[4] And earlier research suggested that scale effects are negative after some size in the U.S. domestic airline industry.[5][6] None of the combinations noted have demonstrated improved performance yet.
Jet Blue has now grown to about one-third the size of Southwest and seems to be successful by our definition.[7]
Only Continental of the six “legacy” airlines in our original analysis has not filed for bankruptcy. And now that Continental has combined with United it remains unknown whether a legacy airline could succeed independently without bankruptcy.
One of the next research efforts should be to answer the question “Is bigger better?” for the U.S. domestic airline industry. And what is the optimal size for a U.S. domestic airline?
[1] U.S. Department of Transportation, Bureau of Transportation Statistics, www.bts.gov. Traffic Press Releases. For 2010 U.S. airlines flew 301 billion international asm’s and 673 billion domestic asm’s (“December 2010 Airline System Traffic”). Through November 2011 U.S. airlines flew 288 billion international asm’s and 624 billion domestic asm’s (“November 2011 Airline System Traffic”).
[2] “Airline Cabotage.” U.S. Department of Transportation, Office of General Council. http://www.dot.gov/ost/ogc.
[3] U.S. Department of Transportation, Bureau of Transportation Statistics. Aviation, Air Carrier Summary Data; Schedule T-1, Unique Carrier, All Groups. http://transtats.bts.gov.
[4] Pil, Frits K., and Matthias Holweg. “Exploring Scale: The Advantages of Thinking Small.” MIT Sloan Management Review Winter (2003): 33.
[5] Lowry, Michael K., “National Airlines Step Out From the Pack.” Aviation Week & Space Technology, July 10, 2000.
[6] Lowry, Michael K., “Top-Ranked Airlines Share Entrepreneurial Drive.” Aviation Week & Space Technology, May 31, 1999: 60.
[7] In 2011, through November, Jet Blue flew about 34 billion asm’s to Southwest’s 95 billion asm’s. See [3] for data.
