Second quarter reports related to the airline industry are now being released. The data clearly show that most passenger and cargo carriers are facing unprecedented challenges, and prospects for the immediate future don’t look much better.
The airline industry is composed of some 3,000 companies including passenger and cargo carriers, mail services, and courier operations. Nearly 90% of the overall revenue across the industry is produced by the top 12 companies, with 70% generated by passenger traffic. Some 11% is contributed by cargo and mail services with charter flights producing about 4%. The other revenue comes from maintenance, servicing, training, and reservation entities.
According to Reuters, US carriers could post an industry-wide loss of $6.5 billion for 2008, and other estimates have run even higher. Most of the difficulties have arisen because of soaring fuel prices and the slowing of the national economy.
These situations have caused airlines to raise ticket prices in an effort to combat ongoing losses. Round-trip domestic fares have climbed about 8.8% since 2007, and ticket prices for international travel have increased some 11.3% over the same period.
Because overseas flights are typically airlines’ highest-revenue producers, few if any schedule changes are anticipated in the short term, though some reductions in frequency could occur. Right now, because of the weak dollar, European travelers to America are purchasing tickets on US airlines, which is benefiting export-related travel.
Domestic travel, however, is undergoing numerous changes because of the higher fuel costs. They include adding fuel surcharges, charging for checked luggage, reducing amenities on board, changing routes, and eliminating certain flights to some locations. Other methods to save money and increase profits include employee layoffs along with mergers and buy-outs.
The rising prices for jet fuel (up more than 215% since 2000) have played a determining factor in causing more than a dozen small carriers to collapse in the past six months. Fuel costs are now a notably higher share of total costs than in the past, making it ever more difficult to eke out a profit.
In the minds of many people, the timing of these troubles is most unfortunate, especially since, in a few weeks, the US airline industry will be marking the 30th anniversary of the Airline Deregulation Act of 1978. Along with the multiple benefits realized during those three decades, major carriers have lately been fairly successful in pulling out of the nosedive following the 9/11 terrorist attacks. That traumatic disaster led to an estimated loss across the airline industry of approximately $11 billion in 2002, but most carriers had modest profits last year. Although they had not completely overcome myriad problems, they had made progress and seemingly set the stage for further improvement. While some of the earlier problems could be traced to a failure to respond in the competitive environment, the fuel price spike is completely beyond management control.
Problems with airlines are also spilling over to other aspects of the travel industry. Hotels have greatly benefited from the growing business and leisure air travel over the years, but now this industry is also seeing a downward trend. Additionally, various sectors associated with leisure and hospitality are undergoing modest to moderate challenges.
Skyrocketing fuel costs are not only affecting ticket prices, schedules, and services for air travelers, but because airlines stimulate so much economic activity, their difficulties are impacting our nation’s economy. Airlines not only transport people, they also deliver tons of time-sensitive and perishable cargo on a daily basis.
Any major industry-wide meltdown could dramatically affect the US economy by disrupting supply chain operations, forcing job losses, shrinking business activity, and reducing tourism activities, which would thereby reduce tax revenues and create hardship in numerous industrial sectors.
Commercial air travel has been a part of American life since World War I, with public fascination generally tracing its beginning to Charles Lindbergh’s transatlantic flight in 1927. Although modern telecommunications technology has eliminated the need for some trips, a global economy ultimately demands certain levels of face-to-face interaction. Because it is vital that the services provided by the airline industry continue, a variety of endeavors are now underway to enhance operations and profitability. Given their essential nature, the airlines will continue to play key roles in the advancement of the US economy.