The Business of Aviation
The
airline industry is a vital piece of the global economy. Despite their
necessary function, airlines have historically performed poorly in terms of
profits and return on investment. One issue is the extravagant cost of
operation. Airplanes are expensive to obtain, expensive to operate, and
expensive to maintain. Stiff competition keeps fares low, resulting in profit
margins that average just a few dollars per passenger. While recent relief from
exorbitant fuel prices has been a boon for US carriers, the number of large
flag carriers has dwindled as poor management, inflexible costs, and
inefficient structure have resulted in bankruptcies and mergers. By
reorganizing under bankruptcy law the airline can ideally shed some debts and
emerge a more efficient organization.
Start-up
airlines with a large enough fortune to seek that small fortune do have some
advantages. First of all they are not saddled with an existing infrastructure
that might have grown inefficient as the economy evolved. While perhaps more
expensive up front, a fancy new B737 or A320 is more alluring and fuel efficient
than a 25-plus year old MD-80. Allure is exactly what a start-up airline needs
to gain enough market share to stay afloat. Keeping fares as low as possible is
probably the biggest lure to grab market share, but some airlines have found a
niche with offering better in-flight service. The problem with a niche is that
you almost necessarily have to carve it out of the existing flying population,
and if you get it wrong there is a high probability of failure. The interior of
an airplane can be rearranged, but matching the most effective aircraft for the
job is key. If you plan for too much capacity you will lose money flying
half-full aircraft. If you plan too small you miss out on potential revenue.
References:
4 Reasons Why Airlines Are Always Struggling. (2010,
May 18). Retrieved March 30, 2015, from
http://www.investopedia.com/financial-edge/0510/4-reasons-why-airlines-are-always-struggling.aspx
Maxon, T. (2014, September 22). Seven U.S. carriers
among the world's most profitable airlines. Retrieved March 30, 2015, from
http://aviationblog.dallasnews.com/2014/09/sevem-u-s-carriers-among-the-worlds-most-profitable-airlines.html/
Mouawad, J. (2012, May 25). The Challenge of Starting
an Airline. Retrieved March 30, 2015, from http://www.nytimes.com/2012/05/26/business/start-up-airlines-face-big-obstacles.html?_r=0
Perkins, E. (2014, April 30). Start-up Airlines You
Probably Haven't Heard of (Except for the Zombie Ones). Retrieved March 30,
2015, from https://www.yahoo.com/travel/start-up-airlines-you-probably-havent-heard-of-except-84334605327.html
Pisa, K., & Hobbs, T. (2014, June 3). How airlines
make 'less than $6 per passenger' - CNN.com. Retrieved March 31, 2015, from
http://www.cnn.com/2014/06/03/travel/how-airlines-make-less-than-6/
Why airlines make such meagre profits. (2014, February
23). Retrieved March 30, 2015, from
http://www.economist.com/blogs/economist-explains/2014/02/economist-explains-5
It seems to be a commonly used term, "finding their niche." I like how you explained it as the new airlines needing to carve it out of an existing culture, because the main routes in the U.S. are pretty much taken by competitors and it's very difficult to compete in this market. Airlines need to find their niche in such a way that they have something unique that other airlines do not. Whether that's cheaper tickets, better service, or even a specific route, finding the niche is important.
ReplyDeleteTo "piggy-back" what Tyler said, in order for airlines to compete and find their market, they promote their "niche" to gain customers as well as promote deals. For instance, Spirit offers many in-flight perks, and they promote their airlines through emails, mainly with content focused towards younger flyers. Gaining positive attention through marketing is huge for an airline, whether if it's just starting out, or growing Nationally.
ReplyDeleteSpirit prides themselves on being low cost with no amenities you even have to pay for your first carry on bag . They also have the least amount of seat room so they can fit more passengers per plane. That is why they succeed in this market today. I will admit that they have carved out a niche for them selves for hauling people packed in like cattle for cheap.
DeleteFinding a niche definitely seems to be a theme among new airlines. Some successful new airlines have also been able to execute multiple business models. This could increase the chances of success while dampening some failure.
ReplyDeleteI feel one of the most important aspects of becoming successful in the airline industry is finding your niche. You mentioned that it can be hard if you fail to get it right the first time. I agree with that in that if they miss their mark, then they can run out of money very quickly as the industry is expensive to get into.
ReplyDeleteI agree that keeping the airfare low is the biggest part of gaining the market share, Especially with the online travel sites like Priceline and Travelocity. I know when I am looking for a flight on one of those sites the price is the primary thing that I look at, not the airline.
ReplyDeleteSouthwest worked out a niche to focus on a product that was made for business travelers, which attempted to offset rising costs. A combination of this product and a few other factors has led to "double-digit growth" year-after-year in managed corporate bookings according to Southwest's Chief Operating Officer Robert Jordan.
ReplyDelete