The Business of Aviation

Many people in the airline industry have heard of the common cliché “how do you make a small fortune joke.  This cliché exists in the airline industry as well, probably because it holds a lot of truth to it. Almost every at least knows someone who owns a business or maybe even own a business themselves, but you never hear of anyone starting up an airline.

In order for airlines to succeed, they must constantly be adapting to change. Airlines also offer rewards and specials that capture customers and give them an incentive to choose their airline and stay with them.  Southwest Airlines, a successful budget airline has formed a business model that is catered toward the business travelers (Bhaskara, 2014) Southwest offers Business Select, which lets members earn twice as many rewards points and priority check-in.  Another big incentive that attracts customers to Southwest Airlines is that they don’t charge baggage fees ("The Secrets of Southwest's Continued Success," 2012). 

Another thing that airlines have to deal with is their small profit margins.  Since the Profit margins of airlines are small mistakes can be costly.  Tony Tyler, CEO of International Air Transport Association explained that the average airline profit margin is around 2.4%. That comes out to be around $4 - $5 per passenger.  When considering how much ticket prices are, five dollars seem very small. With the slim profit margins and the cyclical nature of the industry, timing can be crucial when it comes to starting a new airline.

Fuel hedging is another vitally important factor that can make or break an airline’s quarter or year.  In the fourth quarter of 2014, Delta Airlines reported a $712 million loss due to fuel hedging.  They did not think that fuel prices were going to drop the way they did.  Delta reported that a 1-cent drop in fuel prices coverts to a 40 million dollar loss ("Delta Posts Fourth-quarter Loss after Fuel Hedging," 2015). 

The airline industry is a very volatile industry and there seems to always be a merger or a bankruptcy going on.  Over the past 12 years, 10 major airlines shrunk down to 4 major airlines through bankruptcies and mergers.  Southwest bought Air Tran, United and Continental merged, Delta bought Northwest Airlines, and US Airways, TWA, and America West all eventually were bought by American Airlines (Yellin & CNN Money, n.d.).

The Airline industry is constantly changing and adapting. It is important that like most business the airlines are constantly staying on top of the changing world in order to survive.

 

References

Bhaskara, V. (2014, April 22). Southwest Airlines Opens for Business - Customers. Retrieved March 28, 2015, from http://www.forbes.com/sites/airchive/2014/04/22/southwest-airlines-opens-for-business-customers/

Delta posts fourth-quarter loss after fuel hedging. (2015, January 20). Retrieved March 20, 2015, from http://www.cnbc.com/id/102345098

El-Erian, M. A. (2014, June 13). The Secret to Southwest's Success. Retrieved March 19, 2015, from http://www.bloombergview.com/articles/2014-06-13/the-secret-to-southwest-s-success

Irvine, D. (2014, June 03). How airlines make 'less than $6 per passenger' - CNN.com. Retrieved March 19, 2015, from http://www.cnn.com/2014/06/03/travel/how-airlines-make-less-than-6/

N. (2012, June 18). The secrets of Southwest's continued success. Retrieved March 19, 2015, from http://www.economist.com/blogs/gulliver/2012/06/southwest-airlines

Yellin, T., & CNN Money. (n.d.). The runway to the final four. Retrieved April 30, 2015, from http://money.cnn.com/infographic/news/companies/airline-merger/