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Airlines in Turbulence: Strategies for Survival

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Document pages: 84 pages

Abstract: The commercial airline industry carries 1.25 billion passengers and 22 million tons of cargo, about a quarter of the world s manufacturing exports based upon value. The industry produces 22 million jobs (3 million directly, 7 million indirectly, and 12 million induced), and accounts for one trillion dollars a year in economic production ($250 billion directly, $250 million indirectly, and $500 billion induced). If the industry were a nation, it would rank seventh in the world in economic production, just ahead of Canada. Airlines are an essential component of the tour and travel industry, arguably the largest industry in the world. As an integral part of the infrastructure upon which economic growth is built - the veins and arteries of commerce, communications and national defense - a healthy transportation system offering reasonable prices and ubiquitous service to the public is vitally important to the health of the nation it serves. Progress and development in the transport sector often serve as catalysts for broader economic prosperity, both domestically and internationally. Yet airlines have sustained enormous losses since deregulation and liberalization set in. From 1977 to 1992, the global air transport industry earned gross revenue of just over $2 trillion, while operating expenses were $1.96 trillion; operating profit was 2 of revenue, and net profit was a meager 0.6 of revenue. Worldwide, airlines have experienced a $15 billion shortfall over the last four years. U.S. airlines were deregulated in 1978. Paradoxically, despite the fact that the industry has become very highly concentrated under deregulation, from January 1978 through December 1993, cumulative net losses for the major U.S. airlines totaled $9.3 billion. They lost $2.6 billion in 1992, and $2.1 billion in 1993, bringing the total losses to $12.8 billion since 1990. The U.S. airlines alone carry a debt burden of $35 billion, or more than eight times the industry s total accumulated profit from the beginning of commercial aviation in the 1920s, until 1988. The capital needs of this industry are enormous. While the world s airlines spent $147 billion in the 1980s, the industry is projected to need $815 billion by the year 2000. Airbus, Boeing and Douglas predict the industry will need between $40 billion and $50 billion for new aircraft each year over the next decade. Moreover, according to the International Civil Aviation Organization (ICAO), the world will need between $250 billion and $350 billion in new airport infrastructure by the year 2010. Admittedly, some of that infrastructure will come from taxpayers, concessions, parking, and such. But the bulk of it must come from the airlines, directly or indirectly, in the form of landing and air traffic control fees, gate, counter and hanger leases, passenger facility charges, fuel and other taxes, and ground services fees. The airline industry suffers from severe business risk in the form of high fixed costs, highly cyclical demand, and intensive competition; it suffers severe financial risk in the form of high debt-to-equity ratios, which increases the variability of earnings and the chances of insolvency. Because of the level and intensity of business and financial risk in the industry, one would expect that airlines, in order to attract adequate investment, should earn more than other industries. But in fact, airlines earn less.

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