Tuesday, April 3, 2012

The Failing Airline Industry

This was the most striking insight I got from reading Michael Porter's article entitled "The Five Competitive Forces That Shape Strategy":

Why is the airline industry so unprofitable?

It's profitability rate is far below the average industry ROIC in the U.S. at 5.9%. This is less profitable than the book publishing and knitting mills industries. Let me rephrase that, the airline industry is less profitable than the knitting mills industries! It is hard to comprehend this fact, when you consider the advances in aviation and the increased use of air travel. But this is only a perception. Truth is, the airline industry is failing and we can attribute deregulation of commercial aviation for this failure.

The Airline Deregulation Act of 1978 reduced the entry barriers into commercial aviation, with the hope that a competitive airline market would bring lower prices, more innovation, greater efficiency, and more options in air travel. This opened the door to several recognizable airlines we know today, including JetBlue and Southwest Airlines. [1] Yet, when we forward 30+ years later, we see numerous airlines going bankrupt while the remaining airlines go through massive consolidations.

The events that have transpired in last few years raises the question: should we allow the government to re-regulate the commercial aviation? Dave Demerjian argues that might not be a bad idea. Although a regulated airline industry would result in higher prices, they would be more consistent. There would be greater parity among the different airlines; this includes in-flight snacks, beverages, and experience.

[1] Demerjian, Dave. "The Case for Re-Regulating the Airline Industry". Retrieved at: <http://www.wired.com/autopia/2008/06/re-regulate-com/>

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