The airline industry records annual revenues in the range of billions of dollars (GAO, 2009, p.1). In addition, airlines influence the standard of living in the communities around them and are a catalyst for economic growth (GAO, 2009, p.1). The airline industry in conjunction with other transportation modes link communities together irrespective of their populations facilitating the meeting of a remote demand for people, goods and ideas (GAO, 2009, p.1). A spectrum of the US airline industry reveals that it comprises of legacy, low-cost and other airlines (GAO, 2009, p.3). Legacy airlines are those airlines that were already in existence before the industry Deregulation Act of 1978 whose main aim is to serve all routes irrespective of demand for air services. Low cost airlines are airlines, which entered the industry after the Deregulation Act of 1978. They are characterized by low cost operations and fewer aircrafts.
Other airlines are those airlines that restrict their services to specific routes and prefer not to offer national services. Even though the US airline industry is not economically regulated, it is however regulated when it comes to matters of safety, security and operating standards (GAO, 2009, p.3). An airport is a place customized to suit airlines operations (Investopedia, 2010). An airport offers taking off and landing services, storage, repair and maintenance services, and housing for the exchange of people and cargo. The operations of an airport are financed through charges and aviation-related fees imposed on airlines and passengers as well as other revenues generated by other means. The demand for air travels is of a cyclical nature because it is highly affected by both local and international politics and events (GAO, 2009, p.4). Another factor that affects the demand for airline services are health related issues e.g. an outbreak of a certain disease (GAO, 2009, p.4).
In the period between 1990 and 2008, the profits realized by the airline industry exhibit a cyclical trend. This cyclical nature of the profits reflects the fact that demand for air travel is sensitive to changes in an economy and world events and the difficulty that airlines experience in adjusting their services to suit the demand from passengers (GAO, 2009, p.8). The first three quarters of the year 2008 saw the airline industry record a number of losses amounting to $4.3 billion. The biggest contributor to these losses was the ever-escalating fuel price. The situation was so severe that in the first half of that year seven small airlines ceased their operations while others filed for bankruptcy (GAO, 2009, p.9). Airlines countered the escalating fuel prices by using fuel hedges, however, this fuel hedges recorded losses too following the fall of the fuel prices in the end of 2008 (GAO, 2009, p.10).
Even though fuel prices have declined dramatically, the airline industry’s future is still uncertain owing to the global recession, labor costs, debts and pension obligations (GAO, 2009, p.15). The global recession has weakened demand for air travel. The airline industry is labor intensive and the high costs of labor remain a huge expense for airlines (GAO, 2009, p.16). Factors including souring competition in the industry have plunged airlines into debts, which are yet to be paid. The debts are made worse by the recession that is hitting the industry hard. Pensions remain a huge expense for airlines (GAO, 2009, p.16). Governments’ efforts to tame the recession seem to be successful which not bad news for the airline industry is thus it is expected that it will pick up in the very near future.
GAO. (2009). Commercial aviation: Airline industry contraction due to volatile fuel prices and falling demand affects airports, passengers, and federal government revenues. USA: US government Accountability office.
Investopedia. (2010). The industry handbook: the airline industry. Web.