External Forces Shaping the Future of the Airline Industry

INTRODUCTION

The purpose of this report is to inform airline executives about the external forces affecting their industry and what they can do to keep up with the changing business atmosphere. The terrorist attacks of 9/11 had a grueling effect on the economy, and while most industries are almost back to their pre-9/11 financial status, the airline industry is lucky to break-even. This report will explain three leading trends that are forcing the airline industry to re-think their stance on strategic planning.

The first trend discussed will illustrate the effect that online booking has had on the way airlines do business. The second trend will describe how obesity has caused new standards to be set within the industry. The final trend will explain how the demand for business-related travel has been decreased from the use of new technologies. This paper will close with a brief synopsis of the most relevant trend to the industry--the decrease in business travel due to new technologies.

DESCRIPTION

The following portion of this report will describe each of the three trends and contain information to support the claim. Continue reading for further explanation of the trends.

Online Booking

Online booking is becoming more popular, especially in a country where over 50% of its households are connected to the internet (U.S. Department of Commerce 2001). (See Appendix; Graph 1) Americans want things "NOW!" not ten minutes from now. The quicker the service, the more satisfied the customer will become. Various online travel agencies, such as Orbit and Travelocity, give consumers the ability to compare different travel options, all without leaving the comfort of their home. In 2003, 35 million Americans went online to book travel reservations, a 17% increase since 2002 (U.S. News 2004). Currently one-third of all internet-related transactions involve making travel arrangements (The Times 2004).

Obesity

Americans today are heavier than ever, and despite increased health awareness, the obesity epidemic is not slowing down. (See Appendix; Graph 2) Currently two-thirds of Americans are considered to be overweight (New Zealand Management 2004). According to the last U.S. Census, the current population of the U.S. is 281 million. When mixing those details together you can acquire an interesting fact; approximately 185,460,000 Americans are overweight (McKee 2003). In 1991, only 12% of Americans were considered to be obese; since then that percentage has risen to 26% (Lollis 2002). For someone to classify as overweight, the person has to have a Body Mass Index over 25; to be obese a person has to have a Body Mass Index over 30 (American Obesity Association 2004).

Decline in Business Travel

Since the 9/11 terrorist attacks, the U.S. economy has been in a struggle to recover from the damage that was caused. Corporations, in particular, took action by cutting their travel budgets in order to save money. The budget-cutting forced them to become much more cost-conscious, prompting them to look for other means of meeting instead of traveling. The way that corporations are dealing with this is by taking advantage of the new technologies that are available, such as videoconferencing. Another popular technology that is catching on is web casting--the transmission of audio and video to personal computers via the Internet (Caplan 2001). Frost and Sullivan, a consulting firm that specializes in high technology, estimated that in 2003, the web casting business would see revenues of up to $533 million (Lollis 2003). One U.S. corporation has already eliminated 20-70% of air travel due to new technologies such as videoconferencing (Hughes 1993). Also, videoconferencing could replace 13-23% of business-related travel by 2010.

ANALYSIS

This section of the report will discuss how each trend mentioned will affect the airline industry. It will also entertain ideas of what airlines can do to keep up with those currents trends. Read on for further information.

Online Booking

Approximately 22% of travel-related online transactions are for the purchase of flight tickets (The Times 2004). Also, according to Standard and Poor's recent airline industry survey, 90% of 2003's ticket sales were electronic. Standard and Poor's (2004) is also predicting that the percentage will rise up to 95% this year. Since more airlines are putting bookings online, it's causing them to be more competitive with prices. Potential passengers want the lowest price possible; if an airline doesn't offer that, the individual will switch to the next affordable airline. It forces airlines to keep ticket prices low. If their prices get too high, people will not be willing to pay and will go for the cheaper alternative.

Airlines are saving money with online booking by eliminating paper tickets. United Airlines stated that electronic ticketing eliminated 14 accounting and processing procedures and only costs 50 cents per ticket (Corridore 2004). The paper tickets cost $8; the difference saves United $7.50 per ticket. That extra money can add up when talking about millions of sales. Industry wide online ticket sales save carriers about $200 million a year (Haddad 2003). Major airlines are starting to charge extra fees for paper tickets, sometimes up to $25 (Corridore 2004). The goal is to get more flyers to go online to get their tickets, which will end up saving the airlines millions of dollars in the end. If people started to book online more frequently, it could be the cost change that could help many airlines out of bankruptcy.

Obesity's Effect on Airlines

As mentioned earlier, obesity is becoming a major issue in America. As Americans get wider around the middle, they find it harder to fit into regular economy-class seats. Southwest's seats, as an example, measure 17ј inches across (Lollis 2002). One could consider that reasonable space, but many plus-size Americans have to literally squeeze themselves in such seats, making the flight uncomfortable for them and for the passenger sitting next to them.

In past years, airlines would let larger individuals slide by letting them use their seat and some of the seat next to them for extra space. Now airlines are taking charge and enforcing penalties for using the extra space. In 2002, Southwest Airlines started enforcing a 22-year-old policy requiring larger passengers to buy an extra seat if they cannot fit into the regular one (Lollis 2002). Delta won't charge for the extra seat unless the plane is