Jet Feul

Table of Contents

Table of Content Pg.2

Abstract Pg.3

Body Pg.4-14

Appendix Pg.15

Bibliography Pg.16-17

Abstract

The airline industry is dealing with many of the same economic problems today as it did years ago. Rising fuel prices, high union contracts, and competition among the industry are just some of the problems I will cover. Then I will apply some course concepts to these ongoing problems the airline industry is facing. Finally, I will give some recommendations on what economic decisions should be made to save them from filing for bankruptcy.

Airlines

Background

Many of the major airline companies among the United States are facing overwhelming debts they will never be able to pay back. Of the ten largest airline carriers in the United States, only one of the companies recorded a profit for 2004. The collapse of many airline companies could happen by the end of this year if a solution is not reached on how to overcome some of their financial problems “Nearly 20 percent of operating airlines are operating under chapter 11 bankruptcy today, and those companies are still finding ways to borrow more money from their lenders to stay in business. Many airline analysts believe that 70 percent of the industry could be operating under bankruptcy court protection by the end of the year” (Kiger 84). If this were to happen it could turn into an economic disaster, not only for the firms involved, but the consumer and employees would also be affected.

Since the September 11th terrorist attacks, there has been a drastic drop in the demand for air travel. The most common problem the airline industry is facing is the price of jet fuel. This has forced many firms to reallocate their resources to help compensate for the rise in fuel prices. “Several of these carriers including Delta Airlines, who recorded an estimated 5.2 billion dollar loss last year, are seeking to restructure their operations in many ways in order to stay in business.”(Kiger 84) Before I go any further, let me tell you how big of an impact the rise in jet fuel has among the airline industry.

Fuel Prices

“Today, Southwest Airlines calls oil future contracts, or hedges, its insurance policy towards higher fuel prices. Like the other airlines that hedge, they lock in the prices they will pay for oil products months or even years in advance by buying contracts on the open market.”(Austin 133). This is one way the airlines are dealing with their fuel problems that make up nearly 15 percent of their costs. “Southwest Airlines, the only airline in 2004 to record a profit, has hedged 60 percent of their fuel supply for 2005 at $25/ barrel. The price of a barrel is predicted to reach $55 by the end of the year, which means possible bankruptcy for many.”(Austin 133). This problem doesn’t only affect the companies; the average price of tickets is going up in increments of $10 and $20 on average each month. This is causing the consumer to switch to substitutes. "Something's got to give," said John Heimlich, chief economist at the Air Transport Association, a Washington-based trade group. "At the end of the day, I do believe in math. And there's just not enough revenue to go around for all of these players." (Austin 133)

The constantly rising fuel prices will continue to be one of the major problems that all the airlines will have to deal with no matter what. The improvements they make to adjust for this problem is what will separate many of these firms from bankruptcy or success. The firms that advance in fuel technology and improve their resource quality will be the firms that will be successful in the airline industry against their competition.

Competition

Fierce competition among the airlines has kept the price of airline tickets low, causing most companies to find other ways to cut costs. The demand for air travel is price inelastic when it comes to business travel since it’s a necessity to many, but on the other hand for people that are just going on vacation they are more demand price elastic which makes it easier for them to look for cheaper substitutes. This has caused many airline companies to try and find a resolution to this problem quickly. Becoming more efficient has been a high priority for the airlines to keep their customers happy. The use of the internet has played a key role in trying to restore customer satisfaction among the industry; making overbooking less frequent and making it easier to do it yourself.

Companies have saved a lot of money by being able to cut back on man hours within their firms. The difference in the companies that are making money and the ones that are not has to do with the cost of labor.

Labor Disputes

Besides hedging and increased efficiency, the airlines are finding some other ways to deflect some of their high costs; retiring inefficient aircraft and increasing the passengers per flight are some ways that are helping to cut costs. Labor costs tend to be the biggest issue right now especially for Delta and Northwest Airlines. Both have faced recent union arguments relating to the concessions the airlines are asking the employees to take. Production efficiency and being able to do everything in the least costly manner is what most firms are trying to perfect. If cutting many union jobs is the answer then that’s exactly what these firms have started to do. Reducing labor costs has already become a pattern among many firms and that needs to work in order for the airline companies to avoid possible employee strikes. The loss of many of these jobs will incur the loss of efficiency among these firms. By reducing the amount of skilled labor among their companies will result in a loss of efficiency which could equal one another in the long term costs of the company.

COM air, a partner of Delta Air Lines, pilots union has considered going on strike because of contract complications. “Warburg airline analyst Samuel Burttrick estimates that delta will forego $4 million in revenue each day COM air pilots are on strike. After tax income, Delta will take a hit of about $2 million a day.”(Eldridge 1) This is a typical problem many of the airlines are facing due to competition and it is driving workers elsewhere. “President Bush followed