[Get Answer ]-Write A Summary And Explain By A Graph
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AirTravel: “Buy High and Sell Low”
Eversince the U.S. airline industry was deregulated in the late 1970s, the majorair carriers have been struggling to overcome the resulting competition thatbeset them. In the booming 1990s, the major airlines had finally started toearn respectable profits. But the technology bust, short recession, and post-9/11downturn in air travel dissolved any hopes of their establishing a long-term recordof profitability. When this edition was being prepared, their losses continuedto mount. United Airlines and USAirways were in protected bankruptcy underChapter 11. Delta Airlines seemed to be headed for the same fate. AmericanAirlines was threatened with bankruptcy in 2003. Its purchase of TWA severalyears earlier apparently made it no more secure than the other”legacy” carriers. Yet, the “low-cost carriers” have survivedand even thrived in the deregulated environment. Southwest Airlines was one ofthe pioneers in introducing low-cost, no-frills airline service, offeringflights of relatively short distances (usually less than 500 miles) ,13 Indoing so, it believed its competition to be more the automobile than the major airlines.Its financial success in using a different type of business model soon led tothe start of JetBlue and AirTran (formerly ValueJet). The success of thelow-cost airlines can be seen in their very nomenclature. In markets wherefierce competition leads to price reductions, only those with a low-coststructure can survive. An alternative would be to take the “Starbucksapproach” and offer premium services at a higher price. To a large extent,this is what the major airlines have tried to do by catering to businesstravelers who have typically been more sensitive to the scheduling of flightsrather than the price. However, when the entire market demand slumps, itbecomes much more difficult to rely on those segments of the market that arewilling to pay more for premium service. Furthermore, to reduce cost manycompanies have been restricting the travel of their employees or requiring’them to substitute this travel with more Web-based or video conferences. Iftravel is required, employees are being required to find the lowest fares. Inan effort to compete with the low-cost carriers, the legacy airlines have beencontinuing to pare down their workforce and negotiating with the unions to reducewages. Prior to September 11, 2001, United Airlines had more than 100,000employees. In 2004, this number had fallen to less than 55,000. On September 8,2004, Delta Airlines announced a layoff of 7,000 workers. In January 2005,Delta announced a sweeping reduction in its air fare structure. The company ishoping that its lower structure will enable it to survive these price cuts.What has made the situation even worse for the legacy airlines is the risingprice of oil. In the fall of 2004, the price of oil was almost $50 per barrel.This caused American Airlines to project its fuel bill in 2004 to be about $1billion more than planned. If the legacy airlines were unable to sustain their higherprices in the face of mounting competition from the low-cost airlines, they havecertainly not been able to pass on higher fuel costs by increasing airfares.However, some of the major airlines made a feeble attempt to do so by charginga ticketing fee. In September 2004, Northwest Airlines announced that it wouldbegin charging passengers $5 per ticket for trips booked through itsreservations agents and $10 for those purchased at airports. American Airlinesquickly followed suit. American Airlines reported that this fee was expected tobring in additional revenue of about $25 million per year. 14 In conclusion, marketforces have caught the management of the major airlines in a cost trap with hardlya means of getting out. Supply and demand conditions for oil have drasticallyraised fuel prices, and at the same time supply and demand conditions for airtravel have made it difficult, if not impossible, to increase air fares.Contrast this to the situation facing the managers of the sellers of coffee.Specialty coffee retailers such as Starbucks enjoyed huge profits by being ableto mark up the price of their coffee while paying relatively little for thebeans. As supply and demand.