1. The Domestic Airline Industry
Eric Huang
Chase Funderburk
Vincent Russomagno
Terry Wu
My name is Eric, here are my partners. We will be examining the domestic airline industry today and the pricing strategies used.

2. Why the domestic airline industry?
Personal enthusiasm
Purchasing experience and familiarity
Geographic and temporal pricing differences
Variety of pricing possibilities
Personal enthusiasm – chase travelled across Europe, Terry has Private Pilot’s license
Very large potential for data- by competitor, geographic segmentation, pricing per different mediums like airline itself or agent websites, ticket types (first, business, economy), and price per time to flight.

3. Industry Overview Life Cycle Stage: Decline Revenue Volatility: High
Rising fuel prices

4. Background
Industry produces – mostly airline services of both regional airline and domestic mainline.
Domestic mainline are flights to major cities (62% in 2008  53.8% 2013 as result of lowered demand)
Regional airline services (feeder airlines) – niche markets to smaller communities. Bring passengers to major hubs—increasing revenue as consumers try to save costs.
Air freight – also growing as packaging innovations increase (barring recession).
Other – Excess baggage charges, reservation cancelation fees, sightseeing tours, etc.
Basic technology?
Production costs financed?
Who buys products?
Product or service distribution?

5. Background
Major market – coach customer. Drops from 9-11 but increases as fear decreases and routes offered increase. Recession affected it—less so than businesses.
Businesses: previously more multi-purposeful, both for business and pleasure and 10% children. However, post-recession  employees flying economy class. Shrunk section.
Demand determinants: leisure travel, business travel, cargo transportation, sudden impacts

6. Background Capital intensity: high Wages: 10.0% of revenues (2013)
Operating costs:
-increased labor productivity (from 11.6%) from recessionary operation downsizing, technology improvements like online booking and check-in increasing labor productivity, and staff requirement. Also handling and landing fees.

7. Background
Costs are reflected here, where many other expenses (other) are incurred in the airline industry—interest, tax, utilities, insurance, restructuring, administrative costs, etc. However, significant to note most of these are fixed, indicated increase in percentage of revenue when sales fall.

8. Major Companies
Delta Airlines
United Continental Holdings
AMR

9. Major Companies: Delta Airlines
Market Share: 15.1%
Headquartered in Atlanta, Georgia
80,000 employees
5,000 daily flights
Fleet size: 722 (mainline)
Destinations: 247 (mainline)
Member of SkyTeam alliance
Regional servicing: Delta Connection
Volatile yearly revenue changes
Delta part of SkyTeam alliance (transatlantic routes)
Volatile changes: 23.6% to 3.9% in last few years.

10. Major Companies: United Continental Holdings
Market share: 14.7%
Brand names: United Airlines
2010 Merger: United Airlines Corporation and Continental Airlines
Headquartered in Chicago, IL
88000 employees
5656 daily flights
Fleet size: 705 (mainline)
Destinations: 376 (mainline)
Founding member of Star Alliance
Plans to cut unprofitable routes (rising fuel prices)
Expanded Wi-Fi servicing through LiveTV
Like Delta Airlines, also volatile revenue earnings. Reflects sudden changes presence in airline industry.

11. Major Companies: AMR Market Share: 9.0% 2011: AMR filed for bankruptcy
American Airlines, American Airlines Cargo, American Eagle
2011: AMR filed for bankruptcy
13,000 jobs elminated
Headquartered in Fort Worth, TX
80,100 employees
3,400 daily flights
Fleet: 605 (451 on order)
Destinations: 250
February 2013: AMR and US Airways Group merger
Largest airline
Close in Q (72% AMR, 28% US Airways)
New name: American Airlines Group Inc

12. Competition 6 Major Domestic Airlines/market shares:
Delta Airlines, Inc: 15.1%
United Continental Holdings Inc: 14.7%
Southwest Airlines Co: 11.1%
AMR Corporation: 9.0%
US Airways Group: 6.4%
JetBlue Airways Corp: 2.4%

13. Market Concentration
Domestic Airline industry has a moderate level of concentration
Top 4 airlines in the industry account for approximately 49.9% of the industry revenue in 2013
Market concentration has increased due to merger and acquisition activity:
Delta Airlines and Northwest Airlines (2008)
United Airlines and Continental Airlines (2010)

14. Government Regulation
October 24, 1978 – Airline Deregulation Act
Prior to 1978 government agency, the Civil Aeronautics Board (CAB) determined the airline routes and the prices charged
Post 1978
Market-driven industry, customer demand determining price
Hub and Spoke system (legacy carriers): funnel passengers from different locations into central hubs at major airports where passengers are sorted onto connecting flights to their final destination
E.g. American Airlines, United Airlines, Delta, United Continental
Low-Cost Carriers (LCCs) – airlines formed post 1978 deregulation
Eliminate many traditional passenger services offered on legacy carriers
E.g. SouthWest

15. Government Regulation (cont.)
Low entry barriers; high exit barriers
Post deregulation: many new start-ups
Good for consumers; bad for legacy carriers
Start-ups offer lower fares than legacy carriers to compete resulting in decreased legacy carrier revenue
Results in many airline bankruptcies but credit card companies and aircraft manufacturers would rather keep bankrupt airlines alive rather than have them liquidate
Survival of bankrupt airlines makes it difficult for other airline to raise fares to profitable levels

16. Government Regulation (cont)
Maintenance Programs
Federal Aviation Regulations (FAR) Part 121
Industrial Regulations
Standard industrial regulations
Occupational Health and Safety Administration (OSHA)
Environmental Regulations
1990 Clean Air Act: National Emission Standards for Hazardous Air Pollutants (NESHAP)

17. Industry Organization
Aviation Suppliers Association (ASA)
Represents more than 490 global member companies that lead logistics programs, purchasing efforts and distribution of aircraft parts worldwide
Focus on safety, international compliance and ethical business practices that impact the aviation parts supply industry

18. Industry Organization (cont)
Horizontal Integration:
Civil aircraft manufacturing: Boeing (60% of market), Airbus (30% of market)
Aircraft assembly and aircraft engine components: Rolls Royce plc, General Electric (GE)
Equipment and parts: Thales, Teledyne, Gables Engineering, Timken
Aircraft interior refurbishment and completion companies

19. Industry Organization (cont)
Numerous factors affect the aircraft manufacturing industry:
Industry must develop more efficient and environmentally friendly aircraft parts to comply with environmental standards aimed at reducing negative aircraft externalities such as aircraft noise and engine combustion emissions

20. Introduction
Overview of stats on IBIS
Trends and future

21. Pricing Strategies – Pre Booking
Short: 1 week
Medium: 1 month
Long: 3 months

22. Pricing Strategies – Trips
Business Trips:
Departure: Monday
Arrival: Thursday
Leisure Trips:
Departure: Friday
Arrival: Sunday

23. Raw Data Collection
Using Yapta.com we collected prices for 9 selected routes over a one week time frame
Focused on 3 route lengths:
>5 hrs
2.5-5 hrs
<2.5 hrs
Identified 3 major players:
American Airlines
Delta
United
Focused on 3 booking periods:
1 week prior
1 month prior
3 months prior

24. Raw Data Sample

25. Business Trips – 1 Week Booking

26. The mid length flight was the cheapest
Closer to departure, the >5 hr flight was clearly the most expensive
Prices were stable for the <2.5 hr flight and increasing steadily for the other two

27. Business Trips – 1 Month Booking

28. The longest flight (>5 hrs) was the most expensive throughout
The shortest flight was slightly cheaper than the mid length flight
Prices were most volatile in the <2.5 hr flight

29. Business Trips – 3 Month Booking

30. The longest flight was most expensive
Mid length flight was the cheapest
Low price volatility in the mid length flight

31. Business Trip Analysis
When waiting till the last minute to book a flight the distance has little impact
On the 1 month and 3 month pre-booking times, the distance has a more significant impact on pricing
Extemporaneous supply and demand factors in regional markets cause additional price fluctuation

32. Leisure Trips – 1 Week Booking
Leisure vs Business Analysis looking at 1 Week Booking

33. Leisure vs Business JFK - LAX
These flights are similarly priced over time
There is a greater relative spike in business than leisure in the few days before departure

34. Leisure vs Business LAX - SEA
There is a premium charged to business passengers
The extreme leisure rate hike seen by American is an outlier
Could be a result of too much pre-booking

35. Leisure vs Business ATL - IAH
There is a premium charged to business passengers
Delta attempts to take advantage of extreme last minute bookings with steep rate hikes

36. Leisure vs Business Analysis
Airline appear to be effectively price discriminating against business customers
Charge them a premium for late booking tendencies
Example of 3rd degree price discrimination

37. Leisure Trips – 1 Week Booking

38. Interesting that the shortest flight started as the most expensive
Ultimately the longest flight matched the shortest’s price

39. Leisure Trips – 1 Month Booking

40. The longest flight is the most expensive
Shortest and mid length flights are comparable
Shortest flight has the greatest price volatility

41. Leisure Trips – 3 Month Booking

42. The longest is the most expensive
Delta is pricing higher than the competition for the mid length flight
They may have less regional capabilities

43. Leisure Trip Analysis Similar findings to Business Trips
Again we saw when waiting till the last minute to book a flight the distance has little impact
On the 1 month and 3 month pre-booking times, the distance has a more significant impact on pricing
Outside factors like regional supply and demand are difficult to nail down

44. Leisure Trips – 3 Month Booking
Pre-Booking Analysis

45. Average Observed Prices by Weekdays
Book on Monday or Wednesday to save the most money on flights
Lets take out the one week bookings and see what this looks like

46. Analysis – Business vs Leisure
Leisure travelers pay a $20 premium over business travelers for flights booked 3 months in advance
Again this is successful 3rd degree price discrimination

47. Analysis and Recommendation
Industry is heavily reliant on:
Fuel Prices
Seasonality of Travel
Government Regulation
Security
Funding

48. Financial Analysis Industry P/E ratio is 10.4X on average
This is extremely low compared to an S&P 500 average of 14.3X
LTG forecasts are surprisingly high at an average of 28.8%
This is likely explained by the airline industry weathering a few very tough years of high fuel costs and consumer uncertainty
When the economy improves  people travel more
American Airlines has undergone significant restructuring through a Chapter 11 bankruptcy filing
Other major players have cut costs and are now lean and ready to grow so long as government regulation does not interfere

49. Fuel prices are volatile and directly effect the costs of flying
Airlines hedge their exposure to fuel prices but this is more of an art than a science
Low fuel prices will typically result in better industry performance
With the emergence of alternative energy sources the airline industry may face less competition for fuel
Crude Oil Futures

50. Final Recommendation
The airline industry trades at a relative value to the market
There are many risks involved but if you believe in management then “stock-picking” may be a successful strategy within the industry
Suggest avoiding this sector as a long term play