Thinking about airlines, the first thought which probably comes to mind would be luxury and comfort.

However, there is much more to the airline industry than just that. Yes, most of the airlines worldwide
are facing a cycle of rising operating costs and declining profits and margins. Now, passengers may not be
able to observe these characteristics, but after extensive research it is quite apparent the global airline
industry is in disarray.
Political
The airline industry operates in a highly regulated political environment where passengers are favored
over the airlines. This is due to the fact that passenger safety is paramount and the political establishment
have been made weary of the airlines and resorted towards strict regulations for their operations, due to
their earlier inclinations towards monopolistic behavior. Furthermore, with there being more competition
in the industry and regulations in demand, passengers are in a position where they can push for lower
prices and amenities.
Economic
The 9/11 attacks left a major impact that the airline industry is yet to recover from. The prolonged
recession, fluctuations in oil prices and an imminent global slowdown are other debilitating factors that
are affecting the growth of the airline industry. Airlines have to cope with declining passengers, high fuel
prices, competition from low-cost airliners, labor demands and soaring operating and maintenance costs.
In addition, events such as the recent Malaysian airline disappearance, is also adversely affecting the
global airline industry.
Social
Over the years, the millennial generations emergence into the consumer class has resulted in major social
changes, more importantly in terms of service, where consumers have become much more demanding.
Therefore, to meet the increasing demands of this segment, airlines have to stabilize their costs.
Additionally, the passenger profile has changed as well with there being more economically minded
passengers. When it comes to business class passengers, improved communication facilities have reduced
the need to fly down for meetings.
Technological
With intense competition in the airline industry, latest technology must be adapted by airliners in order to
survive in the already tough environment. Additionally, the use of latest technology in aircrafts would not
only lower fuel consumption, but also the cost of airline operations and improve efficiency.
Conclusion
So, this PEST analysis for airline industry has highlighted four important factors that are affecting its
external macro environment. By keeping these factors in mind, we have come to the conclusion that the
increased costs of doing business, strict rules and regulations imposed by regulators, competition from
low-cost airliners, changes in passenger profile, in addition to the recent airline related deaths, all have
affected the viability and profitability of the global airline industry badly. It will require a lot of patience
and hard work for the industry to find its way back to the right track.

Analysis

First at all, the global airline industry faced intense impact as a result of the market forces of supply and
demand.
In fact, the change in demand is one of the most important factors which affected to the airline
industry. The initial variable that can shift demand curve is income. In other words, if the passengers have
the high income, obviously they will be able to get the tickets more in replacement of choosing car, train,
etc. As a result, their demand to go by plane will definitely rise. However, over past 10 years, due to the
global economic crisis, income has been decreased substantially which brings in the decline in demand of
customers. This is illustrated by the Figure 1 below.
In term of supply, input price is the essential variable to shift the supply curve. Indeed, fuel price is one of
clear example. Because jet fuel costs comprise a significant component of airline operating cost, the
airline industry also has been affected. While short term cash flows are related to changes in the fuel price
which make revenue be slow initially, much of the price effects are likely to be passed on as all airlines
face similar fuel costs in the long term. Indeed, there was an argument that airlines also face an
underinvestment problem whenever profitable investment opportunities arise during times of high jet fuel
costs. [3] About technology, due to the stronger development of technological system, the supply of world
airline industry also rises. As a result, there are a huge number of both new and old airlines can provide
the demand of customers.
In term of competitors, if an airline sets up the higher price, they will obviously loss a large number of
passengers at the same time which results in a lower revenue. The specific example is the differences in
percentage of passenger seats sold (load factor) of 9 U.S airlines including Delta, American, United,
Continental, US Airways, Southwest, Alaska, Jet Blue and Air Tran since they are competitors of each
other.
The rest variables also play an important role which affect to the demand curve of airline industry
including tastes, expectation, technology and number of buyers or sellers but the most necessary factors
are still the first two variables.
Elasticity of demand is also the essential factor that influenced the airline industry. Indeed, competition
consistently affects the price of airline tickets because it gives customers other options. When the demand
is elastic, price and total revenue will be negative and when the demand is inelastic, price and total
revenue will be positive. And this explains why the loss and earnings of world airline industry vary
substantially. Hence, the table 1 [5] below shows the annual loss and earnings of airline industry from
1990 to 2005 and figure 3 describes the annual net profit of the world airline industry [6] .
Fuel price:
In general, fuel price always plays an important role in the world economy. That is the reason why either
increasing or decreasing of fuel price affect deeply on airline industry. It is easy to see that fuel and airline
are complements. Airline cannot operate without the existing of fuel. Gasoline, oil, or other products from
crude oil are utilized as irreplaceable fuel in airline industry. According to the theory, complements are
two goods for which an increase in the price of one leads to a decrease in the demand for the other [7] . A
change in price of fuel will shift the demand curve. In the other hand, assume that fuel is input and airline
transportation is output. Rising in input price leads to a leftward shift the supply curve. The following
diagram describes how fuel price causes a change in both demand and supply.
Fuel price cannot remain a stable status for a long - run period then airline industry should be flexible to
react quickly.

Interest rate:

Interest rate is other factor that effect on market economy in general and airline industry in particular. The
interest rate connects the price of goods today and their price in the future. Higher interest rate increase
expected cost of distress and this is particularly so for the airline industry where leverage is high and
distress costs are substantial.
Exchange rate:
Exchange rate risk is important as airline profitability is related to currency values. Tourism demand is
one of reasons that show how exchange rate cause changes of airline industry. Both inbound and
outbound are influenced by exchange rate levels. When the exchange rate is high, tourist will receive
benefits. The result is they are willing to travel more, thus, quantity demanded of airline tickets will be
increased. In contrast, the depreciation of domestic currencies make tourists consider whether they should
travel or not. Travelling in recessive period is a typically example. If the exchange rate falls down,
customer might save their expenditure by not travelling or they might wait for promotion tickets. It means
that foreign demand for international and domestic flights move inversely with the value of the home
currency [12] .
Global events
Besides, the price of oil have effected on this industry. When the price of oil increase, the fees for material
grow up .If the airline do not rise up the price of ticket, they will decrease their net profit. If the price of
oil falls off, there are more than promotion tickets for passengers.
Moreover, the disease can be affected to the industry .Example, when the SARS disease happened, many
countries have not allowed passengers to come to place where SARS disease has.
Government policies
The government policy is another factor what can be effect on the airline industry. Because the
government policy control on price, so the airline industry have 2 legal price such as price ceiling and
price floor .The price ceiling is a legal maximum on the price at which a good can be sold [14] . For
example, an airline has good quality, so they want increase fees. The price ceiling applied to fees to help
people can be paid. When the airline wants to attracted passenger, they create promotions about the price
their ticket. So the price floor is the price minimum at which ticket can be sold and the company airline
still has net profit.
Taxes is an important factor of the government policy .When the taxes of the passenger increase ,the price
of ticket rise up , so if the airline industry want to grow up, they need decrease another fees in ticket.
When the taxes of the airline industry increase, the price of ticket will increase or the industry will cut off
something to protect their profit.
Conclusion:
In details, by successfully managing opportunity cost, and adapting to an ever changing economic
environment, airline industries can have economic success. However, the well-being of the nation's
economy will have a direct impact on the level of success experienced in the airline industry. During
economic shortfalls in the nation's economy, travellers will have fewer resources available to travel for
pleasure. Contributing to the negative economic influences in the airline industry, future and existing
policies targeting the airline industry will continue to hinder the industry's ability to recover losses in
periods of economic hardships
The airline industry exists in an intensely competitive market. In recent years, there has been an industrywide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic
and international services. In the past, the airline industry was at least partly government owned. This is
still true in many countries, but in the U.S. all major airlines have come to be privately held.

The airline industry can be separated into four categories by the U.S. Department of Transportation
(DOT):

International - 130+ seat planes that have the ability to take passengers just about anywhere in
the world. Companies in this category typically have annual revenue of $1 billion or more.

National - Usually these airlines seat 100-150 people and have revenues between $100 million
and $1 billion.

Regional - Companies with revenues less than $100 million that focus on short-haul flights.

Cargo - These are airlines generally transport goods.

Airport capacity, route structures, technology and costs to lease or buy the physical aircraft are significant
in the airline industry. Other large issues are:

Weather - Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down
airports and cancel flights, which costs an airline money.

Fuel Cost - According to the Air Transportation Association (ATA), fuel is an airline's second
largest expense. Fuel makes up a significant portion of an airline's total costs, although efficiency
among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency
because take-offs and landings consume high amounts of jet fuel.

Labor - According to the ATA, labor is the airline's No.1 cost; airlines must pay pilots, flight
attendants, baggage handlers, dispatchers, customer service and others.

Key Ratios/Terms
Available Seat Mile = (total # of seats available for transporting passengers) X (# of miles flown during
period)
Revenue Passenger Mile = (# of revenue-paying passengers) X (# of mile flown during the period)
Revenue Per Available Seat Mile = (Revenue)
(# of seats available)
Air Traffic Liability (ATL): An estimate of the amount of money already received for passenger ticket
sales and cargo transportation that is yet to be provided. It is important to find out this figure so you can
remove it from quoted revenue figures (unless they specifically state that ATL was excluded).
Load Factor: This indicator, compiled monthly by the Air Transport Association (ATA), measures the
percentage of available seating capacity that is filled with passengers. Analysts state that once the airline
load factor exceeds its break-even point, then more and more revenue will trickle down to the bottom line.
Keep in mind that during holidays and summer vacations load factor can be significantly higher,
therefore, it is important to compare the figures against the same period from the previous year.
Analyst Insight
Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and upselling in flight services. But the largest proportion of revenue is derived from regular and business
passengers. For this reason, it is important that you take consumer and business confidence into account
on top of the regular factors that one should consider like earnings growth and debt load. (For more about
the consumer confidence survey, see Economic Indicators: Consumer Confidence Index.)

Business travelers are important to airlines because they are more likely to travel several times throughout
the year and they tend to purchase the upgraded services that have higher margins for the airline. On the
other hand, leisure travelers are less likely to purchase these premium services and are typically very price
sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the
number of leisure travelers to decline.
It is also important to look at the geographic areas that an airline targets. Obviously, more market share is
better for a particular market, but it is also important to stay diversified. Try to find out the destination to
which the majority of an airline's flights are traveling. For example, an airline that sends a high number of
flights to the Caribbean might see a dramatic drop in profits if the outlook for leisure travelers looks poor.
A final key area to keep a close eye on is costs. The airline industry is extremely sensitive to costs such as
fuel, labor and borrowing costs. If you notice a trend of rising fuel costs, you should factor that into your
analysis of a company. Fuel prices tend to fluctuate on a monthly basis, so paying close attention to these
costs is crucial.
Porter's 5 Forces Analysis
1. Threat of New Entrants. At first glance, you might think that the airline industry is pretty tough
to break into, but don't be fooled. You'll need to look at whether there are substantial costs to
access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering
the industry is higher. The more new airlines that enter the market, the more saturated it becomes
for everyone. Brand name recognition and frequent fliers point also play a role in the airline
industry. An airline with a strong brand name and incentives can often lure a customer even if its
prices are higher.
2. Power of Suppliers. The airline supply business is mainly dominated by Boeing and Airbus. For
this reason, there isn't a lot of cutthroat competition among suppliers. Also, the likelihood of a
supplier integrating vertically isn't very likely. In other words, you probably won't see suppliers
starting to offer flight service on top of building airlines.
3. Power of Buyers. The bargaining power of buyers in the airline industry is quite low. Obviously,
there are high costs involved with switching airplanes, but also take a look at the ability to
compete on service. Is the seat in one airline more comfortable than another? Probably not unless
you are analyzing a luxury liner like the Concord Jet.
4. Availability of Substitutes. What is the likelihood that someone will drive or take a train to his or
her destination? For regional airlines, the threat might be a little higher than international carriers.
When determining this you should consider time, money, personal preference and convenience in
the air travel industry.
5. Competitive Rivalry. Highly competitive industries generally earn low returns because the cost
of competition is high. This can spell disaster when times get tough in the economy.