The World of Air Industry

Jiahui He

June 1, 2020

Introduction
This report will identify the performance of the air industry in the United States. The
purpose of this research is to provide an overview of the U.S. air industry by
highlighting several important information in order to help investors to make
decisions. This report will go into depth about the outlook of the air industry, the
major companies and their strategies, the relationship between the air industry and fuel
price, as well as the impact of Coronavirus on the industry.

Industry Outlook

Within the airline industry, there are some strengths and weaknesses. The Air industry
is the business of transporting paying passengers and freight by air along regularly
scheduled routes, typically by airplanes but also by helicopter. Figure 1 shows the net
income of 21 scheduled passenger airlines from 2015-2019.

Figure 1. Source: (https://www.bts.dot.gov/figure-1-systemwide-us-scheduled-service-

passenger-airlines-annual-net-income-2019)

Figure 1 illustrates that the net income for all 21 scheduled passenger airlines
fluctuates within a range during the past five years. However, according to O’Connor
(2020), Over the next five years, rising disposable income levels and increases in
services offered will likely support industry revenue growth. Also, the government
often puts policy support air industry, as it is an integral part of the economy. Due to
the COVID-19 outbreak, 2020 is full of uncertainty and greatly reduced people’s
travel needs, the industry is facing an unprecedented crisis. In summary, the industry’s
strengths demonstrate its investment value, however, the risk can also impact it.

Major Companies and Their Strategies

The US air industry has been considered as one of the most competitive industries,
American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines Holding
are the four major plays. Figure 3 illustrates the market share of the four major
companies and other companies.

Figure 3. Source: (https://my-ibisworld-

com.ezproxy4.library.arizona.edu/us/en/industry/48111b/major-companies)

Figure 3 shows that these four major air companies account for most of the market
share, which is approximately 80% of the whole industry during the latest 5 years. In a
highly competitive environment, major companies need to maintain innovation to
maintain their competitiveness. “Consider America Airlines: it was the first airline to
offer a loyalty program; the first to introduce computerized reservations systems, and
the first to offer a series of other innovations in the market.” (Hannigan, 2015) In
every case, all the airline companies caught up and imitated the innovations in some
way. In summary, there are four major companies in the air industry, and they all need
to keep creative to secure their status.

Relationship Between Air Industry and Fuel Price

One of the major trends in air transportation is that the price of jet fuel plays a large
role in industry revenue performance. The cost of jet cost influences the supply-
demand dynamics of the air travel market, as its expense usually ranks first and second
in airlines’ operational costs. And the research shows that “the optimal fleet is highly
sensitive to fuel prices and to passenger costs” (Sibdari, 2018) Since jet fuel is refined
from crude oil, when global crude oil prices decline, jet fuel prices tend to decline as
well. In the short term, major airlines choose to remove fuel surcharges and reduce
ticket prices to remain competitive. As forecasting fuel prices is extremely difficult,
airline companies commonly employ financial instruments such as hedging and
derivatives to cope with fuel cost uncertainty in the long term. Figure 2 illustrates the
relationship between the air industry’s yearly revenue and the world price of crude oil.
Figure 2. Source: (https://my-ibisworld-
com.ezproxy4.library.arizona.edu/us/en/industry/48111b/industry-performance)

Figure 2 indicates that the fluctuations in the world price of crude oil affect the
revenue of the air industry within an acceptable range. Overall, the fuel price does
affect the revenue of the air industry.

The Impact of Coronavirus on Air Industry

The current COVID-19 pandemic has negatively impacted the US air industry. Due to
the COVID-19, CDC recommends that travelers prevent close contact with one
another (within about 6 feet) and avoid all nonessential travel to all global
destinations. (CDC, 2019) In this case, demand is restricted as many consumers are
reducing their travel. At the same time, the revenue growth for the Airport Operations
industry has slowed at the start of 2020 as a result of airlines shutting down operations
to slow the spread of COVID-19. (Hiner, 2020) Figure 4 illustrates the relationship
between the air industry’s revenue and the number of changes in international trips by
US residents.

Figure 3. Source: (https://my-ibisworld-

com.ezproxy2.library.arizona.edu/us/en/iexpert/48811/iexpert#key-industry-data)
Figure 4 demonstrates that the industry revenue does not have a significant correlation
with the number of international trips by US residents. During this difficult time, air
companies also try to find the solutions, almost all airlines offer self-checking to
reduce delay times for passengers and to provide convenience. (Mc Williams, 2017) In
this case, the COVID-19 highly likely to cause adverse effects on the air industry’s
revenue, but the result is still unpracticable. Despite government funding, many airline
companies will face the risk of losing revenue due to COVID-19.

Conclusion

This research report gave an overview of the air industry’s outlook, the major
companies and their strategies, the relationship between the air industry and fuel price,
and the impact of Coronavirus on it. As a whole, the readers should have some
specific knowledge of the industry and could make a better investment in the air
industry.
 Reference
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