A photo of the text is attached:Case 2.jpg Air Travel: "Buy High and Sell Low" Ever since the U.S. airline industry was deregulated in the late 1970s, the major air carriers have been struggling to overcome the resulting competition that beset them. In the booming 1990s, the major airlines had finally started to earn respectable profits. But the technology bust, short recession, and post-9/11 downturn in air travel dissolved any hopes of their establishing a long-term record of profitability. When this edition was being prepared, their losses continued to mount. United Airlines and USAirways were in protected bankruptcy under Chapter 11. Delta Airlines seemed to be headed for the same fate. American Airlines was threatened with bankruptcy in 2003. Its purchase of TWA several years earlier apparently made it no more secure than the other "legacy" carriers. Yet, the "low-cost carriers" have survived and even thrived in the deregulated environment. Southwest Airlines was one of the pioneers in introducing low-cost, no-frills airline service, offering flights of relatively short distances (usually less than 500 miles) ,13 In doing 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 to the start of JetBlue and AirTran (formerly ValueJet). The success of the low-cost airlines can be seen in their very nomenclature. In markets where fierce competition leads to price reductions, only those with a low-cost structure can survive. An alternative would be to take the "Starbucks approach" 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 business travelers who have typically been more sensitive to the scheduling of flights rather than the price. However, when the entire market demand slumps, it becomes much more difficult to rely on those segments of the market that are willing to pay more for premium service. Furthermore, to reduce cost many companies have been restricting the travel of their employees or requiring 'them to substitute this travel with more Web-based or video conferences. If travel is required, employees are being required to find the lowest fares. In an effort to compete with the low-cost carriers, the legacy airlines have been continuing to pare down their workforce and negotiating with the unions to reduce wages. Prior to September 11, 2001, United Airlines had more than 100,000 employees. 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 is hoping 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 rising price 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 $1 billion more than planned. If the legacy airlines were unable to sustain their higher prices in the face of mounting competition from the low-cost airlines, they have certainly 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 charging a ticketing fee. In September 2004, Northwest Airlines announced that it would begin charging passengers $5 per ticket for trips booked through its reservations agents and $10 for those purchased at airports. American Airlines quickly followed suit. American Airlines reported that this fee was expected to bring in additional revenue of about $25 million per year. 14 In conclusion, market forces have caught the management of the major airlines in a cost trap with hardly a means of getting out. Supply and demand conditions for oil have drastically raised fuel prices, and at the same time supply and demand conditions for air travel 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 able to mark up the price of their coffee while paying relatively little for the beans. As supply and demand.

Week 1 Question 6.docx

Week 1 Question 8.docx