The airline industry relates to the transportation of people and cargo via aircraft. Airlines are divided into international, national, and regional levels. The first mentioned type of airlines is comprised of the largest and the most prosperous airlines that are focused on worldwide transportation of passengers and commodities. United Airlines, one of the largest air carriers in the US and in the world, is an example of this type of company. According to the United States Securities and Exchange Commission (2019), United Airlines revenue over the previous year equals $43.259 billion and net earnings are more than $3.000 billion. The current report provides analysis for economics for United Airlines as well as analysis for the entire airline industry.
Airlines Industry Analysis
Undoubtedly, industries connected with aircraft and aviation have a significant role in any countrys economy since they affect the level of employment and national income. Besides, in economically developed countries, this industry is characterized by high rates of competition between various airlines. This became possible due to the liberalization movement and, eventually, ended in the falling ticket prices with the aim to attract more customers (Secilmis & Koc, 2016). Apparently, passengers are interested in the lower ticket prices and higher quality and safety standards for flights. Therefore, consumers interests affect the further development of airlines and the whole industry. Apart from this, demand in this industry depends on numerous other economic factors. The most decisive ones are the income level and the prices for products (Secilmis & Koc, 2016). This statement is based on the logic that the higher income is, the more people are willing to spend money on travel and, in turn, this increases the demand for flights. Vice versa, the decrease of income results in the decline of demand for air travels since that is not an essential service.
Talking about the supply side of the airline industry, it is necessary to mention that, according to the law of supply and demand, that is developed by John Maynard Keynes, the latter creates the former. Therefore, stable and prosperous economic conditions are vital for the development of the industry. Mohammadian, et al. (2019) also indicate that high competition causes an increase in the frequency of flights, giving consumers more options to choose from. Besides, the existence of multiple flag carriers decreases the level of load (Mohammadian, et al., 2019). This way, companies become able to suggest more available seats for customers. Finally, from the introductory phrase about the influence of demand on supply, it could be inferred that income and employment levels and size of the population influence the supply of airlines in the long term. That is because these factors determine whether the suggested services would be in demand.
United Airlines Analysis
United Airlines cannot be regarded as a monopolist at the entire market of flights in the US because of the existence of other major players such as American Airlines and Delta Airlines. The Hirschman-Herfindahl Index (HHI) increased by more than 40 percent over the preceding 17 years (Ganz, 2020). This signifies the presence of the “anti-competitive impact of airline consolidation” (Ganz, 2020, para. 5). Thus, the major actors are focused on the monopolization of the industry.
Taking into consideration the current pandemic of COVID-19, the most apparent trend in industries connected with travels and flights are mass dismissals. Specifically, forced self-isolation and the closure of borders compel United Airlines to fire 36.000 employees “to match travel demand” because, after the end of the pandemic, the industry will shrink (BBC, 2020). Therefore, it is reasonable for United to become three times smaller.
The major United Airlines competitors at the domestic level include Skywest, Republic Airlines, and Virgin America. At the international level, the company must compete with foreign airlines as well. The company practices acquisitions of smaller companies so that the weak newcomers become absorbed by the stronger player and do not pose a threat to it. (CSIMarket, 2020). The company pursues the strategy of balancing prices with the average so that not to lose the competition with airlines that offer lower costs (CSIMarket, 2020). This way, for United Airlines it is not profitable to try to increase revenue through an increase in fares because this will turn into the loss of customers.
Another point that should be addressed deals with the price elasticity. If a good is elastic, it means that the change in price would lead to a change in the quantity demanded. This way, according to DMR (2020), in 2018, the demand increased up to 158 million passengers compared with 148 million passengers in 2017. The average price for a flight shifted from $700 to $500. Therefore, to calculate the price elasticity of demand, it is required to divide the percentage change in the quantity demanded by the percentage change in the price.
Since 0.22 is less than 1, it signifies that the price elasticity of demand is inelastic. The inelastic demand means that the responsiveness of consumers to changes in price is low. In fact, initially, it was supposed that the price elasticity of demand for the given airline would be more than 1; in other words, it would be elastic. That is because such a situation would mean that consumers sharply react to the changes in price. As soon as there are several competitive airlines on this market, consumers have a wide choice, and they are able to give preferences for companies that offer tickets at lower prices.
It could be suggested that consumers are sensitive to prices if they travel for pleasure. Therefore, when the flight is not necessary but rather a whim, it is rational to choose an airline that sells relatively cheap tickets. At the same time, flights that are connected with business affairs tend to be insensitive to price because travel, in this case, is regarded to be a kind of a necessary tool of doing business.
From the analysis conducted above, it could be inferred that in spite of the initially expected elastic demand, it appeared to be inelastic. Undoubtedly, that is beneficial for United Airlines since it means that most of the consumers would choose this company regardless of the prices. This point is the competitive advantage of United Airlines compared with other air carriers that are described above.
To sum up, the analysis of the market for airlines suggests that United Airlines would be worse off in case of offering better flighting conditions but at significantly higher prices. In this situation, the companies with lower prices win. This way, it could be suggested that if the firm pursues the same strategies as it does now, it would retain its current position. Improvement could be achieved via the introduction of unique services and the creation of the brand community that would become a symbol of quality and stability of the discussed airline. In addition, one could suppose that it would be beneficial to absorb smaller companies and do not let them act independently. This measure would prevent the latter from developing into a dangerous competitor.
BBC (2020). Coronavirus: United Airlines to furlough up to 36,000 staff. Web.
CSIMarket (2020). United Airlines Holdings Inc ‘s competitiveness. Web.
DMR. 25 United Airlines Facts and Statistics (2020) | By the Numbers. Web.
Ganz, S. (2020). Strong competition among US airlines before COVID-19 pandemic. American Enterprise Institute. Web.
Mohammadian, I., Abareshi, A., Abbasi, B., & Goh, M. (2019). Airline capacity decisions under supply-demand equilibrium of Australia’s domestic aviation market. Transportation Research Part A: Policy and Practice, 119, 108-121.
Secilmis, N., Koc, A. (2016). Economic factors affecting aviation demand: Practice of EU countries. Current Problems of the Economy,5 (179), 412-420.
United States Securities and Exchange Commission (2020). Annual report pursuant to section 13 or 15(D) of the Securities Exchange Act of 1934. Web.