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Airlines Industry Profile
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Pummeled by poor profits and scarred from a terrorist attack against the US, the airline industry finds itself on a bumpy course. In an effort to head off a drop in the number of passengers and rising costs for security, companies laid off staff and trimmed services. In an already intensely competitive market, the inevitable industrywide shakedown will have far-reaching effects on the industry's trend towards expanding domestic and international services.
Many airlines are still partly owned by their respective nations, and treaties between nations determine which airlines can land where. To get around national laws and regulatory problems, airlines have formed global alliances such as Star (United Airlines and Lufthansa), Oneworld (American Airlines and British Airways), and SkyTeam (Delta Air Lines, Air France, and AeroMéxico). Through such alliances, airlines benefit from each other's resources, which include additional routes and marketing strategies as well as code-sharing agreements, without incurring the high costs of expansion. The costs involved with increased security precautions and route changes will force the airlines to examine their agreements. For customers, airline alliances offer broader frequent flier programs, streamlined travel, and simplified systems for purchasing tickets, but those benefits may do little to allay passenger concerns regarding safety.
Even as airlines stake out their positions in the global market, they are not immune to competition in their own backyard. Regional airlines have gained new ground with the development of newer, smaller jets that are faster than turboprop planes and have greater ranges. The new regional jets have also made operating in previously underserved markets more cost-efficient.
Recognizing their potential, major US carriers Delta Air Lines (which owns regional carriers Delta Express, Atlantic Southeast, and Comair) and American Airlines (with its AMR Eagle) have sought to control all or part of the upstart regionals. There is a similar trend in Europe, where regional airlines are seeking partnerships with major airlines to more effectively gain access to certain hubs.
Major carriers hoping to merge -- such as United Airlines and US Airways -- have been rebuffed by a headwind of regulators scrutinizing competition issues. An operating partnership established by KLM Royal Dutch Airlines and Alitalia has fallen apart amid disputes.
As the world's airlines struggle to rise above regulators and each other in efforts to grow bigger and better, they are finding themselves in a struggle on other fronts. Airport capacity, route structures, weather, technology, and, most significantly, rising fuel and labor costs have cut into airline profits. Carriers have sought refuge in higher prices, primarily for business customers, who during the thriving economic times of the late 1990s were willing to pay more in exchange for better services and scheduling freedom. The move worked until corporate belt-tightening became the norm in 2000 and 2001, and companies began to reevaluate their travel budgets.
Increasingly business travelers are looking to various alternatives to high ticket prices: using software to streamline travel expenses, scouring the Net for cheaper fares that leisure travelers enjoy, and relying increasingly on video and teleconferencing technologies. The results have left airlines struggling to come up with ways of attracting more premium passengers.
Exacerbating that struggle further are the tragedies at the World Trade Center in New York and the Pentagon in Washington, DC, where two American Airlines jets and two United Airlines jets were hijacked and crashed as part of apparent terrorist attacks in 2001. The catastrophe led to a first-time shutdown of all US air traffic by the Federal Aviation Administration (FAA). The shutdown not only halted all domestic traffic, it prevented all international traffic from entering the US.
Effects from the shutdown have already surfaced. Midway Airlines decided to permanently halt its operations, but later resumed limited operations with the help of $10 million in federal aid. Of the major carriers, Continental Airlines and US Airways were the first to react by cutting back their flights and laying off workers (about 20% each). Other carriers soon followed, which brought the number of layoffs to about 100,000 in the US. European carriers, such as British Airways and Lufthansa, also began cutting services and workers.
In a panic over anticipated financial losses, major US carriers requested government help and received $15 billion worth in direct aid and guaranteed loans. (The EU has so far discouraged state bailouts.) The forces buffeting the industry, however, practically guarantee that there won't be any smooth take-offs back into profitability; most US carriers still incurred heavy losses.
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Key People
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Marion C. Blakey - Administrator of the US Federal Aviation Administration (FAA). The FAA oversees and manages aviation safety and security and operates the world's largest air traffic control system. Prior to being named FAA Administrator, Blakey served as Chairman of the National Transportation Safety Board.
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Glenn F. Tilton - Chairman, President, and CEO of UAL Corporation and its main operating subsidiary, United Air Lines. Prior to that he was appointed Vice Chairman of the Board of Directors of ChevronTexaco in connection with the merger of Chevron Corporation and Texaco Inc. completed in October 2001.
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Pierre J. Jeanniot - Director General and CEO of the International Air Transport Association (IATA). The IATA is a trade organization representing nearly 270 airlines, which account for about 95% of international scheduled traffic. The outspoken Jeanniot is a former CEO of Air Canada and has been the IATA Director General since 1993.
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Herbert D. Kelleher - Founder and chairman of Southwest Airlines, the unorthodox lawyer pioneered the no-frills low-fare airline.
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David G. Neeleman - CEO and founder of JetBlue Airways, Neeleman has had his hands on several successful airlines, including Morris Air, where he pioneered ticketless travel and which was eventually acquired by Southwest Airlines. He also helped start WestJet, a successful Canadian low-fare carrier.
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