The Airline Industry
In 2001, commercial airlines carried nearly 450 million passengers for leisure, personal, and business travel, an increase of approximately 250% since the 1978 industry deregulation. Despite this long-term growth, the number of passengers increased only about 1.5% annually from 1997 to 2001. The airlines were buffeted by both economic and exogenous factors that coincided with particular force. In 2002 and early 2003, virtually every major carrier was under bankruptcy protection or claimed to be on the verge of bankruptcy (Brooks, 2007).
The airline industry is characterized by an oligopoly market structure, a form of imperfect competition in which a limited number of firms dominate the industry. Oligopoly firms have market power in setting or altering prices for their products by establishing various output levels. Since airlines produce similar outputs and compete with their industry rivals, any action a competing airline takes is noticed by its competitors. Consequently, rivals may react with price-cutting or other attempts to enhance market share. Thus, the airlines are interdependent, and each recognizes that its market power is vulnerable to erosion by competitors or new market entrants (Brooks, 2007).
The airline industry is faced with a double edge sword at all times. With the advent of the internet a price transparency on ticket cost has forced the airlines to adapt to the more price conscious customer who can compare all the fares and choose the cheapest one available. Yet even before the inception of the internet the airline industry was a very cyclical industry. Since its inception the airline industry has always been impacted by the elasticity of demand, externalities, and wage inequality, monetary, fiscal, and federal policies ...