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Business, Marketing, Strategy, Airline, Industry, Commerce, Market, Equity
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Airline industry is facing several challenges, which range from: increase in European debt crises, increase in fuel prices and increase in air tariffs. The scenario is worsening day after day although; International Air Transport Association is optimistic and projects $3 billion in profit. This is a decline in profit compared to the previous years where the industry had achieved $7.9 billion and $10 billion respectively. A drop in profit is as a result of unfavorable macro backdrop in which the company has operated this year (Zacks Equity, 2012).
The underlying factors which have driven overall airline profits are decline in passenger markets and weak Freights. The cargo markets have bottomed out following a sharp fall in 2011 though expected to remain stable in the second half. Demand is expected to outpace capacity in the course of the year increasing by 4.8%. An increase in market growth will result to the airline industry restoring its glory. Profits will begin to increase as a result of hiking fare (Zacks Equity, 2012).
Increase in fuel prices: fuel prices are the major variable of the airline profit. A drop in crude oil by about 15% in the second quarter has brought about the drop in airline operating expenses. A drop in fuel prices has also led to slowing down the economy and a fall in demand of air travel. If prices remain stable, the carriers should experience better performance. The industry is trying to provide cushion to the rising fuel prices by adopting the hedging strategy which has helped combat the rise in fuel prices. If the strategy is successful, it will result to increase in profits (Zacks Equity, 2012).
Most of the airline carriers are reducing the unprofitable jets, and this has led to cutting of flights in small airports which are considered to be unprofitable. The leading carrier in this is the North America carriers. This move will have a negative effect to the industry, reducing the number of airlines will reduce revenue obtained from these destinations. In addition to that gross profit margin will reduce making it difficult for the industry to break even (Zacks Equity, 2012).
Zacks Equity.(2012).Airline Industry Stock Outlook. Retrieved on February 9, 2014 from. http://www.zacks.com/stock/news/81160/Airline-Industry-Stock-Outlook-August-2012
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