The airline industry is a service industry. The airlines are in the business of transporting people and their belongings as well as products. The major characteristics of the industry include the following: capital intensive, high cash flows, labor intensive, highly unionized, seasonal. These characteristics are the cause of

the industry’s then profit margin. In fact “airlines, through the years, have earned a net profit between one and two percent, compared to an average of above five percent for U.S. industry’s as a whole”. Due to the industry’s thin profit margin, it comes as no surprise that the history of airlines has been a rocky one.

To be profitable the airlines need to minimize their costs. There are a number of ways this task can be achieved. I will focus on the three costs that seem to be troubling the industry the most. Labor costs are the largest cost for the industry. “Labor accounts for 35 percent of the airlines operating expenses and 75 percent of controllable cost . This high cost is mainly due to the fact that the industry is highly unionized. Many of the troubled airlines will not be able to succeed if they cannot control their labor costs. I believe the best solution for fixing this problem area is to de-unionize the industry. This action will of course be met with much opposition. Costs associated with the operation of aircraft are the second largest cost in the industry . This cost should be watched closely. The troubled airlines need to cut out unprofitable destinations or at least those destinations that do not meet the break-even load factor . Southwest for instance only serves 59 airports while U.S. Air Ways serves 203 . The last cost I will discuss was also introduced in my section on revenue. The cost is that of commissions paid to travel agencies. Commission costs are the third largest cost for the industry . Airlines should lower the commission the pay to travel agencies. The result fewer agencies will exist and direct ticket sales through the Internet will increase. There is one last cost that deserves special attention. The cost I’m referring to is that of security costs. I have saved this for last because of the costs devastating effects on the industry. Security costs have increased drastically since the terrorist attacks. This cost becomes even more troubling when a decrease in revenue resulting from a drop in

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