Contemporary Strategy Analysis, 10th Edition

Case 4The US Airline Industry in 2018*

During the first quarter of 2018, it was unclear whether the strong upswing in the profitability of US airlines that had begun in 2012 would continue. The announcement by United Continental Holdings on January 24 that it planned to expand capacity by between 4% and 6% annually raised fears that the recent upswing would end the same way as previous booms—in excessive capacity additions leading to price wars.¹ These fears were reflected in the prices of airline shares: during the two weeks after the announcement, the Dow Jones Airlines Index declined by 17% (see Figure 1).

FIGURE 1 Dow Jones Airlines Index, 2000–2018

From Regulation to Competition

The first scheduled airline services began in the 1920s. Between 1938 and 1978, the industry was regulated by the Civil Aeronautics Board which awarded routes, approved mergers and acquisitions, and set fares.

Deregulation, combined with rapidly growing demand for air travel, transformed the industry. Despite barriers to entry into the industry arising from the need to set up a complex system comprising airline and aircraft certifications, airport facilities, baggage handling services, and ticketing, 20 new carriers—including People Express, Air Florida, Spirit Airlines, and Midway—began operating soon after deregulation. Since then, new entry into the industry has continued. Although most new ...