Leading Risks before the US Airline Industry
Terrorism is a constant threat to the global airline industry and can harm operations and revenue. Following the 9/11 attacks, governments around the world have tightened the security at the airports. A terrorist attack and the resulting fear affects the revenue of Airline businesses negatively. After AlQaeda, ISIS is a big threat to the security of airports in the US as well as other Western nations and the Middle East. In the Asian and European regions too, governments have taken significant measures to maintain the security of airports. In the United States, the threat is not always external but there are several domestic extremist groups also for whom airports are a high profile target.
Geopolitical conflicts can also have a direct and indirect impact on air traffic and can cause loss of revenue. If there is a Delta flight to Toronto, and a terrorist event takes place in Canada, it will discourage the US and international passengers from flying there. The result will be ticket cancellations, loss of passenger revenue, and even flight cancellations. In the other case, if a war erupts in a particular region then all airlines including Delta would need to avoid flying in the area so as to avoid damage and liability. The hundreds of passengers on a plane and their lives are the liability of an airline and a mishap can significantly damage the company’s reputation. This is why airlines also avoid dangerous routes where the chances of extremist groups targeting airplanes are higher.
However, in the latest situation, Coronavirus has emerged as the biggest threat to the airline industry including the United States and other markets of the world. While the pandemic has brought the entire aviation industry to a standstill, its impact will remain there for long and might be into 2021. Apart from domestic operations that began with the reopening of the US states, international flights may take a lot longer to restart. The challenge before the entire US aviation industry is quite big and might be bigger than any challenge it has faced in the past.
Here are the leading challenges that continue to make airline operations risky for airline operators based in the United States.
Leading Risks in the US airline industry
Extensive Government Regulation:
Government regulation is one of the leading challenges facing the entire US aviation industry. FAA is the leading regulatory authority in the US airline industry. It issues directives from time to time and other regulations that are related to operations and maintenance of aircraft that can lead to significant expenditures. In order to comply with the FAA’s regulations, the airline companies incur significant expenditures regularly.
The aviation industry in the US was tightly controlled before the deregulation in 1978. However, post-deregulation the airline brands started enjoying some freedom in terms of route selection as well as charges. While the situation changed a lot since the deregulation, the overall regulatory environment has still remained very tight. Apart from a large web of laws and regulations, there are several taxes that also add to the operating expenses of the airline brands.
The international carriers are also subject to a wide variety of local and international laws. Overall, laws and government regulation are an important risk factor before all the airline carriers in the US aviation industry. There are several laws related to emissions that also affect the airline industry. Not just in the US but international carriers have to deal with emissions laws in the other markets too.
Hypercompetitive global airline industry:
The level of competition in the global airline industry is intense. Apart from the several players in the US aviation industry like Southwest, Delta, and others, there are many international carriers too drive the level of competition in the US aviation industry higher. The international aviation industry is marked by intense competition with respect to routes, fares, schedules, services, products, customer service, and loyalty programs. The competitive landscape in the airline industry has also changed a lot due to many factors. Several airline companies have already formed international alliances in order to deal with the continuously rising competition. With the rise of subsidized government-sponsored international carriers, and the creation of immunized joint ventures the competitive landscape of the airline industry has also changed. These joint ventures are richer in terms of resources and cover extensive international route networks. Apart from that, they have also adopted more competitive cost structures. Domestically also the rise of Ultra Low-Cost Carriers has given rise to intense competition for the larger carriers that operate on a point to point or hub and spoke business model. Whether it is inside the US or internationally, rising competition can have a material adverse impact on the business of the US-based airline carriers. Rising competition, apart from increased spending on advertising and customer retention, also drives operating expenses higher in the other ways.
Service disruptions at major airports:
In the United States, the business models of airline carriers depend heavily on major airports. However, it is also true about international airports. If there is an extended disruption or interruption at any of the leading airports, this could have an adverse impact on the operational and financial condition of the airline businesses.
Apart from that, the number of aircraft and engine manufacturers on which the US airline industry depends is also limited to just a few. The products that these aircraft and engine manufacturers make are also subject to intense regulation. In such a situation, the grounding of any of these aircraft or engine types as in the case of Boeing 737 max, there can be a material adverse impact on the business operations and financial condition of airline businesses.
Condition of the global economy:
The condition of the global economy also poses a risk to the airline industry in the United States. The economic performance of the US economy has been very good in the past several years which also led to improved financial performance for US-based airline businesses. The global economy had also been performing very well before the pandemic and that had resulted in superior performance for both the US-based and international flight operators. The performance of the global economy has a direct impact on the performance of the aviation industry. When the global economy performs well, and the level of employment is high, customers spend more on travel and tourism. The reverse happens when the global economy is not performing well. With the spread of Coronavirus, a large number of countries are on the brink of entering another recession. Governments around the world are doing their best to save their economies from recession including economic bailout packages like the one introduced by the US Congress worth 3 Trillion US dollars. However, it is estimated that the global impact of Covid-19 in economic terms will be worth several trillion dollars. While on the one hand, it has had a severe impact on employment and spending, on the other, it has left a large number of airline operators in need of a financial bailout.
Effects of Brexit:
Another important threat to US-based airline operators that operate internationally including the United Kingdom is the uncertainty created by Brexit. The United Kingdom and the European Union continue to negotiate the terms that will apply in relation to aviation in the future. In the meantime, the US-UK Open Skies agreement will apply to US-UK flights. However, there are also several grey areas in the future relationships between the UK and the European Union. There are a lot of matters like trade, customs, financial services, and the movement of goods and people where there is a lot of uncertainty due to Brexit.
Biohazards and epidemics:
Biohazards and pandemics can also have a severe adverse impact on the aviation industry's performance both inside the US and globally. The current situation is one of the best examples of how pandemics or contagious illnesses like the Coronavirus deeply impact the aviation industry's operations and financial performance. Once the initial outbreak was identified in China, several US-based airline operators temporarily suspended the Chinese market flights. However, the situation continued to worsen since the beginning of 2020, and even after 6 months have passed, international flights to several markets remain suspended from the United States. The country itself is dealing with the severest outbreak of the pandemic, and the number of active cases continues to climb. While there is currently no firm resolution in sight, it is feared that the pandemic's impact might remain well into 2021. The world is waiting for a vaccine to arrive in the market. However, it is not sure when the pandemic might end. As a result, the pandemic and its fear are expected to negatively impact the aviation industry's performance, which will be one of the severest that any US-based airline might have seen in their history, including the recession. According to an IATA press release in November 2020, a net loss of $118.5 billion was expected for 2020. The pandemic's impact is expected to continue into 2021, causing a net loss of around $38.5 billion to the industry.