E-Portfolio Report on United Airlines

When the issue of "supply and demand" is associated with the aviation industry, there seems to be more of a supply than a demand. This excess of supply has bankrupt many airlines like United Airlines (UAL). United Airlines in the past would show the utility of their service by pampering their business and first class passengers with champagne and steaks.

Complimentary and substitute goods have direct effects on tickets prices whether it is higher fuel costs or other modes of transportation. The demand for a ticket depends on the ticket being price elastic or price inelastic.Also, the economic forecast for the airline is a guess at best. Organizations or companies such as the Congressional Budget Office, the Conference Board, and the Federal Reserve publish economic indicators based on economic trends and historical data.

The Cost Component comes in many different varieties when dealing with the aviation industry. Higher fuel costs, labor, maintenance, and IT push higher costs. These and many more issues are what the commercial airline industry in the United States operating as an oligopoly face in today's market.Individual Product Pricing Component When the subject of Economics is brought up, the first thing that usually comes to mind is the law of "Supply and Demand".

This law illustrates how the consumer will buy more of a product when the price declines and less when the price increases (McConnell et al, 2002). That very principle holds true for most of the business world. The Aviation industry is dealing with a major shortage in demand ever since the tragedy of 911. Currently the airlines are having a hard time making travel a pleasurable experience for the consumer.

With higher security procedures, new check in procedures, and no food being served on flights less than 2 hours; the consumer is feeling little satisfaction. Competition within the aerospace industry is fierce, mainly because of the number of airlines offering the same product. Along with the issues already discussed, there are many more issues that affect the demand and the price of the service the airlines are offering. There are many airlines competing for the same customer, and they all try to offer goods and services that provide utility.

Utility is something that provides pleasure or satisfaction to the consumer (McConnell et al, 2002). United Airlines is known in the past for catering to the business man. On long international and domestic flights, United would provide utility in the form of expensive champagne and exotic foods. By spoiling the business and first class passenger, United would fulfill the needs and expectations of the consumer. Now a days, utility is giving the consumer the least amount of hassle while in the airport, and providing the cheapest fare.

Utility is subjective, so it is difficult to quantify. Champagne and thick steaks may have great utility to someone who is affluent or a business traveler but little utility to someone who is going on vacation and sits in coach. In order to get an idea of the amount of satisfaction from the consumer, economists use a total and marginal utility scale. Total utility is the total amount of satisfaction or pleasure the consumer derives after receiving a specific amount of service (McConnell et al, 2002).

The measure is broken down in units and placed on a determined number scale. Marginal utility is the extra satisfaction the consumer realizes when the scale of total utility has reached the top and is increased by one unit (McConnell et al, 2002). Both scales are dependent on each other. As the frequent flier boards more flights, the total utility will increase, but at a diminishing rate because the pleasure and satisfaction is not as great as the previous flight.

Ultimately, the frequent fliers total utility will maximize at a certain level then begin to decline.Therefore the marginal utility declines each time the frequent flier takes a flight and is at zero on the scale when total utility is at its maximum. Basically, the more the frequent flier takes a trip, the less exciting it becomes and total utility raises at a smaller increment each flight. As a result, the marginal utility decreases at the same increment, where it is the greatest at the first flight, and lowest on the last flight. The frequent flier may then choose to try a different carrier to bring his marginal utility back up.

United Airlines, like all other airlines have many factors that determine the price of their service. Complementary goods are two products, for which an increase or fall in demand for one leads to an increase or fall in demand for the other (Economist). In the case of United airlines, the increase in the price of fuel will result in an increase in the price of tickets, thus lowering the demand for flight. As a result the rising fuel cost and higher ticket prices are complements because they are jointly demanded. If the price of a ticket gets too expensive for the consumer, then a substitute good may be used.Substitute goods are goods for which an increase or fall in demand for one leads to a fall (or increase) in demand for the other (Economist).

In the case of United Airlines, the increasing costs of tickets may force the demand for other transportation methods to increase; (bus, train, car, etc... ).

All consumers have a different responsiveness to a price change. Price changes may have many different results for the company. The best-case scenario would be no change, or a rise in demand with an increase in price. This only happens in rare situations.

To determine how a price change will affect the company, United must first determine if the demand for their product is price elastic or price inelastic. If the price is elastic, then the price change will cause a large change in the quantity demanded (McConnell et al, 2002). In essence, if United had a high price of elasticity of demand, a ticket price increase would result in a revenue decrease since the revenue lost from the resulting decrease in tickets sold is more than revenue gained from the price increase.Conversely, the price is said to be relatively inelastic if a price change will cause less of a change in quantity demanded (McConnell et al, 2002). If United has a ticket price that is inelastic then the price increase of the ticket would result in a revenue increase since the revenue lost by the relatively small decrease in ticket prices is less than the revenue gained from the higher price. Unfortunately for United Airlines, their ticket prices a very elastic, meaning an increase in ticket price would result in revenue lost situation.

The emergence of the low cost carrier really affects the demand for the higher ticket price that United Airlines would like to market. The consumer demand for a specific product will vary as the price for the product changes. The demand for a ticket to fly with United Airlines varies with price while keeping all other factors constant. Some issues that affect consumer demand and the price of a ticket include; the individuals' budget, meaning the individual can only afford a certain amount of money for a ticket.

Next is the substitution effect, where the consumer buys what is cheaper. There is rational behavior used by the consumer, who tries to use their money to get the most amount of satisfaction, or the most for their money (McConnell et al, 2002). Lastly, there are preferences that the consumer has. They may choose to fly another airline they like better instead of United Airlines even if United has the lower ticket price. United Airlines is still trying to derive a strategy to enhance their revenue and emerge from bankruptcy.Suggestions for United Airlines to increase their revenue mainly deal with catering to the customer.

With the aviation industry growing bigger each day, it is paramount for United to spoil all passengers whenever they can. With the low cost carrier stealing many of United passengers, United must concentrate on customer satisfaction, on timely departures, easier boarding procedures, and easy ticket purchasing to remain competitive. Unfortunately for United, their business is directly hit when the economy declines, so they must go above and beyond what they normally would do for the consumer.When the issue of "supply and demand" is associated with the aviation industry, there seems to be more of a supply than a demand. This excess of supply has bankrupt many airlines like United.

Some airlines had no choice but to go out of business. United Airlines in the past would show the utility of their service by pampering their business and first class passengers with champagne and steaks. Complimentary and substitute goods have direct effects on tickets prices whether it is higher fuel costs or other modes of transportation.The demand for a ticket depends on the ticket being price elastic or price inelastic. In the end, the consumer will take all of the previous in account along with their own preferences to determine their own consumer demand for the product.

United Airlines has to decide what kind of customer they are going for and what they are doing above and beyond the rest of the competition. A hard task to accomplish is to get the consumer to use a product when it is not the cheapest offered on the market. United must find a way to make that happen or they may not make it out of bankruptcy.Cost Component In order to operate any business, it is important to control the cost as much as possible. The airline industry is hit hard with a lot of costs that are associated with the economy. After labor, fuel represents the largest cost component in airlines operations.

Fuel has become one of the main cost concerns to the aviation industry, especially since the tragedy of 9/11. There are many issues that affect the overall cost to the airlines. To help cut some of these costs, technology has helped raise productivity and lower the average total cost.An effective and efficient way of reducing costs is to use less fuel. On average airlines spend approximately $100 per minute/flight in total operating costs (labor, fuel, maintenance, etc. ) (Fuel Conservation).

As the war continues to linger in the Middle East, fuel costs continue to soar. Airlines that were not prepared for this increase in price are really starting to feel the pinch, and this is apparent by the bankrupt filings that have occurred thus far. Even the slightest savings in fuel costs can be the difference of an airline surviving or filing chapter 11.A 1% improvement in fuel efficiency across the industry can lower fuel costs by $700 million per year (Fuel Conservation).

Fuel is a big cost component to the airlines as well as labor and maintenance. Maintenance accounts for a significant portion of an airline's direct operating costs. In an environment where many expenses are beyond the company's influence, such as fuel costs that fluctuate with the market, and labor costs that are set by national regulations and labor contracts; maintenance is one area in which an airline does have the ability to exert some cost controls.As a result, airlines are being challenged to increase their overall maintenance efficiency. At the same time, a number of new technologies are emerging that promise to change the way that airline maintenance is performed.

One of the primary bottlenecks preventing airline organizations from rising to these challenges is a dependence on outdated IT systems. These legacy applications are designed around the old way of doing business and cannot easily be adapted to a changing business model, nor can they easily be modified to make use of emerging technologies.Maintenix is a modern, best-in-class maintenance and engineering software package that has been specifically designed to meet the needs of today's airline maintenance organization. Maintenix can help airlines streamline their maintenance program in order to take advantage of modern aircraft and engines that are designed for easier accessibility and maintainability (The Aviation Maintenance Management Software Specialists).

Maintenix also provides advanced monitoring techniques, manageability of the entire maintenance process for the line, heavy and shop maintenance environments, wireless support, and also help airlines manage the maintenance work that they insource from other airlines, and manage the technical records for maintenance that they outsource to third party facilities (The Aviation Maintenance Management Software Specialists). Cost Component comes in many different varieties when dealing with the aviation industry. Higher fuel cost couple with rising labor and maintenance costs is the biggest factor facing the airlines today.Technology has been developed, and is still being developed to help ease the burden of higher costs, and also to bring the IT department up to date with today's sophisticated equipment.

The road (or sky) is still a bumpy one for the airlines; only time will tell how these cost components are dealt with. Market Structure Component The Airline industry has had to restructure their whole market plan since September 11. United Airlines (UAL) has had harder troubles than most of the other airlines. UAL falls into a very specific market structure where the economy is driving the price of the ticket sales.With rising fuel costs and a flat economy, there are many implications of the market structure that have a direct effect on pricing. In order to enhance the sales of tickets, a non-price strategic plan has to be in place to enhance the sales.

Also there are some suggestions on how UAL can move into a more optimal competitive position. Before that can happen, UAL has to first realize what market structure they are in and go from there. The commercial airline industry in the United States would be considered an oligopoly.This is because of the sizable investment required to enter the market and the presence of few market participants (e. g. , United, American, and Delta).

An oligopoly is where an industry is dominated by a few firms (McConnell et al, 2002). The shape of a demand curve depends on the market structure, whether pure competition, pure oligopoly, monopolistic competition, or pure monopoly. The price and quantity information contained in a demand schedule permits a price setter to calculate the revenue associated with each price under consideration (McConnell et al, 2002).Changing a price is always a dangerous practice for an oligopoly.

If the firm lowers the price, its competitors are also likely to lower theirs, and then all will suffer from lower profits. On the other hand, raising prices may lead to a loss of market share unless competitors also raise their prices. The safest thing is to never lower prices and only raise prices when there is abundant evidence that the other firms will also raise prices. Strategic games can explain why firms have a hard time colluding to set higher prices, which is good for consumers but detrimental to UAL.

Non-price competition focuses on other strategies for increasing market share. In the case of UAL and other airlines; this may one of the most important strategies in this tight oligopic market. UAL must employ a mass media advertising and marketing scheme to get the attention of the public. UAL can announce the enhanced seat room they now offer and their consistent on-time performance.

UAL has lush sleeper seats in the first class cabin that can be used in a non-price strategy to get the wealthy, or the business traveler interested in their product.Another way UAL may use non-price competition is to offer more non stop flights to the major cities. Also UAL may offer flights to cities that are not serviced by many other airlines. These are just a few ways UAL may use non-price strategies to enhance their customer load.

For UAL and any other airline to be in an optimal position a Hub-and-spoke system must be in place. Hub-and-spoke systems allow higher traffic densities that would not be possible in a system of direct flights. This is because channeling passengers through a hub airport concentrates passengers onto a limited number of routes, and hence generates higher densities.The alternative would be to spread passengers over the larger number of aircraft that may be required in a system of direct flights. As the marginal cost to an airline of a passenger on a flight with unallocated seats is very small, any arrangement that increases traffic density reduces average cost per passenger-trip. Also, for routes where there is no competition from the low cost carrier, (international), airlines have to capitalize on the ability to charge a higher ticket price for their services.

Unkind to the consumer, but imperative to the struggling airline.Acquiring as many gates and routes is another way to achieve an optimal competitive advantage over the other airlines. The system fluctuates rapidly, and it is important for UAL and the other airlines to keep their competitive edge. Under oligopoly, a firm's profits depend on its own actions and the actions/reactions of rivals. Firms must engage in interactive and strategic thinking. With a handful of firms responsible for most of the output in each industry, avoidance of price competition becomes almost automatic.

If one firm were to lower its prices, it is likely that its competitors will do the same and all will suffer lower profits. On the other hand, it is dangerous for any single firm to increase its prices since the others might hold their prices in order to gain market share. The safest thing is to never lower prices and only raise prices when there is abundant evidence that the other firms will also raise prices. The best way to gain market share is use of non-price strategies to entice the customer to fly on their airline.United can do this with the use of advertisements and the announcements of little extras like more leg room.

UAL must use strategies to achieve an optimal competitive advantage. The use of hub and spoke flying to channel passengers into certain areas in order to fill seats is very important to the overall performance of UAL. Also UAL must take advantage of the routes that offer the least amount of competition. With the use of these techniques along with other strategic advertising campaigns, UAL may be able to compete with the other airlines long enough to once again become the overall leader in the aviation industry.