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Airlines - US - August 2012

A strong market for air travel in 2011 produced a 9.5% increase in operating revenue for 2011 vs. 2010. However, high fuel prices for the year caused U.S. airlines to see a 32% decline in overall profits. While revenues are expected to gain 9.9% in 2012, the European fiscal crisis and weak Asian economy could both impact profits for the leading “big four” legacy carriers (which account for more than two thirds of total industry revenue), and which have increasingly turned their attention to more lucrative international travel.

Airline industry revenues are forecast to continue to grow through 2017 based on the current economic indicators. However, the industry as a whole faces many challenges—including increasing competition from low-cost carriers, volatile fuel prices, unpredictable demand, extensive regulatory and legal oversight, and a hefty tax burden.

This report explores external forces shaping the airline industry and the challenges it faces, opportunities for growth, and innovations. This report also provides an in-depth consumer perspective of airlines and airline travel, including but not limited to use of major carriers and brand perceptions, factors driving airline choice, as well as reasons to avoid airlines.

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Table of contents

  1. Scope and Themes

    • What you need to know
      • Definition
        • Data sources
          • Sales data
            • Consumer survey data
              • Direct marketing creative
                • Advertising creative
                  • Abbreviations and terms
                    • Abbreviations
                      • Terms
                      • Executive Summary

                          • The market
                            • Figure 1: Total operating revenue of U.S. airlines, at current prices with best- and worst-case scenarios, 2007-17
                          • Market drivers
                            • Consumer sentiment toward air travel increasing
                              • Figure 2: Overall Traveler Sentiment Index March 2007-April 2012
                            • Strategic moves independent of external factors also drive airline revenue
                              • Leading companies
                                • Figure 3: Share of total operating revenue and passenger counts of leading U.S. carriers, 2011
                              • Perception of top legacy airlines indicates a lack of brand identity
                                • Figure 4: Select brand qualities of each major U.S. airline, April 2012
                              • Innovations
                                • The consumer
                                  • Four in 10 have flown in the past year; household income is key determinant in use
                                    • Figure 5: Past 12-month airline use and number of trips, by gender, age, and household income, April 2012
                                  • Price is the most important factor in airline selection
                                    • Figure 6: Most important factors in airline selection, April 2012
                                  • Safety issues are a top reason to avoid an airline, bad experiences also a deterrent
                                    • Figure 7: Reasons to avoid an airline when flying for personal reasons, April 2012
                                  • Most flyers are familiar with the airport routine, but many think it’s a hassle
                                    • Figure 8: Select attitudes toward airline travel, by age, April 2012
                                  • The most frequent flyers welcome automation
                                    • Figure 9: Select attitudes toward airline employees, by flying frequency, April 2012
                                  • What we think
                                  • Issues in the Market

                                      • How can airlines turn a profit in the face of volatile fuel costs?
                                        • Will demand drive profits, or will airlines be forced to discount?
                                          • Will commercial air travel hassles outweigh the benefits?
                                            • Do ancillary fees really empower consumers to choose their service?
                                            • Insights and Opportunities

                                              • Passengers pay for priority boarding…so why not for early exit?
                                                • Do we have a bidder? Airlines begin auctioning upgraded seats
                                                  • Bored (and captive) passengers have a new way to buy while they fly
                                                    • Airlines can take advantage of new technologies to improve experience
                                                    • Trend Application

                                                        • Inspire Trend: Who Needs Humans
                                                          • Inspire Trend: The Nouveau Poor
                                                            • Inspire 2015 Trend: Brand Intervention
                                                              • Brand Intervention
                                                              • Market Size and Forecast

                                                                • Key points
                                                                  • 2011 operating revenue exceeds peak, increases expected through 2017
                                                                    • Figure 10: Total operating revenue of U.S. airlines, at current prices, 2007-17
                                                                    • Figure 11: Total operating revenue of U.S. airlines, at inflation-adjusted prices, 2007-17
                                                                  • Fan chart forecast
                                                                      • Figure 12: Total operating revenue of U.S. airlines, at current prices with best- and worst-case scenarios, 2007-17
                                                                  • Market Drivers

                                                                    • Key points
                                                                      • Performance of U.S. airlines is dependent on the economy
                                                                        • Real GDP continues to make gains, bodes well for airline industry
                                                                          • Figure 13: Real gross domestic product, Q1 2007-Q1 2012
                                                                        • Airline fortunes are inextricably tied to the economy and business travel
                                                                          • Figure 14: Global Business Travel Association Business Travel Index Q1 2007-Q4 2013
                                                                        • Increased business travel spending drives airline profits…
                                                                          • …but European fiscal crisis poses a threat to business travel—and to airline profits
                                                                            • Passenger counts are up, demand appears strong
                                                                              • Figure 15: Overall Traveler Sentiment Index, March 2007-April 2012
                                                                            • Reducing supply to meet increasing demand likely to yield greater profits
                                                                              • Ancillary fees drive revenue
                                                                                • Open Skies Air Transport agreements boost international flights
                                                                                • Competitive Context

                                                                                  • Wheels and rails offer varying levels of competition with airlines
                                                                                    • Car travel is twice as popular as flying
                                                                                      • Bus travel less common, but attracting more customers
                                                                                        • Overall, rail travel poses little competition to airlines…for now
                                                                                            • Figure 16: Domestic modes of travel in the past 12 months, by age, October 2010-November 2011
                                                                                          • Private jets compete with airlines for premium service class passengers
                                                                                          • Segment Performance

                                                                                            • Ticket sales account for more than 92% of operating revenue
                                                                                              • Baggage revenue relatively flat 2010-12, increases expected as fees rise
                                                                                                • Industry leaders increase checked bag fees…other airlines are likely to follow
                                                                                                  • Cancellation fees and miscellaneous fees
                                                                                                    • Figure 17: Total operating revenue of U.S. airlines, by type of revenue, 2010 and 2012
                                                                                                    • Figure 18: Total operating revenue of U.S. airlines, by type of revenue, 2007-17
                                                                                                  • Globally, ancillary revenue worth $22.6 billion in 2011
                                                                                                    • Ancillary revenue metrics of leading U.S. airlines
                                                                                                      • Figure 19: Ancillary revenues compared to total sales, by top 10 airlines by share, Q3 2011
                                                                                                      • Figure 20: Ancillary revenues of top 10 airlines by revenue, Q3 2011
                                                                                                  • Leading Companies

                                                                                                    • Key points
                                                                                                      • Top five airlines account for more than eight in 10 passengers
                                                                                                        • Figure 21: Passenger counts of leading U.S. carriers, 2010 and 2011
                                                                                                      • Operating revenues up—top five airlines account for about 80%
                                                                                                        • Figure 22: Operating revenues of leading U.S. carriers, 2010 and 2011
                                                                                                      • Leading companies’ key issues relate to fuel prices, labor agreements
                                                                                                        • Delta Air Lines
                                                                                                          • United Airlines
                                                                                                            • American Airlines
                                                                                                              • US Airways
                                                                                                                • Southwest Airlines
                                                                                                                  • Allegiant Air
                                                                                                                  • Innovations and Innovators

                                                                                                                    • In the air
                                                                                                                      • Airlines offer a range of new service classes for all types of travelers
                                                                                                                        • Upgrading the passenger experience: living the dream on United Airlines
                                                                                                                          • Airbus develops a wider-seat concept for overweight passengers
                                                                                                                            • Virgin, Southwest, and Delta innovate in-flight entertainment
                                                                                                                              • On the ground
                                                                                                                                • Airlines upgrade airport lounges to drive loyalty
                                                                                                                                  • Delta experiments with a streamlined boarding process
                                                                                                                                    • Commercial and government programs speed up the security process
                                                                                                                                      • Venturing into the world of virtual customer service representatives
                                                                                                                                        • Behind the scenes
                                                                                                                                          • Airlines seek to slash operating costs
                                                                                                                                            • New navigation technology and aircraft for increased flying efficiency
                                                                                                                                              • Airlines upgrade aging aircraft to boost operating efficiency
                                                                                                                                                • Delta and US Airways take different approaches to managing fuel costs
                                                                                                                                                  • Delta buys oil refinery to save costs, earn profits
                                                                                                                                                    • US Airways bucks hedging, pays market value, sees benefit in current environment
                                                                                                                                                    • Marketing Strategies and Brand Positioning

                                                                                                                                                        • Delta Air Lines
                                                                                                                                                            • Figure 23: Delta Air Lines, “Taming Air Travel” TV ad, 2012
                                                                                                                                                          • United Airlines
                                                                                                                                                              • Figure 24: United Airlines, “Game is Set” TV ad, 2012
                                                                                                                                                            • American Airlines
                                                                                                                                                              • Figure 25: American Airlines, “Saving Your Sanity” TV ad, 2012
                                                                                                                                                            • Southwest Airlines
                                                                                                                                                              • Figure 26: Southwest Airlines, “Lowest Fares” TV ad, 2012
                                                                                                                                                              • Figure 27: Southwest Airlines, “Below the Belt” TV ad, 2012
                                                                                                                                                            • JetBlue Airways
                                                                                                                                                              • Figure 28: JetBlue Airways, “You Above All” TV ad, 2012
                                                                                                                                                            • Alaska Airlines
                                                                                                                                                              • Hawaiian Airlines
                                                                                                                                                                • Figure 29: Hawaiian Airlines, “Hawaii Flies With Us” TV ad, 2011
                                                                                                                                                              • Frontier Airlines
                                                                                                                                                                • Figure 30: Frontier Airlines, “The Next Animal” TV ad, 2012
                                                                                                                                                              • Virgin America
                                                                                                                                                                • Figure 31: Virgin America, “In the Moment” TV ad, 2012
                                                                                                                                                              • Spirit Airlines
                                                                                                                                                                • Figure 32: Spirit Airlines, “Low Cost Out” TV ad, 2012
                                                                                                                                                              • Allegiant Air
                                                                                                                                                                • Figure 33: Allegiant Air, “Best Deals” TV ad, 2012
                                                                                                                                                              • Top carriers most engaged in direct marketing
                                                                                                                                                                • Figure 34: Direct marketing pieces by leading U.S. carriers, by type, July 2011-June 2012
                                                                                                                                                                • Figure 35: Leading U.S. carriers’ direct marketing activity, by share of type, July 2011-June 2012
                                                                                                                                                            • Airline Brand Perception and Differentiation

                                                                                                                                                              • Overview of the brand landscape
                                                                                                                                                                • Perception of most airline brands indicates low appeal
                                                                                                                                                                    • Figure 36: Select brand qualities of each major U.S. airline, Part 1, April 2012
                                                                                                                                                                    • Figure 37: Select brand qualities of each major U.S. airline, Part 2, April 2012
                                                                                                                                                                  • Brand perception map
                                                                                                                                                                    • Methodology
                                                                                                                                                                      • Legacy carriers are lumped together
                                                                                                                                                                          • Figure 38: Airline brand perception map, April 2012
                                                                                                                                                                        • “Big name” airlines preferred, but experience can be a blur
                                                                                                                                                                          • Figure 39: Attitudes toward airline brand differentiation, by household income, April 2012
                                                                                                                                                                      • Airline Use in the Past 12 Months

                                                                                                                                                                        • Key points
                                                                                                                                                                          • Personal plane travel more common; business travelers take more trips
                                                                                                                                                                            • Figure 40: Past 12-month airline use, personal vs. business travel, April 2012
                                                                                                                                                                          • Household income is key determinant in airline use
                                                                                                                                                                            • Figure 41: Past 12-month airline use and number of trips, by gender, age, and household income, April 2012
                                                                                                                                                                        • Airline Brands Used

                                                                                                                                                                          • Key points
                                                                                                                                                                            • Legacy air carriers are (generally) the most popular
                                                                                                                                                                              • Figure 42: Airline brands used and brand familiarity, April 2012
                                                                                                                                                                            • Flyers look to legacy carriers for personal and business travel
                                                                                                                                                                              • Southwest offers competition for business travelers
                                                                                                                                                                                • Figure 43: Airline brands used most frequently, personal vs. business travel, April 2012
                                                                                                                                                                              • Most affluent fly legacy; Southwest Airlines is most popular choice
                                                                                                                                                                                • Figure 44: Airline brands used most frequently, by household income, April 2012
                                                                                                                                                                            • Factors Impacting Airline Selection

                                                                                                                                                                              • Key points
                                                                                                                                                                                • Price is paramount; scheduling important for business travelers
                                                                                                                                                                                  • Figure 45: Most important factors in airline selection, personal vs. business travel, April 2012
                                                                                                                                                                                • Youngest flyers most price sensitive but also consider service quality
                                                                                                                                                                                    • Figure 46: Most important factors in airline selection, by age, April 2012
                                                                                                                                                                                  • Convenience and comfort more important to affluents
                                                                                                                                                                                    • Figure 47: Most important factors in airline selection, by household income, April 2012
                                                                                                                                                                                • Reasons to Avoid an Airline

                                                                                                                                                                                  • Key points
                                                                                                                                                                                    • Safety issues a deterrent, bad experiences also keep passengers away
                                                                                                                                                                                      • Safety first! Recent news reports of safety problems are top reason to avoid an airline
                                                                                                                                                                                        • Experience is everything, so it had better be good
                                                                                                                                                                                          • In need of upgrades—not necessarily “new” aircraft
                                                                                                                                                                                            • Figure 48: Reasons to avoid an airline when flying for personal reasons, April 2012
                                                                                                                                                                                          • Affluent flyers will take their business elsewhere
                                                                                                                                                                                            • Figure 49: Reasons to avoid an airline when flying for personal reasons, by household income, April 2012
                                                                                                                                                                                        • Airline Reservations

                                                                                                                                                                                          • Key points
                                                                                                                                                                                            • Self-booking online is the most common method of reserving tickets
                                                                                                                                                                                              • Figure 50: How reservations for most recent flight were made, personal vs. business travel, April 2012
                                                                                                                                                                                            • Even the oldest flyers are booking online
                                                                                                                                                                                              • Figure 51: How reservations for most recent flight were made, by age, April 2012
                                                                                                                                                                                            • Flyers’ use of travel agents pales in comparison to online booking
                                                                                                                                                                                              • Figure 52: Booked travel online/used a travel agent in the last 12 months, by airlines used in the last 12 months, October 2010-November 2011
                                                                                                                                                                                              • Figure 53: Used a travel agent in the last 12 months, by household income, October 2010-November 2011
                                                                                                                                                                                          • Airline Tickets Online Search Methods

                                                                                                                                                                                            • Key points
                                                                                                                                                                                              • Online travel agencies vie with airline websites as the starting point
                                                                                                                                                                                                  • Figure 54: Initial online airline ticket search method, by age, April 2012
                                                                                                                                                                                                • Online airfare searches often result in visits to multiple sites
                                                                                                                                                                                                  • Figure 55: Other online airline ticket search methods, by age, April 2012
                                                                                                                                                                                              • Attitudes Toward Airlines and Airline Travel

                                                                                                                                                                                                • Key points
                                                                                                                                                                                                  • Most flyers are familiar with the airport routine, but think it’s a hassle
                                                                                                                                                                                                    • Figure 56: Attitudes toward airline travel and airline employees, by age, April 2012
                                                                                                                                                                                                  • Most affluent flyers least likely to feel airline employees are knowledgeable/helpful
                                                                                                                                                                                                    • Figure 57: Attitudes toward airline travel and airline employees, by household income, April 2012
                                                                                                                                                                                                  • In-flight connectivity more important to younger flyers
                                                                                                                                                                                                    • Figure 58: Attitudes toward in-flight internet connectivity, by age, April 2012
                                                                                                                                                                                                • Impact of Race and Hispanic Origin

                                                                                                                                                                                                  • Key points
                                                                                                                                                                                                    • Airline use in the past 12 months: Asians most likely to fly
                                                                                                                                                                                                      • Figure 59: Past 12-month airline use and number of trips, by race/Hispanic origin, April 2012
                                                                                                                                                                                                    • Airline brand perceptions and differentiation: blacks most discerning
                                                                                                                                                                                                      • Figure 60: Attitudes toward airline brand differentiation, by race/Hispanic origin, April 2012
                                                                                                                                                                                                    • Blacks and Hispanics should be targeted for frequent flyer programs
                                                                                                                                                                                                      • Figure 61: Frequent flyer program membership, by race/Hispanic origin, October 2010- November 2011
                                                                                                                                                                                                    • Airline brands used: use trends similarly overall, Asians most diverse
                                                                                                                                                                                                      • Figure 62: Airline brand usage, by race/Hispanic origin, April 2012
                                                                                                                                                                                                      • Figure 63: Airline brands used most frequently, by race/Hispanic origin, April 2012
                                                                                                                                                                                                    • Factors impacting airline selection: price is most important
                                                                                                                                                                                                      • Figure 64: Most important factors in airline selection, by race/Hispanic origin, April 2012
                                                                                                                                                                                                    • Reasons to avoid an airline: blacks most sensitive to safety issues
                                                                                                                                                                                                      • Figure 65: Reasons to avoid an airline when flying for personal reasons, by race/Hispanic origin, April 2012
                                                                                                                                                                                                    • Attitudes toward airlines and airline travel
                                                                                                                                                                                                      • Figure 66: Attitudes toward airline travel, airline employees, and in-flight internet connectivity, by race/Hispanic origin, April 2012
                                                                                                                                                                                                  • Custom Consumer Groups: Flying Frequency

                                                                                                                                                                                                    • Key points
                                                                                                                                                                                                      • Frequent flyer profile confirms general use trends
                                                                                                                                                                                                        • Figure 67: Key demographics, by flying frequency groups, April 2012
                                                                                                                                                                                                      • Heavy and Ultra flyers’ greater frequency of air travel is driven by business needs
                                                                                                                                                                                                        • Figure 68: Personal vs. business air travel in the past 12 months, by flying frequency groups, April 2012
                                                                                                                                                                                                      • Airline brand perception and differentiation
                                                                                                                                                                                                        • Figure 69: Attitudes toward airline brand differentiation, by flying frequency, April 2012
                                                                                                                                                                                                      • Airline usage
                                                                                                                                                                                                        • Figure 70: Airline brand usage, by flying frequency, April 2012
                                                                                                                                                                                                        • Figure 71: Airline brands used most frequently, by flying frequency, April 2012
                                                                                                                                                                                                      • Factors impacting airline selection
                                                                                                                                                                                                        • Figure 72: Most important factors in airline selection by flying frequency, April 2012
                                                                                                                                                                                                      • Reasons to avoid an airline
                                                                                                                                                                                                          • Figure 73: Reasons to avoid an airline when flying for personal reasons, by flying frequency, April 2012
                                                                                                                                                                                                        • Airline ticket reservations and online search methods
                                                                                                                                                                                                            • Figure 74: How reservations for most recent flight were made, by flying frequency, April 2012
                                                                                                                                                                                                            • Figure 75: Initial online airline ticket search method, by flying frequency, April 2012
                                                                                                                                                                                                            • Figure 76: Other online airline ticket search methods, by flying frequency, April 2012
                                                                                                                                                                                                          • Attitudes toward airlines and airline travel
                                                                                                                                                                                                              • Figure 77: Attitudes toward airline travel, airline employees, and in-flight internet connectivity, by flying frequency, April 2012
                                                                                                                                                                                                          • Appendix: Other Useful Consumer Tables

                                                                                                                                                                                                            • Airline use in the past 12 months
                                                                                                                                                                                                              • Figure 78: Past 12-month airline use and number of trips, by region, April 2012
                                                                                                                                                                                                              • Figure 79: Past 12-month airline use and number of trips, by gender and marital status, April 2012
                                                                                                                                                                                                            • Airline usage
                                                                                                                                                                                                              • Figure 80: Airline brand usage, by household income, April 2012
                                                                                                                                                                                                              • Figure 81: Airline brand usage, by presence and number of children in household, April 2012
                                                                                                                                                                                                              • Figure 82: Airline brand usage, by age, April 2012
                                                                                                                                                                                                              • Figure 83: Airline brands used most frequently, by age, April 2012
                                                                                                                                                                                                            • Factors impacting airline selection
                                                                                                                                                                                                              • Figure 84: Least important factors in airline selection, personal vs. business, April 2012
                                                                                                                                                                                                              • Figure 85: Most important factors in airline selection, by presence and number of children in household, April 2012
                                                                                                                                                                                                              • Figure 86: Most important factors in airline selection, by airline used most frequently, April 2012
                                                                                                                                                                                                              • Figure 87: Most important factors in airline selection, big four legacy vs. other carriers, April 2012
                                                                                                                                                                                                            • Reasons to avoid an airline
                                                                                                                                                                                                              • Figure 88: Reasons to avoid an airline when flying for personal reasons, by age, April 2012
                                                                                                                                                                                                              • Figure 89: Reasons to avoid an airline when flying for personal reasons, by presence and number of children in household, April 2012
                                                                                                                                                                                                            • Attitudes toward airlines and airline travel
                                                                                                                                                                                                              • Figure 90: Attitudes toward in-flight internet connectivity, by household income, April 2012
                                                                                                                                                                                                          • Appendix: Trade Associations

                                                                                                                                                                                                            Companies Covered

                                                                                                                                                                                                            • AirTran Holdings Inc.
                                                                                                                                                                                                            • Alaska Air Group Inc.
                                                                                                                                                                                                            • Allegiant Travel Company
                                                                                                                                                                                                            • AMR Corporation (American Airlines)
                                                                                                                                                                                                            • Continental Airlines Inc.
                                                                                                                                                                                                            • Delta Air Lines, Inc.
                                                                                                                                                                                                            • Frontier Airlines Inc.
                                                                                                                                                                                                            • Hawaiian Holdings Inc.
                                                                                                                                                                                                            • JetBlue Airways Corporation
                                                                                                                                                                                                            • Southwest Airlines Co.
                                                                                                                                                                                                            • Spirit Airlines Inc.
                                                                                                                                                                                                            • UAL Corporation (United Airlines)
                                                                                                                                                                                                            • US Airways Group Inc.
                                                                                                                                                                                                            • USA Today

                                                                                                                                                                                                            Airlines - US - August 2012

                                                                                                                                                                                                            £3,174.67 (Excl.Tax)