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Airlines - US - July 2016

"The US airline industry is enjoying a nearly unprecedented stretch of success, with 2015 profits nearly triple those of 2014. Low fuel prices and relatively strong demand indicate that 2016 will show similar results. The share of Americans taking to the skies has remained unchanged for the past five years, even as passenger counts hit new record highs. This means that a smaller, select group of travelers are flying with greater frequency. Despite industry consolidation, competition for these frequent flyers continues to heat up as major carriers develop new services and restructure loyalty programs to benefit these top-tier flyers."

- Fiona O'Donnell, Director – Multicultural, Lifestyles, Travel and Leisure

This report will cover the following areas:

  • Lowest price wins – Passengers making their selection based on cost
  • Where's the loyalty?
  • The hassles of flying may outweigh the convenience
  • Does customer service even matter?

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Table of contents

  1. Overview

    • What you need to know
      • Definition
      • Executive Summary

          • The issues
            • Lowest price wins – Passengers making their selection based on cost
              • Figure 1: Factors impacting airline selection, March 2016
            • Where’s the loyalty?
              • Figure 2: Attitudes toward loyalty and flying behaviors, March 2016
            • The hassles of flying may outweigh the convenience
              • Figure 3: Agreement that “flying is … a hassle,” by flyer segments, March 2016
            • Does customer service even matter?
              • The opportunities
                • Potential to explore new techniques to drive direct bookings
                  • Figure 4: Airline travel booking methods, March 2016
                • Customer segmentation and understanding the target
                  • Figure 5: Flyer segments, March 2016
                • Offer add-ons, shopping opportunities to business travelers and most frequent flyers
                  • Figure 6: Typically purchases additional items, by reasons for travel and flyer segments, March 2016
                • What it means
                • The Market – What You Need to Know

                  • US airline industry consistently strong (for a change), forecast to grow
                    • Airfares account for vast majority of airline revenues
                      • Experience-oriented Millennials to drive market
                        • Current economic environment favorable for future growth
                        • Market Size and Forecast

                          • Stable economy, record passengers, low fuel costs drive airline growth
                            • Figure 7: US airline operating revenue and fanchart forecast, at current prices, 2011-21
                            • Figure 8: US airline operating revenue and forecast, at current prices, 2011-21
                        • Market Breakdown

                          • Airfares account for three quarters operating revenue
                            • Figure 9: US airline operating revenue, by segment, at current prices, 2014 and 2016
                          • Airfare growth sets the industry pace, slower increases through 2021
                            • Figure 10: US airline airfare revenues and fanchart forecast, at current prices, 2011-21
                          • Revenues for baggage fees, reservation change fees forecast for take-off
                            • Bag check fees soar on the wings of grudging acceptance
                                • Figure 11: US airline baggage fee revenues and fanchart forecast, at current prices, 2011-21
                              • Reservation change fees a healthy source of revenue
                                • Figure 12: US airline reservation change fee revenues and fanchart forecast, at current prices, 2011-21
                              • Other revenues’ growth to accelerate 2016-21
                                • Figure 13: US airline other revenue and fanchart forecast, at current prices, 2011-21
                            • Market Perspective

                              • Millennial wanderlust and “need” to travel boosts airline performance
                                • Cost-driven travelers give little wiggle room to airlines to increase fares
                                  • Long security wait times, cheap gas may prompt travelers to hit the road
                                    • Slower growth in business travel in 2016
                                    • Market Factors

                                      • Domestic economic factors point to positive airline industry growth
                                          • Figure 14: GDP change from previous period, Q1 2007-Q1 2016
                                          • Figure 15: Disposable Personal Income change from previous period, January 2007-May 2016
                                          • Figure 16: Unemployment and underemployment, January 2007-May 2016
                                          • Figure 17: Consumer confidence and unemployment, 2000-May 2016
                                          • Figure 18: US gasoline and diesel average retail prices, January 2007-April 2016
                                        • Record high load factors point to future demand for airline travel
                                          • Figure 19: Load factor on all US scheduled airlines (domestic & international), December 2010-December 2015
                                          • Figure 20: Passengers on all scheduled US-based flights (domestic & international), 2003-15
                                        • Average domestic airfares cheapest since 2010
                                          • figure 21: US average domestic fares, 3rd quarter 1995-2015
                                      • Key Players – What You Need to Know

                                        • Era of consolidation puts pricing power in the hands of few
                                          • But competition is fierce and airlines appear in a “race to the bottom”
                                            • The good news: Carriers are reinvesting record profits in the experience
                                              • The bad news: Record profits from record passengers = longer waits
                                                • What’s coming: More automation, need to optimize mobile
                                                  • Airlines sending bulk of email communication on Tuesdays
                                                  • Airline Overview

                                                      • Top 10 US carriers account for more than 80% of passengers
                                                        • Figure 22: Top 10 US carriers by passenger enplanement, 2103 and 2015
                                                      • Legacy airlines post strong performance from 2014-15
                                                        • Figure 23: Net income of top 10 US carriers, 2013-15
                                                      • Email marketing strategies
                                                        • Major players issue bulk of email on Tuesdays and ignore the weekends
                                                          • Figure 24: Share of projected email volume per day of the week, by airline, January 1, 2016-June 16, 2016
                                                        • Top promotional emails focus on savings, limited-time offers
                                                          • Figure 25: Delta Air Lines, emails – “Don’t Miss Out,” 1st half 2016
                                                          • Figure 26: Alaska Airlines email – “Something new is in the air”, 1st half 2016
                                                        • Legacy carriers average the highest email read rates, overall
                                                          • Figure 27: Read rates, by airline, January 1, 2016-June 16, 2016
                                                        • Southwest, United, and American are top loyalty emailers
                                                          • Figure 28: Loyalty email share of voice, Q1 2014-Q1 2016
                                                      • What’s Working?

                                                        • Airlines getting the final sale
                                                          • Passenger DIY helps to reduce costs, improve satisfaction
                                                            • Profits soar on low fuel prices and ancillary services
                                                              • Reinvesting in the product (and passenger experience)
                                                                • WiFi
                                                                    • Figure 29: Introducing Fly-Fi, December 2013
                                                                  • Entertainment
                                                                    • In-seat power
                                                                      • TSA PreCheck: Working for travelers, not so much for the TSA
                                                                        • Southwest Airlines – It’s been “what’s working” for 40+ years
                                                                        • What’s Struggling?

                                                                          • Brand loyalty harder to achieve among price-focused flyers
                                                                            • #IHateTheWait: long security lines spark frustration
                                                                              • Mobile used to search … not so much to book
                                                                              • What’s Next?

                                                                                • More low-cost competition from abroad on the horizon
                                                                                  • Is the age of mergers over? Is there room for new entries on a smaller scale?
                                                                                    • How long can the industry be profitable?
                                                                                      • Jet fuel prices low now, but appear to be on the rise
                                                                                        • Figure 30: US Gulf Coast kerosene-type jet fuel spot price FOB, US$ per gallon, May 2006-May 2016
                                                                                      • Back to “basics” or sub-economy
                                                                                        • Cuba opens up – sort of
                                                                                          • “Brexit” to impact US international carriers
                                                                                          • The Consumer – What You Need to Know

                                                                                            • About one quarter of Americans fly each year
                                                                                              • Air tickets are purchased online, usually with the carrier
                                                                                                • Flyers choose carriers for lower price, convenient schedules, ease
                                                                                                  • Legacy and low-cost carriers rate highest
                                                                                                    • Loyalty programs: does membership really have its privileges?
                                                                                                      • Most people (especially Ultra flyers) like flying even though it’s a hassle
                                                                                                      • Past 12-Month Air Travel

                                                                                                          • Proportion of US flyers stable, most flying for personal reasons
                                                                                                            • Figure 31: Plane travel [domestic] in the last 12 months, by all and domestic travelers, February 2010-March 2016
                                                                                                            • Figure 32: Reasons for past 12-month air travel, March 2016
                                                                                                          • About three in 10 are frequent flyers; under 45s, affluent are over represented
                                                                                                            • Figure 33: Flyer segments, by number of flights in the past 12 months, March 2016
                                                                                                            • Figure 34: High-frequency and Ultra flyers, by gender and age and by household income, March 2016
                                                                                                          • English-speaking Hispanics among most frequent flyers
                                                                                                            • Figure 35: Frequent flyer segments, by race/Hispanic origin, March 2016
                                                                                                        • Travel Booking Method

                                                                                                            • Air tickets commonly purchased online, direct through supplier
                                                                                                                • Figure 36: Airline travel booking methods, March 2016
                                                                                                              • Online direct with airline most common among frequent flyers
                                                                                                                • Figure 37: Airline ticket travel booking methods – Direct and third party, by flyer segment, March 2016
                                                                                                              • Across generations, online booking wins
                                                                                                                • Figure 38: Airline ticket travel booking methods – Nets, by generation, March 2016
                                                                                                                • Figure 39: Airline ticket travel booking methods – Direct and third party, by generation, March 2016
                                                                                                              • One third of Ultra flyers are interested in airline subscription services
                                                                                                                • Figure 40: Interested in airline subscription service, by reasons for travel and flyer segments, March 2016
                                                                                                            • Factors Impacting Airline Selection

                                                                                                                • Price, schedule, baggage fees, ease are top considerations
                                                                                                                  • Operational factors are key
                                                                                                                    • Customer service and “soft” amenities can help to differentiate carriers
                                                                                                                      • Figure 41: Factors impacting airline selection, March 2016
                                                                                                                    • TURF analysis – Airlines
                                                                                                                      • Methodology
                                                                                                                        • Beyond lower price and schedule, other factors add only incremental reach
                                                                                                                          • Figure 42: TURF Analysis – Factors impacting airline selection, March 2016
                                                                                                                        • Low-frequency flyers look at price; high-frequency consider schedule
                                                                                                                          • Figure 43: Top three factors impacting airline selection, by flyer segments, March 2016
                                                                                                                        • Baby Boomers have great expectations, Millennials – not so much
                                                                                                                          • Figure 44: Top three factors impacting airline selection, by generation, March 2016
                                                                                                                        • Service can make it (or break it) for Ultra flyers
                                                                                                                          • Figure 45: Service factors impacting airline selection, by flyer segments, March 2016
                                                                                                                        • Ultra flyers consider in-flight WiFi and streaming
                                                                                                                            • Figure 46: In-flight factors impacting airline selection, by flyer segments, March 2016
                                                                                                                        • Perceptions of US Airlines

                                                                                                                            • The “Big 3” legacy carriers and Southwest rate highest
                                                                                                                              • Figure 47: US airlines' ratings (1-5 stars), March 2016
                                                                                                                            • Higher-rated carriers garner greater positive sentiment
                                                                                                                              • Figure 48: Perceptions of US airlines, by airline, March 2016
                                                                                                                            • Southwest leads on all but “modern” and “worth paying more for”
                                                                                                                              • Attributes that define the industry
                                                                                                                                  • Figure 49: Perceptions of US airlines, by airline category – Including none, March 2016
                                                                                                                                • What makes a good airline?
                                                                                                                                    • Figure 50: Words associated with a “good” US airline, March 2016
                                                                                                                                  • Familiarity does NOT breed contempt
                                                                                                                                    • Figure 51: US airlines ratings (4-5 star rating), by Light and Ultra flyers, March 2016
                                                                                                                                  • Baby Boomers can’t get no satisfaction
                                                                                                                                    • Figure 52: US airlines ratings (4-5 star rating), by Millennials and Baby Boomers, March 2016
                                                                                                                                • Passenger Booking and Flying Behaviors

                                                                                                                                    • Advance booking not seen as a priority for half of flyers
                                                                                                                                        • Figure 53: Passenger booking and flying behaviors, March 2016
                                                                                                                                      • Generation, income, flying frequency impact booking, flying behaviors
                                                                                                                                        • Figure 54: Passenger booking behaviors, by key demographics, March 2016
                                                                                                                                      • Loyalty is up for grabs – is there even such a thing?
                                                                                                                                        • Figure 55: Passenger flying behaviors, by key demographics, March 2016
                                                                                                                                      • Current booking and flying behaviors lend insight to future motivations
                                                                                                                                          • Figure 56: Passenger booking and flying behaviors, by booking and flying behaviors, March 2016
                                                                                                                                      • Passenger Purchasing Interests

                                                                                                                                          • Relatively low interest in buying while flying
                                                                                                                                            • Figure 57: Passenger purchasing interests, March 2016
                                                                                                                                          • Business and Ultra flyers more likely to purchase add-ons
                                                                                                                                            • Figure 58: Typically purchases additional items, by reasons for travel and flyer segments, March 2016
                                                                                                                                          • Parents of multiple children most interested in buying items for kids
                                                                                                                                            • Figure 59: Interested in purchasing items for kids, by presence, age, and number of children, March 2016
                                                                                                                                        • Attitudes toward the Flying Experience

                                                                                                                                            • Flying becoming more of a hassle, but most people still like it
                                                                                                                                                • Figure 60: Attitudes toward the flying experience, March 2016
                                                                                                                                              • Frequent flyers have a more positive attitude
                                                                                                                                                • Figure 61: Attitudes toward the flying experience – Any agree, by flyer segments, March 2016
                                                                                                                                              • Millennials like flying, feel that the experience has improved
                                                                                                                                                • Figure 62: Attitudes toward the flying experience – Any agree, by generation, March 2016
                                                                                                                                              • Hispanics are ready for take-off
                                                                                                                                                • Figure 63: Attitudes toward the flying experience – Any agree, by Hispanic origin, March 2016
                                                                                                                                            • Attitudes toward Technology

                                                                                                                                                • Mixed results, overall, for desiring in-flight connectivity
                                                                                                                                                    • Figure 64: Attitudes toward technology, March 2016
                                                                                                                                                  • Even the most frequent flyers are ambivalent toward in-flight WiFi
                                                                                                                                                    • Figure 65: Attitudes toward technology – Any agree, by flyer segments, March 2016
                                                                                                                                                  • Millennials want in-flight streaming, internet, to avoid airline personnel
                                                                                                                                                    • Figure 66: Attitudes toward technology – Any agree, by generation, March 2016
                                                                                                                                                  • Hispanics would like to stream entertainment in-flight
                                                                                                                                                    • Figure 67: Attitudes toward technology – Any agree, by Hispanic origin, March 2016
                                                                                                                                                • Attitudes toward Loyalty and Differentiation

                                                                                                                                                    • Majority feel that loyalty programs benefit only the most frequent flyers
                                                                                                                                                      • Figure 68: Attitudes toward loyalty and differentiation, March 2016
                                                                                                                                                    • Ultra flyers more skeptical of loyalty program value
                                                                                                                                                      • Figure 69: Attitudes toward loyalty and differentiation, by flyer segments, March 2016
                                                                                                                                                    • Millennials experiencing memory loss?
                                                                                                                                                      • Figure 70: Attitudes toward loyalty and differentiation, by generation, March 2016
                                                                                                                                                    • Overall enrollment in frequent flyer programs remains steady
                                                                                                                                                      • Loyalty members are doubling down
                                                                                                                                                        • Figure 71: Frequent flyer enrollment and airline programs, 2008-16
                                                                                                                                                    • Appendix – Data Sources and Abbreviations

                                                                                                                                                      • Data sources
                                                                                                                                                        • Sales data
                                                                                                                                                          • Fan chart forecast
                                                                                                                                                            • Consumer survey data
                                                                                                                                                              • Consumer qualitative research
                                                                                                                                                                • Direct marketing creative and email
                                                                                                                                                                  • Abbreviations and terms
                                                                                                                                                                    • Abbreviations
                                                                                                                                                                      • Terms
                                                                                                                                                                      • Appendix – Market

                                                                                                                                                                          • Figure 72: US airline operating revenue and forecast, at inflation-adjusted prices, 2011-21
                                                                                                                                                                          • Figure 73: US airline operating revenue and forecast, by segment, at current prices, 2011-21
                                                                                                                                                                          • Figure 74: US airline operating revenue, by segment, at current prices, 2014 and 2016
                                                                                                                                                                          • Figure 75: US airline airfare revenues and forecast, at current prices, 2011-21
                                                                                                                                                                          • Figure 76: US airline airfare revenues and forecast, at inflation-adjusted prices, 2011-21
                                                                                                                                                                          • Figure 77: US airline baggage fee revenues and forecast, at current prices, 2011-21
                                                                                                                                                                          • Figure 78: US airline baggage fee revenues and forecast, at inflation-adjusted prices, 2011-21
                                                                                                                                                                          • Figure 79: US airline reservation change fee revenues and forecast, at current prices, 2011-21
                                                                                                                                                                          • Figure 80: US airline reservation change fee revenues and forecast, at inflation-adjusted prices, 2011-21
                                                                                                                                                                          • Figure 81: US airline other revenue and forecast, at current prices, 2011-21
                                                                                                                                                                          • Figure 82: US airline other revenue and forecast, at inflation-adjusted prices, 2011-21
                                                                                                                                                                      • Appendix – Key Players

                                                                                                                                                                          • Figure 83: Net income of top 10 US carriers, 2010-15
                                                                                                                                                                      • Appendix – Consumer

                                                                                                                                                                          • Figure 84: Plane travel [domestic] in the last 12 months, by all and domestic travelers, February 2010-March 2016
                                                                                                                                                                          • Figure 85: Table – TURF Analysis – Factors impacting airline selection, March 2016

                                                                                                                                                                      Companies Covered

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                                                                                                                                                                      Airlines - US - July 2016

                                                                                                                                                                      £3,174.67 (Excl.Tax)