AIRLINE INDUSTRY MARKET CHANGE

AIRLINE INDUSTRY MARKET CHANGE

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Airline Industry Market Change

The international airline industry gives coverage to almost all parts of the world and plays a vital role in the creation of the global village and growth of the global economy. The airline industry is a very strong economic force that has seen intense competition and led to several changes in the market over the last three decades. It has had a major impact on related markets, such as manufacturing of aircrafts and tourism. There are few other industries that can match the level of attention that the airline industry gets, including attention from legislators, policy makers, media, together with the general public.

Over time, the airline market has been influenced by major technological advancements. The first major technological innovation that affected the industry was the innovation of jet airplanes, which made their debut in the commercial airline market. This was followed by the introduction of jumbo jets. Initially, there were intense regulations governing the airline industry, something that meant the market was determined by technological advancements and government policies, rather than profitability and competition. However, the airline market took a major turn with deregulation. Industry players started considering cost effectiveness, profitability in operations, and developing competitive behaviors in management. The United States led the way for deregulation of the airline industry, an aspect that liberalized the airline market. The changes brought a revolution in both local and international markets of the airline industry, something that has been a key factor in the evolution of competition in the airline market1.Currently, there are more than 2000 airlines that operate more than 23,000 aircrafts all over the world, and offer services in more than 3700 airports. As of 2006, there were more than 28 million scheduled flights that were covered by these airlines, transporting more than 2 million passengers. Over the last three decades, there has been a five percent annual growth in the airline industry. The substantial annual variations are a result of changes in the economies and differences in the economic grown from country to country. The growth of most airline industries in most countries has been more than that of the GDP. It is projected that, although there could be a conservative economic growth over the next 10 to 15 decades, the annual growth of between 4-5 percent per year will be maintained in the airline industry2.

The United States is the largest market in the world. There are around 100 certified passenger airlines that operate more than of 11 million flights per year, transporting more than a third of the air traffic in the world with more than 745 million passengers, according to statistics for the year 2006. In this period, airlines made reports of revenues exceeding 160 billion dollars, with more than 545,000 full-time employees, and an excess of 8,000 aircrafts that made more than 31,000 flights per day. The industry has had major effects on the economy, as a result of its direct effects on employment, profitability by the companies, and net worth. The industry also affects other industries, including the airline manufacturers, airports, tourism, and virtually all industries by facilitating transportation. To the GDP of the United States, it is estimated that the commercial airline market contributes to more than 8 percent3.

The airline industry is very important, and the repercussions it has in the aircraft manufacturing industry have made the airline profits very volatile. Furthermore, the airline industry highly depends on economic conditions, something that is a major concern for the airline market as well as the aircraft manufacturing industry. Since the deregulation of the airline industry, the market concerns have been growing. Initially, stable profits together with assistance from the government influenced the market, but this has been overtaken by the exception in most international airlines. Over the last fifteen years, the airline industry has experienced mixed market trends that have been caused by the many global crises that have faced the world coupled with periods of economic boom.One of the worst times was the period between 2000 and 2005, where the market was so poor, and the industry faced cumulative losses of more than 40 billion dollars4.

The deregulation of the airline industry is among the major influences of the airline market in the world. The experience after deregulation in the United States was admired by all countries, especially due to the benefits it brought to the air travelers. One of the major results of deregulation is a tremendous growth in air travel frequencies, but with a tremendous reduction in air travel rates, which are less than half of those experienced before deregulation5. The market was characterized by an increase in new low-cost entrants that changed the pricing as well as the expectations of the public in relation to low-cost air travel6. One major concern of deregulation was that market competition pressures could lead to a reduction in maintenance standards. However, this could not have been the case, considering it has not been backed by statistical evidence.

Although it was a good experience for passages, the producers in the market had a rough time. There was increased pressure to cut costs, profit volatility increased, the number of mergers increased, and more companies became bankrupt. These factors meant that the companies had to reduce wages, lay off workers, and there was a reduction in the power of airline unions. Equally, not all airline travelers enjoyed the benefits of deregulation. Those mostly affected were residents of small towns, where patterns in air travel, especially for domestic travel. Small regional airlines came up, replacing the jet services that were subsidized. Although there was a general reduction in prices for air tickets in the American air travel market, there was a widening disparity between the cheapest and most expensive rates, with business travelers who opted for the expensive rates. Huge connecting hubs by the major airlinesdeveloped in the United States, which increased concerns about the power to price, by the airlines that had dominated the markets in these hub cities7.

Deregulation brought liberalization and intensified competition in the airline market. Over the last twenty years, most airlines across the world have been seeking to manage their costs while improving productivity. Moreover, the emerging airlines have been forced to face up to the competitive challenge in the market. This has led to a quest to take advantage of economies of scale, something that has increased production at low costs to both the established and emerging airlines. One strategy that has been used in the past to increase the economies of scale is mergers and acquisitions8.With increasing concerns of several governments on the consolidation of the industry, it is expected that more mergers and acquisitions could be experienced in the future. There have been responses from the airlines, with many of them seeking to increase economies of scale through partnerships and international alliances that are designed such that standardized products are offered to depict unity in the marketing image among the consumers.

In the world, especially in the United States, the airline market has been greatly affected by the global financial crises that intensified in the new century.9In 2001, there was a global economic downturn, which was worsened by the increasing global terrorism threats. In the United States, the airlines accumulated losses of more than 40 billion dollars for the first five years of the century. However, this took an upward shift with an accumulated profit of 3 billion dollars in 2006. Since then, the profits are increasing though at a steady rate. The terrorist activities have affected the airline industry to a great extent. Many people have lost their jobs, airlines have had to cut off capacity, and there has been a decline in passenger traffic due to security concerns.10 In some regions across the world, the airspace is not safe, and many airlines have been forced to discontinue flights through these areas, especially the eastern parts of Europe, and some parts of Africa. Other industries, such as tourism, have also been affected by terrorism, which has reduced the number of passengers. Fuel and labor prices have also been on the rise. Many airlines have also been faced with deteriorating labor-management relations and constraints in the aviation industry that resulted to increased congestion and delays in flights. These aspects increased customer dissatisfaction with many citing poor delivery of services, which has created perceptions about some airlines in the market. Actually, the terrorist activities have been a cause of reprieve to some challenges facing the industry, in recent times. For instance, poor infrastructure has been shielded from blame by reduced pressure on the available infrastructure through the reduction in number of flights that resulted to fear of terrorism. The financial future of most airlines has been shielded by the massive layoffs and a reduction instance by airline trade unions. Furthermore, passengers have lowered their expectations from the airline in exchange for security.11

There have been major shifts in the behavior of passengers in the market, especially those travelling for business trips, which has had an impact on the ability of these airlines to generate enough revenues that would cover the costs incurred in operations. Due to the economic downturn, the airline market experienced a reduction in number of business and leisure travelers. The increasing security concerns also increased the hassle factor that means the uncertainty about their processing times among the passengers. There was also a reduction in budgets to be used for travel, which, coupled with a reduction in quality of services to passengers, led to a rise of substitutes to traveling, such as video conferencing. However, with the strengthening of the global economy, many people travelled for leisure purposes, but business travelling could not get to the heights of the past, because new cultures on the use of alternatives to travelling had been established12.

In different countries, traditional network airlines have been performing dismally, due to the unwillingness of business travelers to pay the higher traveling rates, coupled with an increase in number of low-cost traveling options. Since deregulation, low-cost carriers have been registering a steady growth, although they control a small amount of the air travel market13. They have grown from less than seven percent in the in 1991 to the current 25 percent in the United States. Although the network airlines have reported major revenue problems since the new decade, it was clear that they had internal cost and productivity issues, as compared to the low-cost carriers, who were their major challenges. Low-cost carriers operate on a basis of point to point, which have reduced ground times while the network airlines use hub and spoke networks. With a short ground time, the aircraft is utilized to the maximum. For instance, an average low-cost aircraft can operate up to 14 hours every day while the network airlines can manage up to 7 hours in a day. This means that the low-cost aircraft is utilized at a more optimal level than a network airline.

With increasing rate of bankruptcy by the legacy carriers, those that survived decided to come up with a bankruptcy protection plan. The plan involved downsizing, reduction in operating costs, and improvements in productivity. However, during this period, the low-cost carriers took advantage of this situation. They expanded their networks, entered into new markets, and increased number of flights with low prices. The low-cost carriers also experienced with similar challenges that other companies had experienced. The high fuel prices that were experienced up to 2012 worsened the situation14.

In summary, improvements in production and costs of production have been a major contributor towards competition in the airline market. Both legacy and low-cost carriers have used different tactics to counter increasing costs and increase productivitybut have realized similar results. Passage carriers have had several challenges, ranging from security threats, increasing fuel prices, and reduced passenger traffic, where many have fallen off, although others have come out strong. The two types of carriers, legacy, and low-cost carriers have experienced challenges at different times, for instance, between 2006 and 2013, the legacy airlines had positive growth, while low-cost carriers experienced challenges. Before 2006, low-cost carriers experienced a boom, while legacy carriers experienced major problems, with some becoming bankrupt. Although at first the restructuring initiatives taken by the legacy airlines seemed to be advantageous to the low-cost carriers and unrewarding to the legacy carriers, these efforts are now bearing fruits15.

The airline market is currently restructuring something that could have a bigger impact on the industry than that experienced after deregulation. However, several decades after deregulation, the market remains fragile, facing different periods of success and failure in equal measures. There is a competitive pressure from the upcoming low-cost carriers to the legacy carriers and increasing reduction in consumer confidence with the air transport system have led to a decline in travel rates and significantly impacted the revenues to these airlines.

Bibliography

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“Global Airlines Industry Profile.” Airlines Industry Profile: Global 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

Drocton, Mathew. “Searching For The Sweet Spot: An Analysis Of The American-Us Airways Merger.” Case Western Reserve Law Review 65, no. 2 (Winter2014 2014): 487-504. OmniFile Full Text Select (H.W. Wilson), EBSCOhost (accessed May 22, 2015).

Fuller, E. ‘Impact Of The World’s Travel/Tourism Industry Adds Up To More Than A Walk On The Beach’. Forbes. Last modified 2013. Accessed May 23, 2015. http://www.forbes.com/sites/edfuller/2013/12/03/impact-of-the-worlds-traveltourism-industry-adds-up-to-more-than-a-walk-on-the-beach/

Hepher, Tim, and Robert Evans. ‘Airlines Brace For Heavy Europe Crisis Impact’. Reuters. Last modified 2011. Accessed May 23, 2015. http://www.reuters.com/article/2011/12/07/us-airlines-iata-idUSTRE7B616F20111207.

Hernandez, Manuel A.1, and Steven Wiggins. “Nonlinear Pricing Strategies And Competitive Conditions In The Airline Industry.” Economic Inquiry 52, no. 2 (April 2014): 539-561. OmniFile Full Text Select (H.W. Wilson), EBSCOhost (accessed May 22, 2015).

Mertens, Daniel P., and Timothy M. Vowles. 2012. “Southwest Effect” – Decisions and Effects of Low Cost Carriers.” Journal Of Behavioral & Applied Management14, no. 1: 53-69. Academic Search Premier, EBSCOhost (accessed May 22, 2015).

1. 2014. “Global Airlines Industry Profile.” Airlines Industry Profile: Global 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

2. “Airlines Industry Profile: United States.” Airlines Industry Profile: United States (May 2014): 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

3 “Airlines Industry Profile: United States.” Airlines Industry Profile: United States (May 2014): 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

4 “Airlines Industry Profile: United States.” Airlines Industry Profile: United States (May 2014): 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

5 Hernandez, Manuel A.1, and Steven Wiggins. “Nonlinear Pricing Strategies And Competitive Conditions In The Airline Industry.” Economic Inquiry 52, no. 2 (April 2014): 539-561. OmniFile Full Text Select (H.W. Wilson), EBSCOhost (accessed May 22, 2015).

6.Mertens, Daniel P., and Timothy M. Vowles. 2012. “Southwest Effect” – Decisions and Effects of Low Cost Carriers.” Journal Of Behavioral & Applied Management14, no. 1: 53-69. Academic Search Premier, EBSCOhost (accessed May 22, 2015).

7. Hernandez, Manuel A.1, , and Steven Wiggins. “Nonlinear Pricing Strategies And Competitive Conditions In The Airline Industry.” Economic Inquiry 52, no. 2 (April 2014): 539-561. OmniFile Full Text Select (H.W. Wilson), EBSCOhost (accessed May 22, 2015).

8.Drocton, Mathew1. “Searching For The Sweet Spot: An Analysis Of The American-Us Airways Merger.” Case Western Reserve Law Review 65, no. 2 (Winter2014 2014): 487-504. OmniFile Full Text Select (H.W. Wilson), EBSCOhost (accessed May 22, 2015).

9.Hepher, Tim, and Robert Evans. ‘Airlines Brace For Heavy Europe Crisis Impact’. Reuters. Last modified 2011. Accessed May 23, 2015. http://www.reuters.com/article/2011/12/07/us-airlines-iata-idUSTRE7B616F20111207.

10. Fuller, Ed. ‘Impact Of The World’s Travel/Tourism Industry Adds Up To More Than A Walk On The Beach’. Forbes. Last modified 2013. Accessed May 23, 2015. http://www.forbes.com/sites/edfuller/2013/12/03/impact-of-the-worlds-traveltourism-industry-adds-up-to-more-than-a-walk-on-the-beach/.

11. 2014. “Global Airlines Industry Profile.” Airlines Industry Profile: Global 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

12Hepher, Tim, and Robert Evans. ‘Airlines Brace For Heavy Europe Crisis Impact’. Reuters. Last modified 2011. Accessed May 23, 2015. http://www.reuters.com/article/2011/12/07/us-airlines-iata-idUSTRE7B616F20111207.

13Drocton, Mathew. “Searching For The Sweet Spot: An Analysis Of The American-Us Airways Merger.” Case Western Reserve Law Review 65, no. 2 (Winter2014 2014): 487-504. OmniFile Full Text Select (H.W. Wilson), EBSCOhost (accessed May 22, 2015).

14. “Global Airlines Industry Profile.” Airlines Industry Profile: Global 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

15. “Airlines Industry Profile: United States.” Airlines Industry Profile: United States (May 2014): 1-37. Business Source Premier, EBSCOhost (accessed May 23, 2015).

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