Economics Airline Industry

Part 1 The Characteristics Of The Airline Industry Preface Introduction The Primary Characteristics Competition Within The Airline Industry The Secondary Characteristics – The Tertiary and Quaternary Characteristics – Part 2 PESTEL Of The Airline Industry Conclusion References PART 1 The Characteristics Of The Airline Industry Preface Economics or Managing In The Global Environment, a subject everyone needs to be familiar with and most believe or think that they are, but at the end of the day, very few are competent and understand it’s deep meaning, intricacies and implications.

These implications and meanings are for the Government, the people, the economy as well as for the observer ( a person observing the economy or industry in a foreign country ). I do have an economic background and therefore I understand the intricacies of all this and that a layman may find the perusal of economic charts or data statements confusing or ambiguous. Anyway that’s beyond the boundaries of this assignment.

Having been given a free hand at choosing a business sector of my choice for this assignment and going on to highlight its key economic characteristics, the effect of the same on the sectoral development and paying particular attention to any global influences on this development, I shortlisted two sectors both from the leisure industry – hotels and aviation. Being deeply knowledgeable about both and having a keen interest on the subject made sense to me. For the purpose of this examined coursework assignment, we shall focus purely upon the aviation industry.

The ECA guidance document states to mention, the geographical domain that you shall cover in this report. I am looking at the aviation industry on a world wide platform. I’m not looking at the United Kingdom or India or China specifically. Introduction – Not many inventions have changed how people live and experience the world as much as the invention of the airplane. It was the Wright brothers, Orville and Wilbur who on 17 th December 1903 changed the manner in which the world would travel forever. During both World Wars, government subsidies and demands for new airplanes vastly improved techniques for their design and construction.

Following the World War II, the first commercial airplane routes were set up in Europe. Over time, air travel has become so commonplace that it would be hard to imagine life without it. The airline industry, therefore, certainly has progressed. It has also altered the way in which people live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit and conduct business in places once considered remote [1] Air travel remains a large as well as growing industry.

It facilitates the most vital process of economic growth, world trade ( free or restricted as the case might be ), international investment and tourism and is therefore key to the globalization taking place in many other industries. It makes boundaries smaller and shrinks national borders to almost make them seem non-existent from the sky at 35000 feet. The Primary Characteristics – Everyday thousands of aircraft go into the sky and come back onto terra firma. It’s like a process, it keeps repeating itself, thankfully successfully. But is it that simple.

Is it only about passengers boarding, take off and being served an average meal with pride, landing, taxi and disembarking, immigration and collecting their baggage. No there’s a lot more to it. The key characteristics of the airline industry are several. There are micro as well as macro economic factors that affect the industry. It’s an industry that is quick to be hit by global events and slow to recover from them. The key economic characteristics of the airline industry are as follows The main feature of the airline industry is that it is not a monopoly or monopolistic competition but operates as an oligopoly.

The reasons for the airline industry being an oligopoly according to a study done by Wells AT [2] are listed below – 1. High Barriers To Entry 2. There are few sellers in the market place 3. All airlines offer products and services of similar nature 4. Airlines enjoy substantial as well as major economies of scale 5. There is growth through merger 6. Airlines are mutually dependant on one another 7. Price rigidity and non – price competition 8. Price Transparency and collusion Having said that, it is now amply clear that airlines, whether full service carriers or low cost, short haul or long haul operate in an oligopoly.

Competition Within The Airline Industry A key characteristic of an oligopoly is limited competition, collusion and interdependence within firms. In recent times, we have seen sworn public enemies colluding privately. British Airways and Virgin Atlantic coming together to fix the passenger fee for ‘fuel surcharge’ to the flier. The first to investigate were the Office for Fair Trade and after much investigation, the trial broke down on 10 th May 2010 due to discovery of certain e-mails. Last month it was revealed that Virgin Atlantic and

Cathay Pacific might have illegally co-ordinated prices for passenger flights between London Heathrow and Hong Kong’s Chep Lap Kok airport between 2002 and 2006. [3] Airlines compete in several other ways as well. Ticket prices fluctuate and the earlier you purchase, the cheaper it is. Frequencies and timings of flights differ over sectors. With regard to timings, British Airways have the BA 26 and the BA 28 leaving Hong Kong for London within 15 minutes of each other. Virgin leaves at the same time. Cathay Pacific has two flights at the same time.

That’s approximately 1630 seats over 2 hours. Some airlines fly differently configured aircraft to different cities ( British Airways 777’s to Mumbai and New Delhi have 4 classes while the 777’s to Chennai or Bengaluru are 3 class aircraft’s ). They compete over landing and departure slots and parking slots at busy airports such as Heathrow. One key reason for Lufthansa and Virgin wanting to purchase a carrier like BMI was simply it’s stronghold over slots at Heathrow, second only to British Airways. This would give the buyer real competitive advantage.

Airlines also compete with different offerings or quality as well as quantity of offerings in both their ‘on the ground or before you board’ product and the product and service once on board. The availability of a loyalty programmes is also a point of competition and whether the airline belongs to an alliance like One World, Star Alliance or Sky Team. Again the alliances compete in the same way against each other via their members – the airlines. The recent proposed mergers between BA and AA is also one way airlines wish to come together to curb competition although I believe this to be stifling.

The Secondary Characteristics – There are several characteristics of a lesser nature that affect the airline industry. They are unique, cannot be ignored and hence are listed as tertiary characteristics below – 1. Governmental Monetary Aid – Unlike most oligopolistic industries, various governmental systems have played key as well as direct roles in financing the growth and development of the airport-airways system. 2. Governmental Intervention – Besides finance, governments play a direct role in the aviation sector. There are rules and regulations put down by them that operators cannot violate.

This ensures discipline in the skies. 3. High Operational Expenditure Airlines have to pay high salaries to several categories of staff, as they are highly skilled. Airlines require a skilled and specialized workforce. On the macro level, they are subject to high fuel prices and ever-rising ATF. 4. Sensitivity to Economic Conditions The airline industry is extremely sensitive to economic conditions. When there is a period of recession, people travel less and companies also cut back on executive travel or executives are downgraded a class.

Sir Richard Branson said about a year ago that Upper Class ( Virgin’s brand name for their business class product ) takers were far less than previous years or as anticipated. The Tertiary and Quaternary Characteristics – Having outlined the main characteristics of the airline industry, we need to have a quick glimpse of the other characteristics that affect the industry from time to time – 1. High and Constant Equipment Requirements – Airlines need to constantly upgrade their product. It is not uncommon for airlines to change cabin and cabin layouts and launch all together new products every five years or so.

Airlines also have to spend on equipment by purchasing new planes and getting rid of older ones due to safety and also because people are very conscious of what they fly or would like to fly. 2. Weather and Conditions Weather is ever fluctuating and unpredictable. Extreme heat, cold, fog and snow can shut airports, delay and cancel flights, which costs the airline money. The operating cost meter still ticks on while everything else is at a standstill. The volcanic ash is the most recent example that can be provided for the same. 3. The airline industry is a service industry. It is labour intensive and requires a lot of capital.

You require high cash flows and looking at it purely financially, the payback period may be rather long. It is highly unionized ( perfect example British Airways ) and is also a seasonal business ( flights to tourist destinations and charters ). PART 2 Here we discuss how the characteristics discussed above have impacted upon the development of the sector during the recent past. I suggest that by doing a PESTEL analysis of the same, we shall amply exhibit our point of view. A PESTEL Analysis Of The Airline Industry – 1. The Political Factors There are several political factors that have impacted the industry, the main one being deregulation.

As the market size has increased, economies of scale have also increased exponentially. Skies have been liberated. We have ‘open skies’ in many parts of the world. Ownership rules have been relaxed with the EU and USA forcing this through increasing the market size as well as capacity. Safety standards offered by airlines is also something that is now political. The Federal Aviation Administration and other regulatory bodies the world over keep a close look on airlines. Aircrafts, Airports and cabin crew all require certificates and checks, which is again in the political domain.

2. The Economic Factors In the recent past, it has been the economic factors that have impacted the development of aviation. There are economies of scale in production due to expanding market size. The recession has played a huge role. Airlines are definitely amongst the worst affected. They shall also be slow to regain altitude. Oil prices are another huge factor. Although the flier pays a part for this, the airline is definitely affected. When crude crossed USD 105 per barrel on 4 th March 2008 the airline industry was in a bad way. Fiscal and Monetary policies also play a part.

Whenever, Governments decide to raise tax on domestic or foreign carries, it’s the passenger who bears the brunt and this does have a ricochet effect upon the airlines. When taxes are lowered, it’s the opposite effect obviously. Interested rates to financial institutions also affect airlines. When they lease aircrafts from organizations like ILFC, The International Lease Finance Corporation, interest has to be serviced. ILFC are amongst the largest owners of aircraft worldwide. Airlines do run into severe financial strife from time to time and most of them do rise.

Sir Richard Branson said on his Facebook page approximately ten days ago that the way ahead for survival would be through mergers. You could say that it is the economic characteristics that have the most bearing at the moment 3. The Social Factors Events like 9/11 impacted the industry beyond measure. Security issues are unfortunately still prevalent. Airports safety authorities are discussing features like full body scans at airports to see if anyone has anything on them that could be destructive. The liquids ban still carries on, although there was some mention of The British Airport Authority planning to lift in the future [4].

All this does cause a reluctance to fly and aviation authorities and airlines need to create a confidence to fly once again. More recently, health issues like swine flu also made people not want to be in a closed environment for too long. 4. The Technological Factors Technology has also changed how we fly. E-Commerce and the Internet have put travel agents into a weaker position. You can book, pay and print your tickets online and then choose your seat and check in online. Leave your luggage at the baggage drop and avoid long queues. Certain airlines now

pay no commission to travel agents thereby promoting their own website. British Airways did this to Indian travel agents two years ago. You also have sites like dealchecker. co. uk, tripadvsior. co. uk and kelkoo. co. uk that actually display fares and offers across selected airlines on your screen so you always might get the best or most suitable deal. Technological factors also refer to equipment. BA to quote Willie Walsh were in a fortunate position that Rod Eddington left them a fleet in good condition and they would not have to do anything in the short term.

5. The Environmental Factors These include new rules with regard to carbon emissions (while booking on ba. com you can pay a small fee to offset the carbon emissions of your seat), contrails and noise pollution. Example would be the FAA’s Environmental Policies. 6. The Legal Factors These include regulations with regard to ownership and control. Price fixing, collusion and cartels also come under this. Authorities have to constantly upgrade their rules to ensure that airlines don’t breach them and the passenger does not suffer.

Conclusion It is evidently clear that global patterns and movements have a heavy impact on the aviation industry even though it operates in an oligopoly. The peaks and troughs of the world economies ever so clearly make the industry move the same way and as already said, it is much slower in recovery than other sectors or the economy in itself. The time we live in now is not favorable for the airline industry and they barely keep their heads out of water. In the coming years, the situation will be tougher for the airline industry if the global economic slowdown isn’t over. There may be several factors for this condition.

The global recession and the hike in air fuel are considered the major factors. The airline industry is a competitive market. There are various airlines providing flights all over the world. In the current recession period, all airlines are putting their best efforts to overcome this situation by providing cheap tickets for their customers with different holiday or business packages. So from the various key economic characteristics that affect the airline industry today, it is definitely the economic and technological characteristics that are the most important and affect the airlines the most. 2494