The airline industry

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INTRODUCTION

The Airline industry is one of the world’s largest industries generating over $300 billion in revenues in 2001 alone and additionally has the second highest industrial growth rate, after the computer industry, with typical growth rates of 3-5% per annum over the last 20 years (Humphreys, 2003; BA Fact book, 2002).

For the purpose of this assignment, freight/cargo airline activities will not be considered as freight travel consists of only 2 % of total airline activity (see figure 3.1 and appendix 1) (BA Fact book, 2002, ICAO, 2003).  Furthermore, due to the nature of the airline industry and the Asian market being a lot smaller and internally focused, we will concentrate on the North American and European markets which between them, account for 65% of the market (see figure 3.1 and appendix 1) (ICAO, 2003).  

   

 

Section 1:The main forces shaping the airline sector’s global business environment.

The past two years has seen an unprecedented number of airlines, worldwide, filing for bankruptcy and many more would have followed suit had it not been for government intervention (Economist, 2002a). The main factors leading to their demise and to the problems currently faced by the airline industry in general, have their roots in the existing economic and political climate (see figure 1.1), which according to IATA (2002) continue to remain challenging.

Figure 1.1: PESTEL Analysis of the airline industry

1.1 Economic Forces facing the airline industry

Since the performance/profitability of the airline industry is closely connected to the economic cycle (BA Fact Book, 2002), the importance of the global economic environment and the impact that it has on the industry cannot be underestimated (see figure 1.1).

This is evident from the performance of the industry during the late 1990’s as profitability soared on the back of a buoyant world economy (characterised by the hype generated by the technological revolution; record levels of corporate activity etc) which fuelled demand for air travel. It is not surprising that the subsequent slump in air travel which began in the USA towards the end of 2000 and slowly spread to other parts of the world (Economist, 2001), corresponded to a change in the economic forces as the knock on effects of the US economic slowdown infiltrated the global economy.

One of the main consequences of the global economic slowdown has been a decrease in the number of business passengers as companies, worldwide, attempt to reduce costs. This has had significant implications for an industry which relies on these passengers for approximately two thirds of its revenue (Economist, 2001). The reduction in business passenger numbers has resulted not only in adding to the already existing overcapacity problem but also in increasing competitive pressures, the resultant effect being a persistent downtrend in airfares. In fact, after adjusting for inflation airline revenues per passenger kilometre are about half the level of 30 years ago (BA Fact Book, 2002). The birth of the low cost carriers and the increasing market share they have acquired has further exacerbated this downward trend as passengers become more price sensitive.

1.2 Political Forces facing the airline industry

The airline industry is also very much in the political frontline (see figure 1.1). The implications of terrorism for the industry are evident from the statistics – 2001 was only the second year in the history of modern civil aviation in which international air traffic declined (IATA, 2002) and, although air traffic has since improved, it is nevertheless still below pre-September 11 levels. Furthermore, the knock on effects it has had in other areas of the industry, most notably the vertiginous rise in the cost of insurance and security, has further added to the economic woes of the industry. Since the attacks insurance companies immediately increased insurance premiums and reduced cover for war/terrorist liability to $50 million “per event” (Economist, 2002b). Although many governments subsequently agreed to become insurers of last resort for airlines’ war and terrorism liabilities, they did so for a limited period only and the need for the industry to find an affordable, non-cancellable, global solution to the insurance issues remains a challenge (IATA, 2002).

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Furthermore, the uncertainty surrounding Iraq coupled with the political instability in Venezuela have resulted in the price of aviation fuel soaring on the back of crude oil prices which have doubled in the past 12 months. Since fuel accounts for approximately 12 % of airlines total operating costs (Norbjerg and Market, 2002) volatile oil prices have significant cost implications for the industry and although many airlines limit their exposure to fluctuating oil prices by hedging their ‘fuel consumption’ through options in the futures market it is nevertheless an expensive, short term strategy which many of the smaller players can ...

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