Air Transportation A Management Perspective John G. Wensveen ©2015 978-1-4724-3681-8 (paperback) 978-1-4724-3678-8 (hardback) 8th edition

Part 1: An Introduction to Air Transportation

Chapter 1 The Airline Industry: Trends, Challenges and Strategies Air Transportation (8th ed.) Chapter 1 The Airline Industry: Trends, Challenges and Strategies

Stages of Development Impacting the Airline Industry There are four stages of development impacting the airline industry. Some regions of the world have skipped a step or two resulting in both positive and negative results for the industry:

Stage I: Regulation Until the 1970s, the bulk of the global airline industry was regulated Governments controlled air fares, routes and market entry of new airlines Regulation is characterized by: Strict ownership control of airlines Limited to no competition on selected routes Limited markets served Limited city-pair frequency Generally higher air fares Government bail-outs for financially troubled airlines

Stage II: Liberalization Liberalization is characterized by less government control compared to a regulated environment Most countries appear to be recognizing the need for liberalization in the airline industry with increased bilateral negotiations between countries According to the International Air Transport Association (IATA), liberalization allows for: Expansion into new markets Diversification of new products Specialization in niche products Market exit for carriers not able to success in a competitive environment

Stage III: Deregulation Government control, such as entry and price restrictions for air carriers, are removed Airlines are allowed to serve any given route Deregulation is further characterized by: Reduction of air fares Improvement in safety Sometimes service quality improvement Caveat: Small and some medium-sized airports usually do not benefit from a deregulated environment

Stage IV: Re-regulation As a result of increased merger activity in recent years, the U.S. airline industry entered formal discussions regarding the possibility of re-regulation Role of government would be to prohibit predatory pricing below actual cost Although the U.S. airline industry is considered to be deregulated, some experts argue that there are emerging trends incorporating forms of re-regulation

Past, Present and Future Trends Since September 11, 2001, the global airline industry has experienced four phases of evolvement which have changed the way airlines do business:

Past, Present and Future Trends In the past, negative scenarios resulted in operational barriers: Outbreak of SARS in 2003 Wars, for example the Iraq War or Afghan War At present, airlines need to be prepared for additional scenarios whether they occur or not In the future, airlines need to be ready for new challenges in a global business environment

Top Three Costs for Airlines Fuel, labor and maintenance costs are the top three costs for most airlines Actual costs do vary company by company

Regional Analysis As airlines usually link regional economies to the world, a regional and global understanding of the aviation industry is highly important At the end of 2009, the global financial crisis negatively impacted the aviation industry By the end of 2012, the global economy started to recover, but airlines continued to struggle due to extremely high oil prices

Regional regulatory trends Note: The table highlights general regional regulatory trends only, which may not reflect trends in individual countries within a particular region.

North America Canada has experienced the privatization of airlines, airports, Air Traffic Control (ATC), and the rise of the low-cost airline The United States has experienced the rise of the low-cost carrier, government control of airports, the development of secondary airports, major airline debt, bankruptcies, mergers, stagnant domestic passenger growth, and increased international growth Mexico has experienced government control of the industry and bankruptcies in addition to the emergence of the low-cost airline

Europe Within Europe, airlines operate in a fully liberalized environment European airlines are mostly privatized and the region has experienced the growth of low-cost airlines and the growth of alliances including airlines and airports Competition between different modes of transportation has impacted the airline industry, especially the use of high-speed rail National pride continues to be an issue for the industry and many challenges will continue to be faced as the EU expands its geographic boundaries Good to know… Despite the existence of the European Aviation Safety Agency (EASA), regulatory systems in Europe are still fragmented on a national level

Asia-Pacific The Asia-Pacific region has experienced managed liberalization and change has been slow compared to North America and Europe The region has felt the positive rewards of strong growth since late 2001 especially in China and India Megacarriers and small international carriers co-exist and there are limited interline agreements despite having the largest share of the world economy There has been increased growth in the development of airline alliances and the region faces increased airport and airspace congestion as well as competition There is a dire need for advanced navigational equipment to improve efficiency and enhance safety measures

Middle East The Middle East is strategically positioned and the use of efficient hub airports has resulted in a stronger presence in the long-haul markets Safety and security continue to be issues that require addressing The Middle East is home to a small number of global megacarriers called the ME3, dominating passenger flows between Europe and Asia

Africa Although growing at a higher rate than most other regions, Africa has a small share in global air traffic Increased stability in the region may increase the importance of aviation on the African continent The average fleet age of African airlines is extremely high, causing safety concerns Lack of skilled personnel is a burden for African airlines With a few exceptions, civil aviation authorities are lacking institutional strength

Latin America / Caribbean Latin America and the Caribbean are shifting from regulation toward liberalization There is a strong need for training at the management levels as well as a need for research and development Safety performance continues to be an issue in Latin America and the Caribbean

The Industry: Challenges and Strategies Physical, economic, political and/or legal, socio/cultural, demographic, and technological forces impact the airline environment Airline management must be aware of these factors Investment in next generation Air Traffic Control (ATC) infrastructure is necessary to mitigate capacity issues Good to know… The U.S Federal Aviation Administration (FAA) plans to modernize the U.S National Airspace System. The initiative, also known as “NextGen”, aims to replace, among other things, radar based navigation with satellite based systems

The Industry: Challenges and Strategies

The Industry: Challenges and Strategies

The Industry: Challenges and Strategies

The New Breed of Airlines The global aviation industry is constantly experiencing a change of business strategies Examples of types of carriers: Legacy carriers Regional carriers Low-cost carriers Aside from conventional carriers, a new generation of carriers, such as Virgin Galactic, has the potential to disrupt the current business environment Good to know… There are many definitions of low-cost carriers (LCC), such as low cost / no frills carrier, low fare / high value carrier, less frills carrier, value carrier, budget carrier or new generation carrier

Failing and Achieving Success Failure occurs when: Undercapitalization (as airline business is characterized by extremely high capital cost) Overexpansion or overcapacity, leading to high revenues but low profitability Lack of flexibility in regard to a changing business environment Lack of leadership skills Lack of competitive advantage Failure to demonstrate revenue growth and profitability

Failing and Achieving Success Success if often accomplished by: Development of solid business plan Flexible and diversified business structures Effective leadership Steady and moderate growth and cost-cutting strategies Fleet commonality Route network optimization / alignment Partnerships and alliances Listening to customer demands Good labor union relationships Effective lobbing efforts to influence policies and laws

Optional Class Discussion: Re-regulation in the U.S. - Truth or Myth? U.S. airline executives complain that increased competition by the ME3 (The Middle East Three - the Gulf carriers Emirates, Etihad Airways and Qatar Airways) is harmful to the U.S. airline industry. They have lobbied the U.S. Department of Transportation to amend the Open Skies agreement with these Gulf nations. Discuss in a small group whether this could be considered to be re-regulation. Why? Why not?

Review Questions Chapter 1 List the four stages of development impacting the airline industry and briefly describe how each has impacted the future direction of the industry. What are the top five frustrations in aviation today? Describe each. What are additional areas of debate? What are the top three costs for an airline typically? In addition, list other typical airline operating expenses. What is the name of the index that produces such costs? How often is the index published? What are the six aviation regions of the world? Describe the regulatory trends associated with each region. What are the main forces impacting the airline environment? What are the main infrastructure issues? What are the main failures in airline business planning? Describe each in detail. Other than airline travel as we know it today, what other forms of air transport are being developed? Describe how this emerging technology could impact the future of the airline industry.

Chapter 1 Checklist You Should Be Able To: Define the four stages of development impacting the airline industry Discuss the main trends impacting the global airline industry including regional challenges Describe and discuss the main critical financial issues and challenges associated with air transportation Understand the main strategies for global aviation in order to achieve success Discuss the different types of air carriers evolving and the main factors behind success and failure Describe how evolving new technology may impact the future of aviation