1. Air Transportation A Management Perspective
John G. Wensveen
©2015
(paperback)
(hardback)
8th edition

2. Part 1: An Introduction to Air Transportation

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

4. 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:

5. 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

6. 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

7. 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

8. 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

9. 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:

10. 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

11. 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

12. 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

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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. The Industry: Challenges and Strategies

22. The Industry: Challenges and Strategies

23. The Industry: Challenges and Strategies

24. 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

25. 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

26. 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

27. 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?

28. 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.

29. 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