Airline Woes Extend Beyond 9/11 - Essay Example

Airline Operations The airline industry faces many financial problems in the current day economic and political climate. The events of 9/11/2001, while more than five years in the past, still cast a shadow over the marketplace for air travel. Subsequent problems in the middle east , together with far greater demand for oil, have led to fuel prices rising sharply. The old airlines, set within what are now inefficient ways are also facing new competitive threats from companies such as JetBlue, SouthWest Airlines and a host of other airline start-ups that have managed to minimize costs (Ben-Yosef, 2005, p. 24). In recent years the events of 9/11/2001, in which two planes were flown into the World Trade Center, one into the Pentagon and one into a field in Pennsylvania had a devastating effect upon the financial circumstances of the airline industry, an effect from which they have yet to fully recover ((/11 Commission, 2004) . As a report a year after the 9/11 attacks stated, "the costs of the terrorist attacks have been borne disproportionately by a few industries, especially airlines, tourism and insurance" (Makinen, 2002, p. 2). First of all, no airlines flew anywhere in the United States for one week after the 9/11 attacks. This involved a backlog in flights and plane maintenance/positioning that took months to overcome once flights started. The US Congress gave the airlines access to $15 billion, in the form of $5 billion in short-term emergency assistance and $10 billion in loan guarantees. However, the attacks of 9/11 seem to have sped up economic woes that were already occurring, and led to major reorganizations such as the Chapter 11 bankruptcy of US Airways (Makinen, 2002, p.2). Reports for airline finances in 2002 were dismal, with US Airways filing for bankruptcy and United Airlines soon following suit. However, several airlines such as JetBlue reported better earnings than expected, solidifying a trend that had been occurring in recent years. The effects of the 9/11/2001 attacks on air travel to Britain can be seen in the following statistics: (Source: International Passenger Surveys, 2000, 2002) Thus the number of visitors fell by more than 1,000,000 and the money earned from those visits fell by more than 1 billion pounds. One of the major results of the 9/11 attacks, and one that has yet to fully return to normal, was the rapid decrease in the amount of business travel on airlines. Business travelers were some of the most profit-making customers for airlines, and these often offset the barely breaking even or loss-making performance associated with vacation related and other consumer travel. This loss of business travel may be related to the fact that telecommunications technology has meant that real-time meetings through video conferencing has become the norm rather than the exception. The fact that 9/11 occurred, making business travelers less certain about flying because of safety concerns may have compounded a situation that was already occurring with the rapid advance in communications technology. Large corporations have also learned that they "don't need to pay those higher, unrestricted fares . . . there is always going to be some business travel that needs flexibility to change flight plans . . . but the policy of many large corporations will be to book in advance to save money or to justify it when you don't" (Corridore, 2004, p.1). The traditional airlines such as United and American have also been facing great competition from low-cost competitors such as Jet Blue, that have started to move into transcontinental flights. For example, JetBlue offers numerous non-stop California-East Coast flights for little more than $100 one-way. A customer can also change their flight (through changing the time or just canceling) up to a minute before the flight with a nominal ($25) charge and the remaining balance to be used for future flights (jetblue, 2006) . The increased use of web-sites that have been created from scratch with the idea of making buying/changing a flight very easy has provided a further layer of competition that the traditional carriers simply can't match. In Britain similar types of systems have occurred with deregulation of the airlines. While there were many initially, "today Easy Jet and Ryan Air are bitter rivals carrying up to three-quarters of all low-cost passenger traffic" (Mintel, 2006). The reaction of traditional carriers to this situation was to raise "fares on the routes where the low-cost competition didn't exist" (Craun, 2004, p.1). Now that the low-cost competition is increasingly, and aggressively moving into those markets the traditional carriers have little choice but to either accept rapidly decreasing sales or to lower their fares. Either way, their margins and potential profitability - or rather attempts at minimizing losses - are perhaps doomed to failure as they charge prices that can be met by low-coast carriers while still having an infrastructure for a much larger airline in place. Within Britain, airlines are currently facing a suggested doubling of the passenger taxes that are already perceived as high. Thus the current taxes of 10 pounds for basic short-haul flights to 40 pounds on long-haul flights would be doubled in next year's budget. British Airways stated that "this hike in Air Passenger Duty is revenue-raising pure and simple, with aviation being treated as a cash-cow" (airwise, 2006). The Chancellor, Gordon Brown, claims that the money will be used to counter environmental problems, including climate change. Precisely how this newly raised levy will enable this is unclear, and it seems as though British Airways may have intuitive logic on their side in arguing that it is merely an attempt to raise cash from an easy target. The higher fares that would result form this rise in tax may lessen passenger numbers and will involve the collection of money that will go the government rather than into the coffers of the airlines. The present government seeks to make all industries "greener", and the airline industry is seen as one of the worst offenders. But the actual total pollution produced by the industry is rather small compared to that produced by cars or other industries. Airlines present an apparently easier target. Another financial problem faced by many of the traditional airlines is the fact that they have highly expensive pension plans in place that were designed to reward the loyalty of long-term employees to their companies. The 2005 decision by United Airlines to dump its pension plan was met with derision and a near-panic among many of its employees. One letter from a former employee expresses the opinion of many: Should the employees of such companies have known ahead of time that through economics, mismanagement and other factors that one day their longevity and dedication to their employers would result in the loss of their pensions (Davidson, 2005, p.12) Much of a company's success (or otherwise) depends upon the performance of its employees. As numerous studies have shown, employee performance depends in large part upon how "happy" the individual employee is as well as how the whole group of them feels they are being treated by their employers. The manner in which many airlines have been treating their employees in recent years, while perhaps creating short-term financial gains, may in the long-run hurt them far more. This is particular the case in a service-industry in which many employees have direct contact with the customers. An unhappy or disgruntled flight crew is not a pleasant experience for the airline passenger, and she is likely to go elsewhere, to the apparently "happier" low-cost airline such as JetBlue or Southwest if at all possible. The rapid rise in the cost of airline fuel has also been a bad economic and financial factor for many airlines. The statistics for the rise in costs are rather stark: The average cost of a gallon of commercial airline fuel has more than doubled since 2000 - from 78 cents per gallon in January 2000 to$1.81 per gallon in January 2006 . . .. . the record high cost of commercial jet fuel was the primary reason why the US airline industry is expected to post an estimated $10 billion net loss in 2005. (Aviation Sub Committee, 2005, p.1) There is little that the airlines can do about such rises ink costs other than trying to offset them with a reduction in labor costs (as the highest cost taker) or raising fares. Again, the ability of low-cost carriers to produce highly efficient airlines with little waste and which concentrate on the most profitable routes enables them to offset the rise in fuel costs more successfully. It is the older airlines that have little room for maneuver and which suffer the most. Increased security concerns have also led to a great increase in the premiums required of airlines by insurance companies, as well as contributions to airline security that are required by the government. All of these are added costs that have no return in the form of added revenue. Also, the major airlines have complained that their "hub" system makes them liable for a greater percentage of the added security costs at major airports than the more diffuse structure in place at the low-cost airlines. Again, there is little that the major airlines can do about this situation other than attempt to become more efficient, more competitive and thus, perhaps, more profitable. Within Britain the effect of the August scare in which a plot to blow up planes while en route to America over the Atlantic had both short-term and long term impacts upon the airline industry. Short term effects included the chaos that ensued at many British airports, including confusion and very long waits for many passengers as they attempted to pass through the newly stringent security procedures. One of the long-lasting problems that resulted from this threat was the apparently random nature of the new security measures and the fact that they were reactive rather than proactive. Initially no liquids as carry-ons were allowed at all, and a number of electronic devices such as notebook computers, PDAs and i-pods were also banned. Within weeks these restrictions had been relaxed. This should imply easier travel for travelers and thus an improvement for the airlines, but the public has seen that the stricter and then more relaxed rules seem to be based upon fear and reacting to the moment rather than logical in nature. Thus is the danger from notebook computers any less now than it was in the week after the 24 would-be terrorists were arrested If they were never a danger in the first place, why were they banned If they still are why are they allowed on planes Here political concerns enter the mix once again. The government sees the need of taking drastic action when such a widespread plot, that would have killed thousands, was revealed to the world. This need to make a statement seems to stem more form emotion than rationality. The need to maintain position within polls is not a good measure of what security measures to introduce, but it is occurring. The current lawsuits being considered against the British government for the financial fallout from the added security measures that were quickly withdrawn shows that there is a division occurring between the airlines and the government over a matter that one might expect them to be agreed upon. The mixture of forces at work on airlines can be seen within the following piece of journalism, describing a press release from Ryanair: Ryanair revealed its intention to take on both "terrorists and extremists" and the UK government in a single press release Friday.Its battle against evil will be waged with the week-long sale of 1 million seats across more than 100 routes for 25 ($47.40) one way including taxes and fees. "Ryanair is releasing these cheap seats to get Britain flying again, which is the best way to defeat terrorists and extremists," the combative airline said.Its dispute with the government, which it claims is responsible for the "shambles" at UK airports that is costing carriers millions, may lead to a lawsuit. A Ryanair official sent an e-mail last week asking other airlines to join in holding authorities liable for delays and losses resulting from new security. Friday the LCC said it appealed to Secretary of State for Transport Douglas Alexander to "immediately restore the security measures at Britain's airports to the IATA 'normal' standards in order to get Britain's airports and airlines moving again," as last week's approach to normalcy was owing to "emergency rosters and overtime" that are "not sustainable. "Ryanair's letter included a request to restore the hand baggage allowance and halve the number of passenger body searches and a threat: "If the government restores the security at British airports to these normal IATA levels within the next seven days, then [the carrier] will not make any claim for compensation, which it is entitled to under the provisions of Section 93 of the Transport Act 2000."CEO Michael O'Leary said the security alert cost Ryanair at least 2 million ($2.6 million) in lost revenue, according to press reports, rejecting some analysts' predictions that the hit would be closer to 10 million.A Dept. for Transport spokesperson told the BBC, "The security regime in place at UK airports is necessary because of the level of security threat and is kept under constant review. We have no intention of compromising security levels nor do we anticipate changing our requirements in the next seven days." The spokesperson added that the government does not believe it is liable for Ryanair's losses. (atwonline, 2006) Thus the mixture of political, social, economic and historical forces is at work in the airline's attitude towards the world. To conclude, airlines of every kind, form the smallest start-up to the international carrier, face numerous financial and economic woes. This is a somewhat ironic situation as the demand for air travel has in fact never been greater. More people are now flying than at any other time in human history, and many planes are now flying at capacity. Indeed, the policy of deliberately overbooking flights in order to ensure that they are full even with the inevitable no-shows causes great problems with customer satisfaction as the situation of individual being "bumped" from flights is increasing. The fact that it is the traditional airlines rather than the low-cost alternatives that have this system in place once again adds to their economic woes through decreasing customer satisfaction. Airline passengers do tend to have increased amounts of choice on which carrier they fly on, and all airlines need to take this into account when instituting policies which may yield short-term financial benefits, but which are likely to be detrimental in the long-run. The future of airlines appears to be somewhat mixed. The growth in population that is occurring in many countries, together with a rapidly expanding middle class, should assure a much larger market for airlines. However, current fuel costs are a great burden to them, and this will only get worse as the world's oil supplies inevitably dwindle in the decades to come. If an attack such as 9/11/2001 occurs again, or if an even worse one such as the 2006 August plot in Britain came to fruition, then the airline industry might be devastated. ______________________________________________ Works Cited Aviation Sub-Committee, "Commercial Jet Fuel Supply Impact and Cost on the US Airline Industry", US Congress, Washington: 2005. Ben-Yosef, Eldad. The Evolution of the US Airline Industry: Theory, Strategy and Policy. Springer, New York: 2006. Corridore, Jim. "Airline Woes Extend Beyond 9/11" CNN Money September, 2003. money.cnn.com/2003/09/09/news/companies/airlines_terrorism/index.htm. Accessed December 3, 2006. Craun, Jim. "Airline Woes Extend Beyond 9/11" CNN Money September, 2003. http://news.airwise.com/story/view/1165443806.html http://www.atwonline.com/news/story.htmlstoryID=6129 money.cnn.com/2003/09/09/news/companies/airlines_terrorism/index.htm Accessed December 3, 2006. Davidson, Neal. Letter. USA Today. May 17th, 2005. Makinen, Gail. The Economic Effects of 9/11: A Retrospective Assessment. US Congress, Washington: 2002. Mintel International Group Ltd. No-frills/Low-cost Airlines- UK February 1, 2005 National Commission on Terrorist Attacks Upon the United States, The 9/11 Commission Report. United States, Washington: 2004. UK Government, International Passenger Surveys, 2000, 2002 www.jetblue.com. Accessed December 3, 2006. Read More