Key Developments within the Global Airline Industry - Essay Example

Key developments within the global airline industry Introduction Globalisation has led to integrated and interdependent economic economy that has led to increased interdependence among national economies and institutions. Globalisation has been facilitated by the rapid technological advancements, reduction in the barriers to goods and investment flows between nations. Some aspects of technological advancements include electronic commerce, commercial jet travels, telecommunications and high power computing. The last 30 years has seen high development of the global airline industry whereby more than 2000 airlines operate nearly 50 000 passenger and cargo aircrafts. The growth of the industry is averaged at 5 percent annually though the estimates have changed due to changing economic conditions and differences in air travel safety across continents. According to the International Air Transport Association (IATA), the industry experienced a $ 4 billion decline in profitability in 2011. Surprisingly, analysts point that global air travel passengers will hit a mark of 3.5 billion passengers annually in2015 which is a 30 percent increase from the current figures. IATA clarifies that increase in global fuel costs will impart negatively on the profitability of many airlines since it is estimated that global airlines will experience about $ 1.6 billion fuel cost increases. Accordingly fuel costs account for about 35 percent of airline costs currently, up from 15 percent in 2000 (Stonehouse 2007 p 344). Factors affecting the industry Numerous uncertainties such as the recent global financial crisis and global terrorism have negatively affected the profitability of the industry. The developments have led to shifts in t global air travel services provision as major global players have intensified competition in the new centers of production. Additionally, the emergency of new international financial hubs such as China has led to movements of major airlines from their home markets to new high growth markets. Transnational corporations like the World Trade Bank and International Monetary Fund have facilitated globalisation through the elimination of barriers in trade and investment flows among the nations (Cento 2009 p 87). There are numerous factors affect the competitiveness of the airline in the domestic market. Some factors include the level of technological innovation, the influencing factor creation and organisation of the airline. According to Porter’s diamond model, the structure of the industry, the rivalry of the firms, the factor conditions, demand in the market and supportive industries are the important internal factors that determine the success of the firm in the domestic or national market (Cento 2009 p 99). For instance, the European market is mainly occupied by Air France, Turkish airlines, British airways, Virgin Atlantic, Air Canada and KLM-Royal Dutch airline. The factor conditions that impact of the market share and profitability of each airline in the national economy include the specialized pool of labour such as excellent customer care personnel and specialized pilots. Another factor condition is the availability of special infrastructure such as modern aircrafts and high standard airports. For instance, Virgin Atlantic and British Airlines have increased their market share due to specialized dispatch airports that ensure customer convenience and minimum cancellation of the flights (Iatrou and Oretti 2007 p 100). Another factor that has shaped the national airline industry is the changing demand for the travel services as evidenced by changes in tastes and preferences. Many customers prefer travelling directly to their destination without having to connect through numerous airports. In addition, due to the frequency of travels by the corporate clients, majority prefer the low cost airlines that ensure convenience of travel. The emergency of supportive industries has made many national airlines shift their market bases from their traditional routes to the emerging economies. For instance, in the North American market, the supportive industries such as airports, hotels, food service companies, aircraft leasing companies and aircraft manufacturers have influenced the entrance in the market by foreign airlines such as Turkish airlines, Qatar airlines and Australian airlines (Eaton 2001 p 250). However, the firms’ strategy and degree of rivalry in the airline industry has led to the formation of global strategic alliances in the industry. For instance, the bargaining power of the buyers such as the travel agents, governments, and business travelers has increased thus forcing the airlines to lower their air fare. Additionally, advancements in technology have created new substitute products for the business travel such as videoconferencing thus reducing the demand of business travel. Many national governments have also concentrated on improving alternative transportation channels such as fast trains, boats and private transportation systems such as private jets. The level of intra-industry rivalry especially in the mature markets such as Europe and North America is high. For instance, entrance of foreign carriers and regional carrier establishments have negatively affected the market share of traditional carriers such as United Airlines, American Airlines, Delta Airlines, Canadian Airlines and British airlines (Harvey 2007 p 224). Deregulation of global market and strategic alliances Global airline industry investments increased owing to the high capital investments in new technology and costs of upgrading the existing aircrafts. Over the past decade, the improvement in manufacturing, traffic control and flying simulation technology has also improved the global competition in the industry. The globalisation of the airline industry has also been facilitated by the reduction in trade barriers that has led to global access to capital and goods markets. For instance, the world trade volumes expanded by 2.2 percent annually from 1950s to 1970s due to the elimination of some protectionist trade policies in the major economies. The General Agreement on Tariffs and Trade (GATT) sought to create transparency in trade and eliminate discriminatory practices that hindered global trade. The creation of the World Trade Organization (WTO) in 1995 facilitated the agreement on services trade (GATS) and the protection of intellectual property. This development changed the flow of goods and investments with China, United States, Japan and Germany leading as the main exporters and importers in the world. However, the WTO agreement has led to some positive implications for the transnational corporations in the airline industry since it has stabilized the trade in business travel, led to few protectionism wars including the opening of access to export markets. Additionally, the increasing competition in the global airline industry has led to the formation of global strategic alliances in order to reduce operating costs and expand the global market share (Holloway 2008 p. 67). Beginning from the US market in 1978, deregulation efforts in the airline travel industry have spread to most of the countries in the world. The efforts were aimed at enabling the airlines to select the routes of operation and set their own market prices. Deregulation led to increased competition and subsequent reduction in the travel costs for consumers. Surprisingly, some airlines like Pan Am of the US fought it difficult to bear with the increased completion and sold their right in the domestic and international routes to new entrants. Deregulation led to the hub network that created single ticketing in the major hubs such as London, Amsterdam, Dubai and New York thus enabling the passengers to flow to different destinations in the world from a single hub. The next development in the industry was the creation of Fortress hub that involved a family of airlines that dominated the hub thus enhancing the competitiveness of the airlines. The open market initiatives in the global airline industry changed the structure of global airline industry through enabling foreign carriers to enter the market and access different airport destinations. The European airlines shaped the economies of scale of the global market by purchasing the smaller airlines like Charter carrier and Netherlines that were acquired by KLM (Cento 2009 p 114). Due to globalisation of air travel services, many companies have been forced to form strategic alliances in order to extend the route network and share costs. For instance, the airlines have benefited from shared costs in their marketing efforts, shared costs in maintenance of facilities and operating handling procedures such as check-ins. The consumers have also benefited from reduce air fares, expanded destinations, shorter travel time and round the world ticketing that has enabled travelers to fly to different destinations using a single air ticket. Some of the notable alliances include the Star alliance, Oneworld, and SkyTeam alliance. Another alliance in cargo includes WOW alliance that facilitates inter-airline code sharing connection within different parts of the globe. For example, the Star alliance consists of Scandinavian airlines, Lufthansa, Air Canada, Thai Airways and United Airline and other new members. Some new entrants in Star alliance include Ethiopian airlines, Continental airlines and Turkish airlines. Star alliance currently serves 900 destinations with more than 460 million passengers annually. Another alliance is the Oneworld alliance that serves 600 destinations and members include American airlines, Japan airlines, Royal Jordanian Airlines and British Airlines (Gangopadhyay 2005 p 145). Currently, the global air travel policy is geared at liberalization of the skies, formation of regional open skies and strategic alliances. The liberalization of the global airline industry will lead to more economic development, and stimulate the growth of developing markets. Other expected benefits include increased competition and efficiency through the formation of strategic alliances and reduction in air fares. For instance, open skies and blocs have been implemented in the US and European countries. An example is the United States open sky agreement with more than 95 countries and the EU single aviation market that became operational in 1997. The US-EU agreement is projected to increase the number of passengers by 40 percent in the next five years. Another regional agreement is the ASEAN bloc that has numerous stages of skies liberalization. For instance, the ASEAN agreement has created 2 designated points in each country and unlimited liberalization in the capital cities with also unlimited air cargo liberalization in all parts of the countries. Since 1997, the single aviation Europe market has led to the reduction in air travel fares and improvement in the higher frequency travel routes. In addition, the liberalization of the market has reshaped the airline networks through formation of more global alliances thus stimulating the growth in air travel traffic. Some notable low cost carriers that have entered the European market include Air Berlin, Ryan Air and EasyJet. Several airlines in the European market have operational carbon offset programs that reduce the carbon emissions through efficient landing operations and shorter routes. In terms of technology and operations, global standards have been implemented in order to reduce noise pollution, and ensure local air quality standards (CO/ NOx/ HC). The international aviation industry has also agreed to a 2 percent annual improvement in fuel efficiency while minimizing the carbon dioxide emissions (Delfmann 2005 p 194). In 2013, the global airline industry looks much brighter due to slow recovery that has been witnessed since the end of the economic recession in the major economies. There are better prospects of increased air travel demand globally since major continental airlines such as British Airlines have registered increased mileage per passenger. Another notable development is the Airline-supplier consolidation since major airlines have been forced to improve their customer service due to aggressive pricing strategies (Scott 2012 p 77). For instance, airlines have started implementing the direct-connect models in order to establish close ties with loyal customers. Another development is the environmentally-responsible aviation. For instance, all airlines based in the EU must furnish carbon emission reports and adhere with the emission and noise standards in the market. In addition, most of the airlines have moved to bio-fuel in certain routes. Future prospects Another impressive trend is the growth in incentive trips that account for about 15 percent of travel spending thus creating about 2.6 million jobs and USD 240 billion spending in hotels and restaurants in key global markets. According to the IATA, air traffic will reach 3.6 billion passengers in 2016 with China accounting for a quarter of the additional passengers. About 500 million new passengers will travel within the domestic routes by 2016 while 400 million new passengers will use the international air travel routes by 2016. The international freight volumes will increase by 3 percent due to increase in global production and trade to level at 35 million tones in 2016. Accordingly, this will represent a 3 percent increase in volumes or 4.8 million tones of cargo from the current volume of 30 million tones. Surprisingly, the emerging markets such as Asia-Pacific, Latin American countries and Middle East market will significant drive growth in volumes of international travel. China which is ranked first as the most prospective economy in the future is expected to contribute to 193 million of the 900 prospected new airline travel passengers over the forecast period. The Asia region accounts for about 31 percent of global exports and 24 percent of the foreign direct investments, thus markets like China, India and Japan will experience new airline entrances due to expanding business travel market (Hanlon 2012 p 309). The North American market that is mainly controlled by well established airline companies such as United Airlines, Delta and Virgin Atlantic will remain stagnated due to maturity of the market. The North American region controls 16 percent of global exports and 13 percent of world imports thus forming as sizeable market for business travel. According to IATA estimates, the United States will still remain the largest market for domestic travels at 710 million passengers but the growth in international travel is expected to grow at 4.3 percent due to shifts in world production to emerging markets such as Asian-Pacific countries (Hanlon 2012 p 312). In summary, from the statistics of global production, the largest markets for domestic passenger by 2016 will be United States at 710 million passengers, followed by China at 415 million passengers and then India at 107 million passengers. The fastest growing freight markets will be United States, Germany, India and China reflecting the share of global production and foreign direct investment flows (Clark 2010 p. 23). Recommendations The national government should facilitate the deregulation of the industries through ensuring free skies. Airlines should foster the formation of strategic alliances in order to enjoy economies of scale and hedge against the possible decline in profitability in the domestic markets. Additionally, airlines must embrace bio-fuels in order to minimize carbon emissions. In the future, airlines will have to establish hubs in the emerging markets such as China and Southern American countries in order to benefit from the increased passenger volumes. Conclusion Globalisation of the airline industry has led to reduction in air fares and access to a variety of destinations from a single hub. Changes in global production have shifted the concentration of well established airlines from their traditional markets to emerging markets such as Asia and South America. Major airlines have been forced to form alliances in order to sustain the global competition and expand their market share. The strategic alliances offer numerous benefits to the member airlines such as joint marketing, joint ground services, and baggage handling including joint aircraft purchases thus leading to economies of scale. However, the internal air travel passenger volumes are expected to increase in the future due to increase in global production and foreign direct investments in emerging global markets such as Dubai, India and South American cities. References: Cento, A. 2009. The airline industry: challenges in the 21st century. Heidenberg: Verlag. Clark, P. 2010. Stormy skies: airlines in crisis. Burlington: Ashagte. Delfmann, W. 2005. Strategic management in aviation industry. London. Pearson. Eaton, J. 2001. Globalisation and human resource management in the airline industry. London: Pearson. Gangopadhyay, P. 2005. Economics of globalisation. Aldershot: Ashgate. Hanlon, P. 2012. Global airlines. New York: Routledge. Harvey, G. 2007. Management in the airline industry. Chichester: Wiley. Holloway, S. 2008. Straight and level: practical airline economics. Aldershot: Ashgate. Iatrou, K and Oretti, M. 2007. Airline for the future: from alliances to mergers. Aldershot: Ashgate. Scott, A. 2012. Limits of globalisation. London. Pearson. Stonehouse, G. 2007. Global transnational business: strategy and management. Chichester: Wiley. Read More