Factors that Affect Demand for Passenger Traffic Faced by an Airline - Assignment Example

Identify and Explain Factors that Affect Demand for Passenger Traffic Faced by an Airline and Factors that will influence Cargo Growth in the future. Abstract: The globalisation phenomenon and the digitisation of business have significantly impacted the traditional tourism industry business model. Whilst the current economic downturn clearly impacts passenger traffic demands faced by airlines; the airline industry reports suggest a consistent decline in passenger traffic in the past ten years, particularly in the US domestic market. This paper critically evaluates the factors impacting demand for passenger traffic and proposes that globalisation and changing consumer behaviour has pressed the need for airlines to become consumer centric in implementing customer relationship management as part of growth strategy. However, this has to be balanced against airport costs for airlines along with the location of hub and gateway airports, which clearly impact passenger traffic demand. Directly correlated to passenger traffic demand is the air cargo carrier market and whilst current economic predictions point to a temporary reduction in the carrier market, long term predictions suggest that the air cargo market may attract an increase in profitability, particularly with integrated cargo carriers. To this end, this paper further evaluates the factors affecting cargo growth in the future and considers the extent to which airlines can maximise profitability in the cargo carrier market. 1. Introduction Tourism is one of the largest employers and major industry in the expanding market of overseas travel and its annual level is predicted to grow to an estimated 1.6 billion by 2020 (Swarbrook, J. and Horner, S. 2006). Whilst deregulation of the 1970s enabled airlines to directly connect with passengers, the relationship between globalisation and the growth of the internet has fuelled the digitisation of business, with a concomitant impact on the airline and air cargo industry, effectively forcing airlines to redevelop competitive strategies for continued growth. For example, Held and McGrew argue that globalisation represents the interconnectedness of states, societies and culture as facilitated by easier travel options and the internet. This in turn has propelled global trade, ideas and capital (Held & McGrew, 1999). Indeed, Brah et al, further highlight the instantaneous nature of globalisation as evidenced by the growth of the internet and wide dissemination of information (Brah et al, 1999: 3). They further argue that a central part of this is movement of capital, commodities, cultural imaginations and practices (Brah et al, 1999:3). On one side of the spectrum, this has led to commercialisation of the customer, which in turn has revolutionised traditional business models in the travel industry particularly with the demand for passenger traffic, air cargo services and how airlines compete within this market space. Moreover, the impact of globalisation on the traditional travel industry business model is in turn reflected by changing consumer habits and multi-chain retail strategy. Furthermore, the proliferation of the Internet and online growth has facilitated novel societal trends and business opportunities through the piecemeal evolution of electronic commerce, thereby creating a new social and business model accommodating the contemporary passenger demands. Additionally, the reshaping of traditional business models has segmented the market place, thereby enabling new airlines to enter the market; which in turn has an impact on passenger traffic for airlines. As such, the increased competition for passenger traffic has pressed the need for airlines to introduce effective customer relationship management (CRM) into growth strategy and consider alternative income streams such as integrated and combined air cargo profits. The focus of this paper is to critically evaluate the central factors affecting demand for passenger traffic by airlines and cargo growth going forward. To this end, I shall firstly consider passenger demand in Section 2, followed by a discussion of Air Cargo issues in Section 3. Section 2: Demand for Passenger Traffic Faced by Airlines Recent reports by Ashford et al (2005) and Burghouwt (2007) highlight that notwithstanding the growth of the tourism industry as a whole, there has been a consistent decline in demand for passenger traffic for airlines, particularly in the US market (Ashford et al 2005; Burghouwt, 2007). It is submitted as a central proposition in this paper that in the contemporary socio-economic framework the demand for passenger traffic is intrinsically impacted by the globalisation, challenges of the internet business model and economic triggers such as the current economic downturn. Therefore, in the immediate future, it is evident that the current economic crisis has clearly impacted demand for passenger traffic by airlines. Indeed, the International Air Transport Association asserts that the current passenger traffic demands are continuing to drop, which in turn is impacting load factors (www.iata.org). Additionally, a report by the Air Transport Association of America (ATA) in June 2009, demonstrates that passenger revenue suffered the sharpest drop in 2009 (www.airlines.org). Similarly, the report found that cargo traffic also took a 26 per cent decline, with both being attributed to the economic crisis and the swine flue influenza outbreak (www.airlines.org). As a result, business demand for passenger traffic is in decline and the president of the ATA commented that “despite extreme price discounting, June data reflect ongoing weakness in demand for air travel. The airline industry remains fragile as this country continues to suffer from the worst recession since the 1930s” (www.airlines.org). However, whilst the current economic situation is undoubtedly a factor affecting passenger demand in the immediate short term, it is important to additionally consider the long term factors impacting demand for passenger traffic in the future. Indeed, Ashford et al highlight the point that passenger traffic is built up from the “individual journey demands of many passengers….. not surprisingly, this is reflected in different peaking characteristics depending for example on whether the passenger is domestic or international, scheduled or charter, leisure or business” (Ashford et al, 1996:30). To this end, it is submitted that the interrelationship between globalisation and its concomitant impact on the socio-cultural framework in turn impacts modes of travel and thereby passenger traffic. For example, Urry argues that the way in which tourists operate now book holidays has via the globalisation impact on the traditional tourist business model has created the “tourist gaze phenomenon” (Urry, 1990). This not only changes patterns of tourism via bespoke and cultural and urban tourism, it correlates to other social changes via globalisation (Urry, 1990). In further considering the impact of globalisation in tourism, Wahab refers to the trends in globalisation to tourism with discussions of who the tourist is; their demands and the industry response, particularly in a multi channel climate and sustainable development (Wahab & Cooper, 2001). As such, Wahab & Cooper argue that the globalisation has fuelled increased competition between tourist destinations worldwide (Wahab & Cooper, 2001). Indeed, the internet business model has clearly segmented the retail marketplace and Gittell highlights the point that in terms of charting trends in demand for passenger traffic, Southwest Airlines growth was driven by growing demand for the product that Southwest delivered so well: reliable low-cost travel and therefore “consumer behaviour changed in the early 1990s toward greater price sensitivity, downturn in business cycle and corporate control over business travel, and impacted both” (Gittell, 2005). Additionally, it is submitted that the impact of demand for passenger traffic on airlines is clearly cyclical and Gittell comments that “anybody who has a modicum of Internet capability and wants to take what is now a modest amount of time can very rapidly find out and comparison shop….. and business travellers may be in the process of retraining themselves as to what they are willing to pay for business travel tickets” (Gittell, 2005). From the airline’s perspective, the proliferation of different business models, work patterns has meant that the success of the working organisation is inherently dependent on greater participation and employee empowerment, through the concept of the “learning organisation” (Porter, 1996). Interestingly and analogous to the position regarding the airline industry is that many of these companies are in high pressured industries exposed to international competition, which forces corporations to constantly re-evaluate the working organisation model. Hamal and Prahalad argue that a central element of this is the shift in how companies compete with each other, with the underlying basis of competition moving towards “soft” factors such as reputation, service and market placement and positioning. This in turn reflects the evolution of the “knowledge-based economy” (Hamal and Prahalad, 1996). From the airline industry perspective, the fall in profits in the current economic downturn and global pressures has clearly created a need to manage costs and flexibility, which in turn creates the need to change the dynamic of the work organisation, which has impacted passenger traffic. To this end Gittell et al further comment that the current travel industry business model further compounds the falling revenues for passenger traffic for airlines and that “complicating the whole matter is the fact that unlike the situation in most other modes of transportation where the passenger is dealing with only one operator, in air transport, there is complex interrelationship of the passenger, the airport, the several airlines” (Gittell, 2005:30). Therefore, in terms of the long term impact of passenger traffic demand on airlines, it is submitted that central factor clearly influencing passenger traffic for airlines is the conflict between the airline meeting passenger demands and “the airport influencing demands of airline in terms of loading, time slots and fleet utilisation” (Gittell, 2005, 31). Accordingly, whilst the economic conditions have clearly impacted passenger traffic, Burghouwt points out that a significant factor is airport connectivity and spatial concentration. For example, “the distribution of air traffic in the airport hierarchy has always been skewed towards the upper end of the airport hierarchy even before the deregulation of various air transport markets” (Burghouwt, 2007: 148). This in turn impacts prices of landing fees, which impacts sustainability of an airline in maintaining attractive prices to sustain passenger traffic demands. Moreover, in highlighting the impact of hub and gateway airports on the passenger market, Burghouwt further makes the point that “several authors argue that the adoption of hub and spoke concentration of connectivity and passenger flows at a few key airports in the hierarchy. Since airline hub and spoke networks require a concentration of traffic in space and time, such network strategies may result in spatially concentrated traffic patterns at the level of the aggregated aviation network”. (Burghouwt, 2007:149). Additionally Burghouwt refers to leading studies between 1970 and 1997; which indicate that hubs and gateway airports grew much faster as a result of passenger traffic demands (Burghouwt, 1007) Therefore, to this end, Goetz and Sutton (1997) highlight the point whilst passenger traffic flows are “attributable in part to general population and economic growth trends, they also reflect the importance of airline hubs and international gateways” (In Burghouwt, 2007:150). If we consider these factors from an airline perspective, in the long term airlines the deregulation of the marketplace and customer use of the internet in making travel choices has forced airlines to maintain competitive pricing and introduce CRM policy to sustain even passenger traffic demands. However, the ability to do so is inherently reliant on location to key hub and gateway airports and airport ability to dictate loading and landing times, which in turn shapes impact passenger demand for airlines. In any event, the current ten year figures demonstrate that whilst the current economic downturn may have precipitated the decline in passenger traffic; there has been a continued decline in passenger demand, which also has an impact on air cargo for the future. 3. Air Cargo The previous section highlights how the recent figures for air cargo in the US suggest a consistent downturn in profitability. Interestingly, Wensveen “Carrying cargo has been far more important than carrying passengers for almost every mode of transportation ever used by humankind… the only exception so far has been aircraft” (2007, p.321). However, despite the recent figures of the ATA indicating a sharp decline in airline profits from air cargo, Wensveen refers to the arguments of commentators who “believe that aircraft will be carrying more cargo than passengers as the 21st century progresses” (Wensveen , 2007:321). Furthermore, Wensveen suggests that “cargo accounts for a large share of revenue for most major non US air carriers, but it plays a much less prominent role for many other airlines, including most major US passenger airlines” (Wensveen, 2007: 321). Whilst such arguments are clearly at odds with current ATA statistics, it is evident that a significant factor is the current economic backdrop. Nevertheless, as a general observation, Wensveen highlights that a fundamental reason for the inability to increase air cargo profits is the fact that air cargo cannot surpass passenger revenues is due to the premium cost mode of transportation and costs involved. (Wensveen, 2007: 340) To this end, there is clearly no compelling reason to use air services and generally “computer companies regularly ship by air, for example, because the added cost of air transportation is more than offset by getting the product to market and into service earlier” (Wensveen, 2007: 321). Additionally, the other companies using air cargo are fresh produce companies as a result of necessity. Moreover, Vasigh et al observe that in terms of airline financing, due to the fact that the higher proportion of profitability derives from the passenger market; the majority of airline capital is primarily being injected into passenger aircrafts that are designed for maximum passenger capacity and not cargo (Vasigh et al, 2007). As such, Wensveen suggests that “the unprofitable operations of freighter aircraft through the years also took a toll on air cargo’s reputation. The fact that freighters lost money somehow translated to the belief among senior management of the leading US carriers that air cargo was an unprofitable business” (2007: 340). Alternatively, it would appear that from the long term growth perspective, the integrated air cargo market is successful and “airlines such as Lufthansa, Japan Airlines and Air France, earn as much as one-third of their gross revenues from cargo on some routes” (Wensveen, 2007: 340). However, with regard to combination carriers, it would appear that whilst not as successful as integrated carriers, there is an increasing trend towards the contracting out of airport cargo services, which Wensveen posits may increase airline cargo profitability by cutting out labour costs. Nevertheless, in terms of long term trends for airport cargo, such an approach to combination carrier profitability by airlines must manage to sustain pricing and service quality to prevent continued loss in market share (Vasigh et al,2007). Overall, it would appear that the most sustainable part of cargo growth in the long term will be the integrated cargo carrier market. However, from an airline’s perspective this is clearly likely increase implications for airports as integrated domestic traffic moves in all cargo aircraft as there will clearly be a rise in demand for parking positions (Brebbia & Pineda, 2006). To this end, Wensveen highlights that “integrated carriers have more flexibility in locating cargo warehouses than do combination carriers, which need access to passenger aircraft, so the demand for on-airport cargo warehouse space will grow less rapidly than the demand for cargo aircraft parking” (Wensveen, 2007:327). Moreover, these issues further correlate to the point made in section 2 regarding gateway and hub airports as if integrated cargo carrier market increases; it will clearly impact carrier flight routings. 4. Conclusion The above analysis highlights that in the short term, both the air cargo and passenger demand profitability have seen sharp declines for airlines. In terms of passenger demand, the long term outlook suggests that globalisation, the internet and the empowerment of the consumer have resulted in increased passenger control. Moreover, the ensuing market segmentation and proliferation of new airlines has created challenges for airlines in retaining a declining passenger traffic demand. As such, in light of the long term projections for passenger traffic demand, airlines are faced with having to maintain attractive pricing and implement effective CRM strategy to retain customer loyalty as Brebbia and Pineda assert that “the continuing support of transport business is dependent on imitative behaviour of travellers….. the most effective way to ensure imitative behaviour …..is to provide a product or service that continuously meets the traveller’s expectations” (2006, p13). However, this has to be balanced against airport pricing in the increasing competition for favourable landing times, which is inherently correlated to passenger traffic demands. In turn, airport controls in such matters is compounded by the power of hub and gateway airports on passenger traffic demands. Alternatively, whilst the current air cargo market has inevitably been affected by the economic downturn, estimates suggest that in the long term, air cargo profitability will that will grow at 5 per cent in US and 6 per cent in Europe (Wensveen, 2007). Moreover, it is argued that globalisation and increased improvements to aircraft could provide a much needed stimulus to air cargo demand and to this end, Wensveen posits that “in addition, the formation of an integrated European economic community should result in increasing traffic to Europe from all areas of the world. The European market will consist of some 330 million people, exceeding by half the size of the United States (Wensveen, 2007:345). Therefore, going forward, airlines may want to consider investing further into the integrated carrier market, particularly if trade barriers and customs procedures are removed. Bibliography Ashford, N. Stanton, H. & Moore (1996) Airport Operations. McGraw Hill. 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