The Presence of the Airline Industry Infrastructure and the Status of Prime Importance - Research Paper Example

 ABSTRACT: Inconsequential innovations have changed the way people live and experience the world as much as the invention of the airplane. After the World War II, the first commercial airplane routes were set up in Europe. Over the years, travelling by air has become so customary that it would be difficult to imagine life without it being in existence. The airline industry has therefore progressed over time. This industry has also fixed the way in which people conduct their business and also the way in which people live by minimizing travel time and fixing the distance problems in long journeys, making it possible for people to visit and conduct business in places once considered remote. This report focuses on the universal Airline Industry. The analysis of the nature of the airline industry is done by using strategic management frameworks. This report basically demonstrates the functionality of the airline industry and also affirms the rate of competition that exists within the airline industry and also amongst the competing firms in the airline industry. The purpose of this report is to analyze the airline industry using the strategic tools of Porter’s 5 forces, PESTLE, and the SWOT analysis. Furthermore, analysis based upon the figures pertaining to the current scenario of the airline industry is also made. The analysis brings forth the competitive advantage of the industry as a whole and the fact that why is it so important to the contemporary world. TABLE OF CONTENTS TOPIC PAGE List Of Abbreviations 3 Introduction 4 Research Methodology And Data Collection 6 Industry Review Airline Industry Attributes Airline Industry Trends Airline Industry Challenges 7 7 8 9 Industry Analysis Analysis Based On Strategic Management Frameworks Porter’s 5 Forces Analysis On International Airline Industry PESTLE Analysis On The International Airline Industry SWOT Analysis Airline Industry Analysis And Forecast Based On Figures 11 11 11 14 17 18 Conclusions 21 Bibliography 22 Appendix A Appendix B LIST OF ABBREVIATIONS (in alphabetical order) IATA International air transport association PESTLE political, economic, social, technology, legal and environment USA United States of America INTRODUCTION The airline industry is a large and growing industry which facilitates the global economic growth, tourism, world trade and international investment and it is basically a core unit to the globalization present in many other industries. There has been a huge growth in business travel, this is as a result of companies becoming increasingly international in terms of their investments, production chains, customers and their supply, and also the accelerated growth in the global trade in goods and services and international direct investment has contributed to the high growth in business travel. The general pattern of the airline industry ownership has gone from government owned or supported to independent, for profit public companies, that is in prior years, airline industries were partly dominated, owned and controlled by government, but in recent times, airline companies are principally owned by corporations closely for shareholder value maximisation. The airline industry has advanced towards globalization and consolidation, characteristics associated with the acknowledged development of many other industries; it has gone through the alliances and partnership between airlines linking their networks to expand access to their customers, this is ranging from marketing agreements to code - shares to franchises and equity transfer. The international airline industry is a highly competitive combination of markets. Never the less, the airline industry is undergoing a term of abstruse transformation which is associated with three major factors which are mutually connected to one another. These factors are the global competitive environment in the airline industry, the clients demand aggravated by the condition of global economy and the binding regulatory requirements of the airline industry. The airline industry review focuses on the revenue generated by the industry, and the size of the industry with concentration to the firms involved within the industry. This is followed by the analysis of the airline industry, hereby characterizing the industry classifications, the industry characteristics and the competitiveness that exists within the players in the airline industry. Strategic management tools such as Porter’s five (5) forces and PESTLE are used in this report to analyze the different aspects of the airline industry. The Porter’s 5 forces deal with the threat of the substitutes to the industry, the bargaining power of the buyers and the suppliers, the threat of the new entrants and with the rivalry between the existing firms within the industry. The second strategic tool (PESTLE) used for the analysis of the airline industry encompasses the political, economic, social, technological, legal and environmental facets of the industry under consideration. The strategic options available will be evaluated, analyzed, and recommendations outlined. This is in order to ensure that the airline industry has a competitive advantage that stands up with its competitors, and perhaps excels overall, and these strategic options will be made towards the growth and developments of the airline industry. METHODOLOGY AND DATA COLLECTION This report sources were gathered based on recent and credible information sources. The report was conducted using only secondary data for which the main sources include scholarly journals and articles, industry articles, marketing reports, industry reports, internet sources available on different related websites, relevant texts books and published documents and articles on the global airline industry. Secondary data sources are available information already published for user’s acquisition, in as much as its one of the cheapest mode of acquiring and gathering already existing information, it has its own limitations. The following are limitations of secondary data sources; Secondary data can be generally vague and not really help companies with decision making The information data may not be accurate. The sources of data must always be checked The data may be old and out of date The sample used to generate the secondary data maybe small The company publishing the data may not be reputable Various authors buttress the importance and value of using secondary data sources for the research methodology of a growing and reputable industry like the airline industry; this is in order to produce a credible perception of the global airline industry. The secondary source of data as the methodology for this report is competent, effectual and ideal to produce a strong and reliable report. INDUSTRY REVIEW The scope and scale of the airline industry are from those airline companies with a single airplane carrying cargo or mail, through full service international airlines operating hundreds of airplanes in different types. The structure and services of the airline industry can be classified as being regional or domestic, intercontinental, intra continental and maybe operated as scheduled services or charters. The adaption’s in the different types of airline companies, the scope in which they operate and the route they ply makes the airline industry analysis complex. Regardless of the airline industry complexity, different patterns which occur as regulators have developed in the last fifty years of the airline experience. Though these various patterns have not been completed for all the airlines in all the regions, the increasing demand for air travel services is a derived demand. This means that it is dependent on business passenger demand, leisure passenger demand, business needs for cargo shipments, and all these are solely influenced by macroeconomic activities in the airline industry market. AIRLINE INDUSTRY ATTRIBUTES Within the airline industry there are certain attributes, particular to the industry itself which ensure its growth and evolution. Some of them are discussed as follows: Sustaining airline profitability Maintaining a transparency of the pricing in the airline industry is of vital importance since the inception of other low cost airline companies. It is a part of the strategic aim of the airline industry and remains a part of the competitive advantage as well Ensuring safety and security The loss of any degree of the consumer’s confidence in the reliability and performance of the air transportation could cost a lot of damage. To prevent any anticipation of losing the customer satisfaction the elements of security and safety in the air travel are a vital ingredient. Developing adequate air transportation infrastructure For any industry, its growth and prosperity largely depends upon the level of satisfaction it is able to grant to its consumers. Thus to deal with the issue of consumer satisfaction in the airline industry the adequate development of the whole infrastructure of the air transportation is a mandatory attribute of the airline industry. AIRLINE INDUSTRY TRENDS Whether it be a single aircraft delivering cargo articles to different places or the numerous aircrafts carrying the passengers, both the categories of the air travel fall under airline industry. The segregation of the airline industry would result in the types that comprise of regional, domestic, between different continents or within the same continent. “Records show that the demand for airline travel has been increasing. 1950 through 1960 manifested a trend when the yearly growth was consistent at approximately 15%. Airline industry showed yearly growth ranging between 5% to 6% consistently in the 80s and the 90s.” (www.economywatch.com) However, due to the deregulation policies implemented, the prices of airline tickets went flexible due to which the expected rate of growth cannot remain the same. The airline industry in some of the countries is regulated by the government; however, in countries where this industry has been privatized, it still has to be in accordance with the norms and regulations put forward by the government of that country. The norms and regulations laid down by the government have been formulated while considering the safety, economic and political aspects. “The Airline industry trend shows that during the period 2000 through 2002, 6% profit was enjoyed by the Airline industry, as much as 10% to 13% was gained by companies in the catering sector, manufacturers of aircraft gained by 16%, airports gained by 10% etc…” (www.economywatch.com) AIRLINE INDUSTRY CHALLENGES The airline industry is a big industry and is also known for its rapid growth over years. Just like every other industry, it faces it own challenges which has enforced the airline industry to amend how they run their business both on the operational and financial level. The International Air Transport Association (IATA) considers that the fuel bill, efficiency, cash reserves, capacity management, and partnerships are the risks and challenges of the present airline industry. Although the fluctuations and increase in the fuel prices is affecting the profit margin in the industry and also clear terrorism acts and threats which has demoralized the airline industry by external shocks, the industry still lies in a secure position; this is as a result of the increasing demand for air travel as cited by Airline News Resource, “the steadily rising positive trend which has been evident since November is in reaction to the miserable experience of a year ago. Thus growth in March of 8.5% goes only two thirds of the way towards making up the damage of 2009.” (www.airlinenewsresource.com) However, the USA occurrence of the September 11, 2001 and the post 9/11 effect on the airline industry cannot be neglected as a negative effect, also the recent and improving internet developments, betterment and rapid technological growth has affected the whole face of the airline industry (Kearny, 2007). It has been well observed and discovered by the players in the airline industry that security is one of the key challenges faced by the airline industry (Prlog, 2009; Ideas, 2009; Kearny, 2009; Ferreira, 2001) INDUSTRY ANALYSIS The airline industry is an industry that is of an ever changing kind. There are several economic characteristics associated with the industry – where there are potential threats, there is also available a host of opportunities. The importance of this industry lies in realm of travelling and the tourism industry. However, its importance is not confined to only these areas: it is also of a vital nature when it comes to the developing of the new business strategies amongst different industries. In 1920’s the first scheduled airline service started and since then there has been a lot of eventful history including eras of prosperous growth of the airline industry. Moreover the industry has become one of the most significant facets of the contemporary transportation infrastructure. There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector (Thurlby, 1998). ANALYSIS BASED ON STRATEGIC MANAGEMENT FRAMEWORKS PORTERS 5 FORCES ANALYSIS ON THE INTERNATIONAL AIRLINE INDUSTRY As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry’s likely profitability is conducted in Porter’s five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces. The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization’s behaviour in a competitive market. These include the following: The potential threat of new sellers entering the market. The threat of substitute products becoming available in the market. The impact of the suppliers on the sellers. The power exerted by the customers in the market. The rivalry between existing sellers in the market. Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998). The potential threat of new sellers entering the market The threat of the new entrants in a market is ever present to almost all organizations of any industry whatsoever. These new entries might be offering better services or products at better prices. However, in the case of airline industry the threat of new entrants is relatively low; which could be attributed to some factors such as the extensive capital requirements. In the present times, due to economic crises the financial institutions are unwilling to give an access to monetary assets, especially such heavy kind of loans. Even then, if a new entrant is able to surpass these economic barriers, it will be extremely difficult to compete with already existing airlines that have an established position in the market, with marked brand recognition and enjoying a large base of loyal customers. The threat of substitute products becoming available in the market Another threat to the airline industry is from the introduction of substitutes. The decrease in the prices of the fuel, for instance, may drive the people to travel by road or via train. The distance travelled by an individual usually determines the mode of travelling as well. For regional airlines, the threats of substitutes may be higher as more people might prefer to travel by road on the account of decreased fuel prices. However, there are still many who would fly rather than road-travel such as the community of the businessmen. But it should be taken under consideration that the trend of the energy costs and the introduction of the energy efficient vehicles may instigate an interest of travelling other than air. The impact of the suppliers on the sellers The ability of the suppliers to raise prices or reduce the quality of the purchased goods or services can affect any possible country. In the case of the airline industry, the bargaining power of the suppliers is high as there are only two major suppliers in the industry, namely Boeing and Airbus. Being so few in number, their bargaining powers are very high because of the control of the market these suppliers possess due to the high demand of the products that they manufacture. The power exerted by the customers in the market Like the suppliers, the powers exerted by the customer can also have a considerable affect on the industry. The industry is affected by the buyer’s ability to reduce prices or bargain for higher quality or more services. In the airline industry, the high number of the buyers make their power to haggle quite strong as there are a lot of passengers in the industry. The switching costs are low and the passengers have a lot of choices available in the market. The rivalry between existing sellers in the market When it comes to the airline industry, there exists a rivalry amongst the firms due to the fact that there are a variety of airline companies available that provide aircrafts and services to the best of their capacities to the consumers. Moreover, some companies try to expand their market shares by creative advertisements and exclusive promotions and also by providing best prices and services to their customers. PESTLE ANALYSIS ON INTERNATIONAL AIRLINE INDUSTRY PESTLE analysis is an analysis of the external macro – environment that affects all firms. PESTLE is an acronym for the political, economic, social, and legal and environment. A well thought analysis only give a competitive advantage, however can be used to maximize upon advantages of opportunities hence make contingency plans for threats when compiling business and strategic plans (Byars, 1991; cooper, 2000) It is very important to understand and pin point the fundamental and specific factors that affect major variables in the industry both on the short and long run before the analysis of the macro – environment is done. Such external factors are usually beyond the firms control and sometimes present themselves as threat. For this reason, some say that the pestle analysis is an appropriate term for these factors. Let us look at the pest analysis of the global airline industry. Political The political factors that affect each industry present in a country cannot be ignored. Either ways, the political intervention has to exist in the industry; this is because the airline industry is prone to modification in a political environment because it has a great bearing on the travel habit of its customers. An unstable political environment accounts for ambiguity in the minds of air travellers, in regards to travelling to other specific or particular countries. Since the 11th of September 2001, the involvement of government in the airline industry has increased tremendously. This involvement has come both in form of the various taxes charged to airlines in different countries for different landing and fuelling or refilling services and legislations. Economic Business chain posses a broad reaching impact on the airline industry. At every point of the recession, airline is recognized as a luxury and therefore spending on air travel is much reduced which lead to cut down in prices. During prosperity phase, people indulge themselves in travel and prices increase. After the September 11, 2001 occurrence, the world economy dropped into global recession due to the depressed sentiment of the consumers. According to Ezard (2009) recession is by far the greatest strategic issue and threat facing the airline industry. It is more concerning than high oil prices because it is the first truly global recession the airline industry has faced. Social Different people across cultures have developed different habit for travelling on different grounds and reasons. This can be as a result of the growth in population across cultures in the world which has a tremendous effect on the airline industry. Different people at various stages in life have particular disposable income that they are willing to spend. There has been an increase in different people travelling across cultures irrespective of cultural differences either for tourist’s reasons, business attraction or reasons, educational purposes and different cogent reasons. Technology In recent years, the reducing cost of technology has provided the airline industry with greater advantage. The increasing use of internet has provided the airline industry with lots of opportunities and the reduced cost of technology can be as an advantage to the means of entry in the industry. Recent technological assimilation and integration can also be expensive to adapt, this is as a result of up to date and the occurrence of latest and new developments that occurs often in technology. Legal Various countries have different legal laws and rules that govern them in their different industries. These rules vary across countries that are some countries have flexible rules that favour the airline industry; some countries tend to be strict while some countries are amiable. Environment The go green initiatives and the variations in the climate factors have affected the airline industry. Different airlines have to show that they control a corporate social responsibility policy. SWOT ANALYSIS The analysis of the strengths, weaknesses, opportunities, and threats of any organization are the key elements to understanding that industry. The international airline industry is no exception by any means. The strengths and weaknesses comprise the internal analysis, whereas the opportunities and the threats compose the external analysis. Strengths One of the major strength of this industry is the product that they sell – the air travel. Over the time the trend to travel by air has been increasing mainly because of its safety records and the face that it is the fastest way to travel. Moreover staff of the airline industry is highly trained and professional, trained and experienced. Weaknesses Huge amount of capital investments are required and the return in these investments may not as planned. The airline industry also have high “spoilage” rate as compared to the other industries, i.e. once the flight leaves, an empty seat is a loss. Other than this, as in this industry travelling is done all over the globe, the climatic factors can change quickly and make the scheduling difficult. Opportunities Energy efficient resources could result in lower input of costs in terms of fuel. Technology advancements can generate revenue via the value-added services for which the customer will pay extra. Moreover other advancements in technology can result in cost savings with different ways. Threats The global economic crisis leads to decreased trend of travelling by air either for leisure or for commercial purposes. Also the terrorist activities can have a negative impact on the air travelling. Additionally, government intervention can result restrictions or limitations AIRLINE INDUSTRY ANALYSIS AND FORECAST BASED ON FIGURES The position of the airline industry is a stable one posing a substantial potential for a strong growth. Forecasts suggest that the number of passengers will double by 2010 (www.adg.stanford.edu). However, despite the forecast suggestions of the passengers increasing by double, the future potential growth holds quite a lot many challenges. In order to be successful in the face of these challenges the airline companies will have to continue to tackle their costs and improve their services and products. Only by such an endeavor can they secure a strong presence in the global aviation market. Early in 2010, the airline markets rose to a considerable extent and so was the case by the end of year 2009, but however, “growth remains concentrated in the emerging markets of Asia, Latin America and the Middle East, with benefits accruing mainly to airlines in these regions; highlighting the problems caused by ownership rules” (IATA) The same standards suggest that the market growth of the developed markets of Europe and North America have a slow trend. The air travel and the freight volumes of the international markets is shown in figure 1 of appendix A. as shown in the graph, the increase in the air travel and freight is due to the divergent performance of the airlines operating in different regions as demonstrated in figure 2 of appendix A. By an insightful analysis of the graphical figure it could be inferred that the financial performance of the airlines is closely associated with the economic growth of the areas they serve. Although there has been further development of alliance co-operation, joint ventures and some mergers & acquisitions it is the case that airlines are still highly dependent on the traffic generated by their local economies and trade lanes. Consequently, the airlines that are functioning well in the current scenario are the ones from Asia and Latin America, where a revival of economic growth has been observed. The weakest markets as depicted are clearly across the North Atlantic and within Europe, where the economic recovery has faltered, under pressure from consumer debt and still weak bank balance sheets (IATA). Other than the fact that there is a big difference in air travel by virtue of the region and the market, there is also a considerable difference in the passenger numbers by the seat class (figure 3, appendix A) The figures for the Earnings Before Interests and Taxes for the different regions across the globe are shown in table 1 given below: Table 1 – source: IATA economics As already discussed before, the strongest market trend in the airline industry is exhibited by the regions of Latin America and Asia. The forecasted EBIT for the year 2010 for Latin America and Asia-Pacific is 4.1% and 3.7% respectively as compared to that of North America (1.9%) and Europe (-0.6%). However, overall there is a net positive EBIT, but the forecasted EBIT for the year 2010 is in the negative figures (figure 4, appendix A). In our analysis of the airline industry with regard to the strategic management frameworks, it was discussed that one of the most difficult challenges for the new entrants in this industry is that of the amount of capital invested. However, the forecasts by International Air Transportation Association have suggested that the long term financial unsustainability will remain when it comes to return on the capital (figure 5, appendix A) CONCLUSION The airline industry is an ever changing industry which has to face many challenges in the way of its growth. However, despite the numerous challenges posed by the different factors, this industry continues to be a prime interest of many entrepreneurs. The increase in the trend towards tourism and of globalizing different businesses, the presence of the airline industry infrastructure has achieved the status of prime importance. BIBLIOGRAPHY The Airline Industry, viewed at 6 March 2010, International air line industry overview, viewed at 4 March 2010, World’s airlines industry faces risks and challenges, viewed at 23 February 2010, Current aviation industry overview, viewed at 26 February 2010, Graziadio Business report, A journal of relevant information analysis, viewed at 3 March 2010, Limitations of secondary research, viewed at 7 March 2010 Airline Industry – service sector management, viewed at1 March 2010, Porter’s 5 forces analysis, viewed at 19 February 2010, < http://university-essays.tripod.com/porters_5_forces_analysis.html> Farr, M. J. R. (1979). The Long – term retention of Knowledge and skills: A Cognitive and instrumental Perspective (1st ed.). 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Thurlby B (1998) “Competitive forces are also subject to change”, Management Decision London The Airline Industry, viewed at 6 May 2010 International Passengers Up 8.5% in March, viewed at 7 May 2010, Economy Watch, Airline Industry, viewed at 7 May 2010, Areas of Activity, IATA economics, viewed 12 May 2010, APPENDIX A Figure 1 Source: IATA Figure 2 Source: IATA Figure 3 Source: IATA Figure 4 Source: IATA Figure 5 Source: IATA APPENDIX B Table 1 Source: IATA Read More