Global Airline Industry - Research Paper Example

Global Airline Industry Abstract The given report is about international airline industry. To explore the development, trends and competitiveness of the industry an exploratory research has been conducted. This was a secondary research were both quantitative as well as qualitative data were used. According to the result derived, it has been found that in the last two decades performance of this sector was outstanding. With growth in passenger traffic, the number of competitors also increased that resulted in high competition for market share and price war. However, the recession phase has adversely affected the international airline industry but with time it is expected to be back on its growth curve. Table of Contents Abstract 1 Introduction 3 Research question 4 Literature review 5 Research methodology 7 Data collection 8 Findings and analysis 9 Change in research process depending on the nature of users 13 Reference 15 Bibliography 18 Introduction Globalisation has smudged the boundaries of nations. Companies are trying to diversify their business in different parts of the world, and hence are required to cater to the worldwide customer base. Thus, people need a fast and reliable mode of transportation to move from one place to another or more specifically from one country to another at minimum possible of time. This growing demand for fast and reliable transportation positively affected the airline industry positively. Today, one can travel from one place to another just within few hours. This makes people call Earth a global village where distances between two places in not of much importance. Globalisation has directly affected the global aviation industry. Today, this industry is one of the largest sectors in terms of revenue generation capability, number of consumers who use the service provided by this sector and also the number of rival companies operating in it. With time, this sector has seen major changes in terms of ownership. Initially, aviation industry used to be public sector units where the governments of nations were responsible for developing and providing aviation services to the people. However, after privatisation of this sector, great changes were witnessed in this sector. With time, the number of companies operating in this sector has increased which has resulted in high degree of competition among the rival companies. Companies introduced several innovative business strategies to cater to customers’ needs in an innovative and creative manner. In this report, an exploratory research will be conducted to analyse the global airline industry. While conducting it, a secondary research will be carried out alongside where emphasis will be on both on quantitative as well as qualitative data. Once the data collection process is over, a thorough analysis will be conducted to find out recent development, trends and the nature of competitive rivalry existing in this sector. Discussion will also be done to explain that how the nature of research will change depending on the users of the report. These users can be SMEs, MNEs and independent investors. Research question While starting any kind of research, it is quite essential to have a research question. Research question explains “what one actually wants to interpret out of the research” (Flick, 2009, p.324). Therefore, research question clearly states the aim of conducting the research. The whole of the research aims to find out answer of this research question. Hence it can be said that the research question provides a direction to the researcher. In this research, the research questions are discussed below: 1. How was the development of this industry affected by the external environmental factors? 2. How far are the growth prospects responsible for ensuring competitiveness in the global airline industry? Therefore, while conducting the research, the main aim will be to find out the past performance of this sector and the prevailing competitiveness in the industry. Literature review According to Stoll (2004), airline sector was one of the vital drivers of globalisation. In the past, due to stringent regulations and restriction, this industry failed to flourish as compared to other sectors. However, deregulation and liberalisation process introduced in 1970s changed the scenario of this sector. Thereafter, from 1970s onwards this industry developed at a healthy rate (Vedder, 2008, p.11). In early 1920s, governments of different nations imposed stringent rules and regulation to regulate the air traffic. Such rules reflect the degree of fear regarding market failure, national prestige, safeguard of national defence and fear of free competition. Government of different nations were more concerned with the development of national airline industry and they offered high subsidy and the concept of state ownership came into practice. Inter-governmental Chicago Convention in 1944 resulted in an international aviation market where regulations were stated regarding the route to be followed by the international airlines. This agreement standardised the fare system which reduced the market and revenue prospects of the airline industry. This scenario continued till 1980s but the scenario changed after “bilateral air service agreement (ASAs), inter-airline pooling agreement and the tariff-fixing machinery of the IATA” (Vedder, 2008, p.12). Buton & Hanlon (1994) pointed out that because of growing public pressure and privatisation taking place in all other industries, the domestic aviation industry was also liberalised. This gave an opportunity to the local players to compete for lower fare and high profitability. However this liberalisation was not much effective for the international airline industry because the bilateral agreement restricted the ownership and control issue in the global market (Vedder, 2008, p.13). Major changes were noticed after the introduction of “Airline Deregulation Act of 1978” in USA. With rapid development and reform, soon US domestic airline industry emerged as the largest domestic market. Chan (2000) pointed out that reduction in entry barriers increased the competition in the market. Several new carriers entered the market and offered low fare to the passengers. Thus, there was high pressure on the price and several major airlines witnessed loss in market share (Vedder, 2008, p. 13). As described by Steininger (1999), the major airline companies developed counter strategies to introduce entry restrictions on the new entrants in this sector. They launched “frequent fly programme (FFP), yield management system, computer reservation system (CRS) and hub and spoke network” (Vedder, 2008, p. 13). Further, the airline companies consolidated to gain synergy and thus the international airline market was dominated by few large and well known airline carriers. In April 2007, the “Open Sky Agreement” was signed and in 2008 it came into effect between EU and USA (Great Britain: Parliament: House of Commons: Transport Committee, 2009, p.10). The open sky bilateral negotiation that took place between US and UK allowed both these countries’ airlines to fly freely through any route (Braithwaite & Drahos, 2000, p.456). With growing competition in the international aviation sector, companies started following innovative marketing tactics to retain their competitive edge in the market. The concept of code sharing is one such innovative marketing technique. Code sharing helps the airline companies to develop partnership for combined advertisement, ticketing and handling of baggage on the shared operating routes (Havel, 2009, p.208). Today, this industry offers jobs to millions of people in different nations. Several other sectors like travel and tourism is directly dependent on the quality of service offered by this sector. The airline service is one of the important elements of infrastructure in a nation, and thus it influences the economic development of the country (Steinen, 2006, p.8). Research methodology Before conducting the research, it is quite essential to determine the research methodology to be followed. Research methodology explains the nature of research to be conducted and the research approach to be followed. Depending on the nature of the research question, the researcher finalises the nature of research to be conducted. As for example, research can be comparative, descriptive, correlated, experimental and explorative and many more (Walliman, 2005, p.92). In the given report an exploratory research will be conducted because the main aim is to evaluate and explore its development and competiveness in the international airline industry. Collection and analysis of primary data is beyond the scope of this research. Therefore while conducting the research; secondary data will be taken into consideration. Secondary research takes into account the data which have been collected by someone else and published along with its research. These data can be both quantities or qualitative in nature. A qualitative research is one that is conducted after analysing the qualitative data; similarly quantitative research is based on quantitative data (Burns & Grove, 2005, p.23). In the given report, a secondary research will be conducted after taking into account both quantitative as well as qualitative data. According to Guba and Lincoln (1981), ‘a research must have "truth value", "applicability", "consistency", and "neutrality" in order to be considered worthwhile’ (Morse, et al., 2002, p.15). Therefore, a research must possess reliability and validity and it must provide the same result each time. The result derived must provide information which is valid for the entire population. Data collection The research process starts with the data collection process. Therefore, reliability and validity of research depends on the quality of the data collected. In a primary research, the sampling and data collection process should be planned before hand otherwise possibility of being biased is more. Biasness in data can distort the whole research and the result obtained may fail to provide appropriate information. Using secondary data saves the time and effort in the data collection process. As compared to primary data, possibility of biasness is less in secondary one and thus the latter is comparatively more reliable. However, often the data may not fit the research requirement. Therefore, while collecting data, care must be taken to ensure that it fits the research requirements. While conducting this research, data will be collected from reliable sources. As for example, the reports published by government agencies, information provided by companies, different books and online research journals. If required, information can be gathered from news articles. To nullify the possibility of biasness in quantitative research, a mix research will be conducted where both quantitative as well as qualitative data will be used. Findings and analysis In the last decade, airline industry has witnessed a sharp rise in terms of passengers (both domestic as well as international). Figure 1: Growth in number of passenger in last decade (Source: Air Transport Association of America, 2010) The given graph reflects growth in number of passengers availing the airline services. There has been a sharp rise in passengers from 1990 to 2001. Though in 2002 there was a dip but from 2003 onwards the numbers of passenger travelling on airline in US went increasing. This growth was disturbed by the recession phase that started in early 2008. However, from 2010 onwards the industry has started recuperating. Similar growth was also noticed in UK Figure 2: Passengers at United Kingdom Airports (mppa) Source: Commission for Integrated Transport It is not only in US and UK that passenger traffic increased in the last two decades; even developing nations like China witnessed major hike in passenger traffic. Figure 3: Passenger traffic in China (1959-2009) (Source: Boeing Job Training, 2010) With growth in the number of passengers using airline services, growth was also witnessed in the number of private companies operating in this sector. With deregulation in this industry, several new players tried to enter it. However, the existing carriers used the concept of mergers and acquisitions to gain synergy. For example Cathay Pacific made 3 acquisitions and acquired stake in 2 companies during the last two decades. Similar strategy was followed by Air China, one of the major airline company in China and the only airline that flies with the National flag. Apart from acquisition and acquiring stakes, companies also used the concept of code sharing to gain competency. Competition among the airline companies resulted in a new concept called low cost airline. This concept is comparatively new in the international airline industry. In 1998, merely eight million passengers used the low cost airline in Europe. By 2005, the number of passenger reached 59 million. This data is enough to explain the growth in the low cost airlines services (BAA, 2006). High competition for low fare, entry of new players, changing economic condition and hike in crude oil prices adversely affected this industry. Specially, the recession phase of 2008-2009 was too harsh for the international aviation industry. Several companies registered high losses and few of them were on the verge of bankruptcy. However, as the economic condition is reviving and demand is also improving; in coming years this industry is expected to be back on its growth curve. Figure 4: IATA international passenger traffic (RPKs) growth (% change year-on-year): Dec-07 to Nov-08 Source: Centre for Asia Pacific Aviation, 2009 According to Chief executive Giovanni Bisignan, the international aviation industry will earn about $2.5 billion in 2010 which reflects the healthy growth after two years of losses (VOANew, 2010). The markets experts pointed out that in future the international aviation industry may face challenges because of environmental issues. Growth in airline carriers has resulted in high rate of environmental degradation. To bring this adverse effect on environment under control, governments of different nations will introduce stringent laws. The airline carriers have to make more investment for introducing eco-friendly technology. Such investment will again increase the cost of operation and profitability will decline further. However, this fall in profit is just a short term effect because by making such investments on eco-friendly equipments, companies will be able to attain healthy sustainable growth in the long run. Change in research process depending on the nature of users The nature of research is often influenced by the users who are going to refer to it. As for example, if research has been done for SMEs, then emphasis will be more on local passengers who use the local carriers. The SMEs are more concerned with their local markets, so the report would be developed with special attention towards a particular nation. On the other hand, the MNEs are more concerned with growth prospect of unexplored potential markets. These companies are more concerned with international competitiveness and legal structure of their target markets. In such cases, in-depth information is required for understanding the demand and supply pattern of the developing markets. The report will also focus on the legal framework and other entry barriers. The investors are comparatively more concerned with the profitability of business. Therefore, while developing the report specifically for them, financial indicators like revenue, net profit, earnings per share, growth rate and dividend declared and share price movement in international stock exchange should also be taken into consideration. Reference Air Transport Association of America. May 12, 2010. ATA Estimates Modest Growth in Number of Summer Passengers. [Online]. Available at: http://www.airlines.org/News/Releases/Pages/news_5-12-10.aspx [Accessed on December 05, 2010]. BAA. September 2006. Low-Cost Airlines. [Pdf]. Available at: http://www.baa.com/assets/B2CPortal/Static%20Files/22_LowCostAirlines.pdf [Accessed on December 05, 2010]. Braithwaite, J & Drahos, P. 2000. Global business regulation. Cambridge University Press. Boeing Job Training. 2010. Boeing Job Training News. [Online]. Available at: http://www.boeingjobtraining.com/ [Accessed on December 05, 2010]. Burns, N. & Grove, S. K. 2005. The practice of nursing research: conduct, critique, and utilization. Elsevier Health Sciences. Centre for Asia Pacific Aviation. January 06, 2009. Global aviation industry "now shrinking by all measures" – IATA. [Online]. Available at: http://www.centreforaviation.com/news/2009/01/06/global-aviation-industry-now-shrinking-by-all-measures---iata/page1 [Accessed on December 05, 2010]. Flick, U. 2009. An introduction to qualitative research. SAGE Publications Ltd. Great Britain: Parliament: House of Commons: Transport Committee. 2009. The future of aviation: first report of session 2009-10, Vol. 1: Report, together with formal minutes. The Stationery Office. Havel, B. F. 2009. Beyond Open Skies: A New Regime for International Aviation. Kluwer Law International. Morse, J. M., Barrett, M., Mayan, M., Olson, K. & Spiers, J. 2002. Verification Strategies for Establishing Reliability and Validity in Qualitative Research. International Journal of Qualitative Methods. University of Alberta. [Pdf]. Available at: http://ejournals.library.ualberta.ca/index.php/IJQM/article/view/4603/3756 [Accessed on December 05, 2010]. Steinen, E. V. D. 2006. National interest and international aviation. Kluwer Law International. Vedder, H. 2008. Strategic Alliances in the Aviation Industry: An Analysis of Past and Current Developments. GRIN Verlag. VOANew. August 25, 2010. International Aviation Body Says Industry Growth Continues. [Online]. Available at: http://www.voanews.com/english/news/economy-and-business/International-Aviation-Body-Says-Growth-Continues-101463464.html [Accessed on December 05, 2010]. Walliman, N,. S. R. Your research project: a step-by-step guide for the first-time researcher. SAGE. Bibliography Gliner, J. A. & Morgan, G. A. 2000. 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