The Impact of the Crisis on the International Airline Industry - Coursework Example

 The Impact of the Crisis on the International Airline Industry The international airlines industry offers its exclusive services across different regions of the world and is one of the major contributors to global economy. In the past, the airline industry has been regulated rigidly, which has significantly restricted the widespread development of the industry. It was in 1978 when United States deregulated its airline industry. Since then deregulation of airline industry has spread in many other nations of the world which I turn has offered airline industry across the world with ample scope to develop and expand. At the same time, competition has also grown which has seen to affect the international airline industry in an immense manner (Massachusetts Institute of Technology, 2014). Subsequently, during the year of 1990’s the effect of globalisation has been observed in the worldwide market place. As an effect, it has been viewed that globalisation has affected each countries domestic air travel. Moreover, it has been observed that the global airlines industry consists of over 2,000 airlines and more than 23,000 aircraft that are engaged in providing exclusive services to more than 3,700 airports around the world. Thus, in the contemporary era the international airline industry has become a major economic force in terms of its own operations and its influences on other related industries such as tourism and aircraft manufacturing (Massachusetts Institute of Technology, 2014). The objective of this paper is to produce a report for a financial institution explaining the most important economic characteristics of the international airline industry. In addition, the paper also aims at addressing how airlines are likely to be affected over next 5-10 years owing to certain imperative factors such as (a) recent financial crisis and the underlying business cycle, (b) changes in price of oil, and (c) the availability of funds for investment (and the prospects for the interest rates). The Impact of the Crisis on the International Airline Industry Over the last 30 years, it has been observed that the growth of world air travel has averaged approximately 5% per year, which has been changed due to the changing economic conditions. On the other hand, differences in economic growth across different regions of the world have been the one of the crucial factors for declining the global airlines industry (Oprea, 2010). The international airline industry has undergone through several crisis in the past including 2001 after the devastated attack on the world Trade Center. According to the observation, it has been identified that the global airlines industry has incurred 7% downfall during that phase. According to Oprea (2010), after the World Trade Center incident the international airline industry again confronted with financial crisis in 2007. Similarly, it has been also observed that financial crisis has affected the performance of some other industries such as travel and tourism industry and hospitality industry. As, an effect it has been observed that global tourism has been reduced dramatically during the year of 2007. Apart from this, increasing terrorism activities in worldwide market place has provided an indication of downfall in the global airlines industry (Oprea, 2010). In accordance with Oprea (2010), global economic crisis has been one of the most crucial factors, which have affected almost each and every sectors of the economy. Similar to other industries, the international airline industry has also been not left unaffected by the recent financial crisis. The impact of the recent financial crisis has been considerable on the international airline industry. In this regard, the international airlines industry has faced several difficulties across its various dimensions (Oprea, 2010). According to the analysis, it has been observed that global airlines industry has been depended on several industries for its operational needs such as travel and tourism. Notably, airline industry is identified to be highly depended on gas and oil industry for fuel supply (Oprea, 2010). The rising price of oil is one of the most crucial issues, which has affected the global airlines industry in a bigger way. It has been observed that during the early stage of 21st century the price of crude oil has been increased due to the limited availability of oil resources. In accordance with Morrison & et. al. (2010), the fuel price has been increased 244% between the years 2004 to 2008 (Morrison & et. al., 2010). The impact has been directly seen on the air fuel price. Apart from this, it has been also observed that the taxes and duties on the air fuel transportation has been also increased during the due time period. Thus, it has become little difficult for the global airlines to keep its transportation cost economical for the economical people. As an effect, the fare cost of air transportation has increased which has caused difficulties for the global airlines business to attain considerable profit (ECORYS Transport, 2006). Figure: 1 Relation between fuel price, transportation costs and transportation prices Source: (ECORYS Transport, 2006) In accordance with Sharif & et. al. (n.d.), due to increasing fuel cost the global airlines industry has incurred approximately $5 billion losses in between 2003 to 2008 (Sharif & et. al., n.d.). It has been observed that more than 2.5 billion consumers’ of global airlines has been highly affected due to rise in fuel price for the commercial airlines in global market place. As an effect most airlines institutes to search for an efficient fuel cost reduction measures in order develop the situation for the global airlines industry (Sharif & et. al., n.d.). On the other hand, aviation finance is a burning issue, which has been also high particularly due to the turmoil experienced by airlines industry. It has been observed that the global economic crisis, debt crisis, and uncertainty have become the main reason of rising funding pressure for the global airlines industry. It has been further observed that during the 1950 to 1960 the global airlines industry has spent its “golden age” in terms of availability of funds for investment. Even after that, in between the years 1982 to 2007 the per annum average growth rate remained 3% for the airlines industry in case of funds and investment purpose. However, after the year 2007, the growth rate of funds and availability of investment has reduced and it has remained around 1% for the airlines industry. During the last three years (2011 - 2013) it has been observed that, the average growth rate of availability of investment and fund has increased marginally to 2% indeed (Sentance, 2012). Trend Analysis The economic crisis has affected and challenged global airline industry but its impact on profitability of the international airline industry is ascertained to be not substantial. According to the observation, it has been identified that during the year of 2006 the global airlines industry has abled to focus on downsizing, improving productivity and cost cutting operation in order to fortify its position. In order to attain aforementioned objectives the international airline industry has chosen certain strategies such as fuel-efficient aircraft. According to the observation, it has been identified that the global airlines has reduced 7% cost by lowering its cost of labours. Apart from this, in order to enhance the productivity the international airline industry has emphasised to larger and longer size aircraft that has enhanced the utility and capacity (Massachusetts Institute of Technology, 2014). Consequently, due to advancement of science and technology the airport traffic control authority has improved its aircraft circulation and communication during the year of 2006. As an effect, it has been observed that the global airline industry was able to reduce the impact of economic crisis to a certain extent. The global airlines consumers are rather identified the importance and essentiality of aircraft and airlines services even after the economic crisis and terrorism violence specially in America, European and Asian market place (Oprea, 2010). Figure: 2 European Airports Transportation Statistics Source: (Oprea, 2010) On the other hand, it has been observed that during the earlier days air transport business was usually directed and controlled by the public authorities. During that phase, the government influence on air transportation was very less apparent. However, after the economic recession the traditional approaches have been changed. Since the year 2007, the public sector or governmental organisations have been providing their constant observation on the airport infrastructure system. Apart from this, the government has also focused on eco-friendly aircraft designing process in order to reduce carbon dioxide (CO2) emission to reduce its impact on environment. On the contrary, it has also emphasized to enhance the performance of the global airlines industry (Macário & Voorde, 2009). It has been observed that the global airline industry tried to create fuel efficient aircrafts in order to balance the operational cost due to constant increase in the fuel price According to an observation it has been identified that airlines industry has produce aircrafts which are more than 70% fuel efficient than those of 40 years ago. It has been observed that the airlines industry has abled to increase its fuel efficiency by 1% every year in the last three decades. As, an effect it has been observed the global airlines industry has abled to save 80,000 gallons of fuel in each and every year. Moreover, it can be asserted that the global airlines will be able to improve its fuel efficiency approximately 20% by the year 2015 and within the middle of the century, the projected improvement of fuel efficiency is anticipated to accomplish 50% growth rate (Luft, 2006). After the economic recession, it has been observed that the several European countries have invested in airlines industry in order to ensure long-term sustainability for the industry and on the other hand, the investors have focused on the facilities of the air travellers for the years to come. Simultaneously, it has been also observed that banks have become more conscious about investing in airlines industry. Similarly, it has been also identified that most of the banks have identified new regulatory for the global airlines industry. On the other hand, it has been also observed that banks have reinforced their interest rate for the airlines industry (Sentance, 2012). Findings From the analysis, it has been observed that the international airlines industry has faced several difficulties in the recent years. Nevertheless, the international airline industry has been able to generate $12.9 billion revenue in the year 2013. Over the last few years, it has been observed that the business environment of international airlines industry has been improved due to several strategic measures, which have been taken by the airline industry across the world. Apart from this, according to the analysis it has been also identified that due high dependency on fuel commodity and -rising of fuel price has become a prior threat for the international airline industry. Moreover, it has been observed that high price of air ticket has hampered the travellers across the world (Luft, 2006). However, according to the analysis it has been observed that the international airline industry has taken a suitable approach in order to satisfy its service users by developing fuel-efficient aircraft model for its consumers. Apart from this, it has been noticed that the international airline industry has introduced high productive aircraft, which has the potential of carrying large amount of good and materials at a time. On the other hand, the international airlines industry has also concentrated on improving its level of efficiency by omitting its traditional aircraft designing process and introducing new eco-friendly and fuel-efficient aircrafts designing process (Macário & Voorde, 2009). In case of availability of funds for investment on global airlines industry, it has been observed that the most of the airlines organisations of Europe has gathered larger amount of funds in order to develop the airline services. Apart from this, several banks have also come up with positive intentions in order to enhance the financial condition of global airlines industry (Sentance, 2012). Alternative Future Scenarios After evaluating the entire issues, it can be asserted that the international airline industry has faced with many ups and downs in the recent years. However, it is anticipated that the future scenario of the international airline industry will not be the same. In this regard, it can be evidently asserted that within the next five to ten years the technology will be become more advanced which will bring considerable transformation in the operations of the international industry that would also influence the needs of air travellers. On the other prospective, it can be asserted that by developing the fuel -efficient aircraft models the airline industry will be able to reduce the consumption of crude oil that will in turn positively influence the operational cost. Moreover, the global airlines industry has also improved the quality of its aircraft products by developing the manufacturing process. Thus, it can be apparently asserted that in future years, the consumers are expected to experience much better aircraft services (Macário & Voorde, 2009). From then different prospect, it can be also asserted that the service quality will be also enhanced in the in the years to come. As it was observed, most of the developed countries have invested several amount of money in the airlines industry in order to enhance the quality of the services for the consumers. At the same time, it has been also perceived that during the last few years the number of aircraft and route of aircraft services has been increased. Thus, it can be evidently asserted that in next five to ten years the global airlines services will be improved (Macário & Voorde, 2009). According to the observation, it has been also identified that most of the global banks and financial institutes have become more conscious regarding their investment in airline industry. Simultaneously, it has been also recognised that most of the global banks have reinforced its rate of interest for the airlines industry, which would ensure the smooth flow of funds for the international airline industry. After evaluating this factor, it can be apparently asserted that in future the role of financial institutions will be vital in order to enhance the performance of global airlines industry (Sentance, 2012). Conclusion It has been reckoned from the foregoing discussion that the increasing price oil has provided significant challenge to the international aircraft industry, but the through developing oil efficient aircraft model the industry has been able to address this issue to a certain degree. Apart from this, financial crisis and availability of funds for investment has also generated difficulties for the airlines industry, but the industry has reacted tremendous manner in order to avoid those difficulties. According to the analysis, it has been observed that in order to reduce the impact of recent financial crisis the international airline industry has undertaken several strategic measures, which has been quite effective so far. Thus, in order to conclude the topic it can be evidently asserted that the global airlines industry will able to keep its operation on high node through implementing strategic measures Moreover, significant changes in the international airline industry can be anticipated in the next five to ten years. More specifically, the future scenario of the international airline industry will be different from the prevailing scenario. References ECORYS Transport, 2006. Analysis of the Impact of Oil Prices on the Socioeconomic Situation in the Transport Sector. European Commission, pp. 1-123. Luft, G., 2006. The Oil Crisis and its Impact on the Air Cargo Industry. Institute for the Analysis of Global security, pp. 1-22. Macário, R. & Voorde, E. V. D., 2009. The Impact of the Economic Crisis on the EU Air Transport Sector. European Parliament, pp. 1-37. Massachusetts Institute of Technology, 2014. Global Airlines Industry Program. Airline Industry Overview. [Online] Available at: http://web.mit.edu/airlines/analysis/analysis_airline_industry.html [Accessed June 29, 2014]. Morrison, J. K. D., & et. al., 2010. Investigation of the Impacts of Effective Fuel Cost Increase on the US Air Transportation Network and Fleet. 10th AIAA Aviation Technology, Integration, and Operations Conference, pp. 1-15. Oprea, M. G., 2010. The Effects of Global Economic Crisis on the Air Transport of Passengers in Europe and In Romania. GeoJournal of Tourism and Geosites, Vol. 5, Iss. 1, pp. 52-61. Sentance, A., 2012. The “new normal” for airport investment. PWC. pp. 1-32. Sharif, S. P. & et. al., No Date. The Impact of higher Oil Prices on Airlines Share Price: the Case of Malaysian Airlines. Multimedia University, pp. 1-14. Read More