Global Issues in Aviation Industry - Term Paper Example

Global Issues in Aviation Industry (Insert Name) (Institution Affiliation) Aviation industry is substantial across the globe with a major contribution in the global economy and plays a key role in helping other economic sectors to compete more effectively in the global market and operate more efficiently. The airlines play a critical role in economic growth and supporting trade and productivity. The aviation industry was not spared the wrath of the global recession and economic crisis. The industry faced various challenges such as decrease discretionary spending and shrinking of capital market (Chandararot, Sina & Dannet, 2009). Both individual and corporate customers were affected by the global financial crisis which led to a significant reduction of customer base. Transport economics particularly the air transport can be perceived as the backbone of many economies in the world. An increase in industrial production, economic activities and expansion of trade relations can all be attributed to the air transport. In the face of the global recession, many airlines were affected by the trend in revenue declining as a result of prudent passenger market that reduced continuously (Branson, 2008). The passenger was as a result of both corporate and individuals striving to cut down expenses. The financial crisis saw the escalation of the fuel prices, labour, asset cost and inflation rate which presented the aviation industry with an unprecedented pressure in their quest to produce viable economic results and shield themselves from making losses. However, a report by international air transport association (IATA) indicates that during the period of financial crisis extending between 2008 and 2010, the airline industry lost close to 17 billion USD (Dobruszkes, & Van Hamme, 2011). Despite this tough recession, the airlines continued with their commercial operations and expansion. This paper critically evaluates the impacts of the financial crisis and the ways in which the airlines have handled it. It also gives a deeper look on how strategic alliances, partnership, mergers and commercial agreements can assist the airlines particularly those in United Arab Emirates to deal with the situation. Along with the analysis is a review of various issues that are significant and need to be focused on by the management as the economic recovery begins and the financial crisis continues to loom. The global recession and the economic crisis linked together with new security provisions, volatile fuel prices, static labour, consumer uncertainty and aircraft cost that saw an unprecedented changes in the airline industry and landscape across the globe. Since the time immemorial, the aviation industry has been extremely susceptible to financial crisis and economic recession (Branson, 2008). The global recession that commenced in the first quarter of 2008 financial year caused economic slowdowns to both individuals and corporate markets which in turn led to reduction of their needs for air travel as a remedy of cutting down operational costs. As a result, majority of the airlines are still recovering from decline of both corporate and discretionary passenger levels. Corporate clients are avoiding air travel as much as possible in order to reduce expenses while the vocational travelers are selecting holiday destinations that are closer to their place of residence in order to spend less. The rising oil prices have had an adverse impact on this industry since it has led to doubling of expense for most of the airlines. To counter this, the airlines were forced to increase the baggage fee, ticket price, food and beverage fee and accommodation fee among many other charges. The UAE air transport system is currently a very important factor of the economy. However, it remains dependent and highly sensitive to economic development in other sectors. The global financial crisis had consequences in the air transport which are very clear. These consequences include: a sharp decrease in demand of transport since less goods and passengers are being transported. The airlines also witnessed a dramatic supply reduction and changed transport flows especially through mergers of loops and routes. As a result, the industry experienced radical changes in strategies and low profits which led to worsening of the companies’ financial situation. Due to the financial crisis that we are currently recovering from, the airline industries considered several strategies to enable them cope with the situation. Some of the issues that were put into consideration due to the risk they pose to the industry include: legislative and regulatory compliance, availability of capital, fuel and labour costs, fuel hedging and aging fleets. Mismanaging or disregarding any of the above mentioned risk might lead to potential bankruptcy and significant losses. To cushion themselves from the above mentioned risks, the airlines took the precaution of establishing effective enterprise and risk management program. The main aim of this enterprise program was to identify risks, assesses the harm they pose and above all manage and monitor the risks in a critical and timely manner. The risk assessment and management program enabled many airlines to maximize in the areas where they areas in which they had total control while at the same time minimize their involvement in areas where they had little or no control (Fu, Oum & Zhang, 2010). The management could then use the findings of this program to make sound decisions regarding both the existing and upcoming risks. Secondly, the aviation industry continued to incorporate new technology such as online check- in, in- flight internet access, kiosk check-in, enhanced online booking and reservation. This technology helped the airlines in streamlining the existing process and serving the customers better. As a result, reduction of operation costs and improved efficiencies ensured the airlines continue in with their operation and expansion programs. Some of the airlines such as Airasia implemented effective computer reservation system. This was an integrated web enabled inventory and reservation system that also included call center, internet and airport departure and control functionality. This system enabled them to bypass the middlemen and travel agents and thus significantly reduce the expenses. It was also during this period of financial crisis that Emirates airline, which is one of the largest airlines in United Arab Emirates, developed a new booking engine that allowed multi- currency pricing. It also developed a Best Price pledge which promised to offer lowest prices on any flight on any emirates website, and above all the introduction of skywards miles to upgrade its facility. The new technology also saw the introduction of pre- departure mobile phone notifications. A good example is Airasia which applied cutting edge technology such as revenue management system and effective computer reservation system which enabled it to offer quality products and services to its esteemed customers. These technological advances have also given Airasia a competitive advantage in the airline industry by enabling it to be efficient and fast in serving its customers (Borenstein & Rose, 2011). Customers were enabled check their flight schedules, pre-order meals, book seats or purchase holiday packages online with ease thus providing an alternative cheaper solution during the period characterized by financial difficulties. Since majority of the airline companies are highly decentralized and consisting of multiple hubs, the implementation of effective asset management system helped in reducing redundancies and cutting down the manpower require for efficient operation. It also helped in making adjustments to depreciation balances and fixed assets on a regular basis in order to unearth measures that ought to be taken in order to maintain profitability and at the same time establish and sustain a competitive advantage. Despite the global recession, the airline industry continued to evolve rapidly over the past few years and a number of technological changes have contributed either directly or indirectly to the industry evolution. Incorporation of mobile technology as a means of information dissemination to air travel customers through the use of mobile phones have greatly contributed to the survival of the airlines through the storm of the global financial crisis. Furthermore, the accelerated use of ICT enabled the airlines to provide low cost air tickets and at the same time maintain a reasonable profit margin. This encouraged customers who were also affected by the financial crisis to continue using air transport. The challenging economic times also forced majority of airlines to undertake necessary steps that were aimed at implementing business community plans that were highly effective and that would help in responding to interruptions in business activities efficiently and effectively (Cento, 2008). Some airlines were forced to retrench some of their highly paid workers and introduce new products, operations and service lines in order to reduce operation costs. To stay afloat during this time of global recession, the aviation industry utilized various different strategies. For the firms in air travel industry, their main challenges was maintain customer expectations, optimizing the cash flow, manage costs, maintain debt obligations and optimize working capital. Many airlines are taking advantage of this current global recession and using it as an opportunity to expand their market share (Fu, Oum & Zhang, 2010). The airlines are also striving to maintain the existing customer base through increased advertising and marketing initiatives. The airlines are also strategically positioning themselves to be able to provide high quality services in the dawn of economic recovery. It clear the global financial crisis changed the structure of the air transport sector. Many airlines especially those in the United Arab Emirates such as Emirates shifted their goals towards future markets while at the same time incorporated the potential effects and risks posed by the economic crisis. It is a fact that uncertainty that characterize the aviation industry can never be entirely eliminated due to its reliance to other economic sectors. When people are wealthier, they usually buy more goods and services and can afford to travel regularly, this leads to a higher demand for mobility and transport. The economy of the world is highly dependent on the air travel. Business travel and tourism are among the major sources of revenue for many countries. The crippling of the economy will mean a decline in the air transport. In what follows, the future developments which involve a combination of the present financial situation and a set of exogenous and endogenous variables that were adopted by major airlines in their efforts of sailing through the financial storm are examined (Borenstein & Rose, 2011). The exogenous variables include factors such as fuel prices, economic activities and aircraft prices whereas the endogenous variables include yields, financial indicators, the cost structure, mergers, capacity utilization and acquisitions. Some of the future developments that are likely to benefit the airlines of the UAE include strategic alliances that are aimed at consolidating and niche player, privatization, changed government influence, more bankruptcies, cross border acquisition and mergers, less employment and increased foreign capital. Increasing aggressiveness when it comes to new market entry will also help the airline survive the financial crisis. Impact of Strategic alliances Strategic alliances, niche players and consolidation are some of the crucial factors that the airlines in UAE need to put into consideration. Through consolidation, the strategic alliances establish a global network of carriers which is characterized by limited number of fiercely competing networks in freight and passenger transport (Yin & Shanley, 2008). On the other hand, niche player usually exploit the opportunities that present themselves in the market due to geographic characteristics. The main purpose of the alliances is to utilize code sharing, interlining and technological cooperation to offer the customers an extensive network that covers the largest number of destinations and at the same time assure or enhance profitability. Due to the financial crisis, many airlines continue to experience the pressure of profitability. Furthermore, the current global recession continues to accelerate a move by few carriers, towards dominating air transport market. Smaller industries which have limited capital continue to align themselves to strategic alliances with the big guns in order to ensure their survival. The niche market on the other hand has led to development of new products and services. Over the past few years, several aircrafts have been converted or configured to suit the needs of the business travelers. This includes speedy check- in procedures that are less stressful, personal space and business class service (Fu, Oum & Zhang, 2010). The package is tailored to persuade the customers especially those in the economy class to pay a slight higher amount in order to receive more personalized services. The airline alliances and principally designed to achieve rationalization of the fleet, rationalization and expansion of the network structure and above all exploitation of economies cost. These alliances offer opportunities for international airlines to expand their services to foreign countries through strategic alliances with the foreign airlines (Smeral, 2009). The alliances partners usually offer greater convenience and effective services to customers through proper coordination of the production processes and their services. This include: greater efficiencies, access to better connecting services, baggage and ground handling, expanded route networks and procedural operations in booking and ticketing. Mergers and Acquisitions The main purpose of mergers, takeovers and alliances share great similarities, that is, to enhance marketing and operational efficiency, create sustainable industrial and economic improvements, achieve superior financial results and scale down the adverse effects of financial crisis through lowering of entry barriers (Yin & Shanley, 2008). Takeovers and mergers usually exhibit a clear cut impact on alliances’ composition and the subsequent economic performance. Over the past few years, several airlines in UAE have engaged in mergers while some have some future prospects of doing so. The mergers are expected to enable the airlines to have a cooperative pricing and at the same time enjoy the anti- trust immunity. Mergers and strategic alliances have recently attracted the highest anti- trust attention. However, many airlines prefer code sharing type of alliances instead of mergers. Code sharing involves sharing of basically the expensive assets such as terminals, planes, crews and counters. With the global economy poised for recovery, the demand for air travel is expected to increase significantly which will lead to rise in air fares. While mergers have many bright effects, it also has several negative impacts on business travelers, vacationers and holiday travelers. Mergers lead to consolidation of flights and the flight schedules which in the long run leaves the customers with fewer options (Cento, 2008). They can also lead to reduction or elimination of competition and as a consequence this leads to poor customer service and full planes that are more expensive. Furthermore, airline mergers affect the airline miles due to loss some alliances. Despite the tough economic times, the aviation industry continued to show significant resilience during the year 2012. Many airlines reported an increase in both local and international carriers. However, some of the airlines were forced to pause the growth project for the year but it is expected that the industry will continue to experience steady and moderate growth. Although the global economy is showing signs of significant growth, the oil prices are still high and there is a bit of uncertainty as to level of the fuel prices when the economy eventually recovers (Smeral, 2009). Data analysis across the aviation industry suggests that despite growth being concentrated in a few countries, economic recovery is evident and this will see a tremendous increase in the air travelers across the globe. According to IATA and the international civil aviation organization, the world air carriers are expected to record an improvement in 2013 following the increase of demand for air transport as the major economies in the world continue to rebound from the effects of the financial crisis that caused depression in the airline industry as well (Fu, Oum & Zhang, 2010). Commercial agreements and interlining Interlining refers to a commercial agreement, that is voluntary and usually between individual airlines, whose major purpose is to take care of the passengers who are travelling on itineraries that does not have a direct route and requires flights with multiple airlines in order to reach their final destination. These agreements allow passengers to move across the global networks of multiple airlines conveniently using only a single reservation (Borenstein & Rose, 2011). It also guarantees the air travelers that their itinerary will include appropriate connection times and their experience will be further enhanced when a particular airline issue boarding passes and baggage checking to the passengers’ final destination and alleviate the need for the passengers to check – in with multiple airlines. Another agreement that is vastly adopted by a good number of airlines is code sharing. These agreements permit multiple airlines to sell tickets and space on the same flight as if it was their own even if it belongs to a different airline. In the code share agreements, one airline operates as the marketing carrier and its main aim is to sell seats, while the other airline is the operating carrier which is responsible for provision of aircraft, supporting crew and ground handling. Code sharing allows the airlines to offer a wide range of options to their client that at times extends far beyond their network coverage. As a result there is convenience, confidence and reliability from the customers’ perspective. Both agreements allow the customer to reach more destinations with the convenience of only a single booking or reservation. There is also confidence in opportunities presented to experience world class service and the appropriate connection times. Over the past 18 months, several airlines in UAE have entered into joint business agreements with Iberia and British airways, Qantas and Japan airlines (Borenstein & Rose, 2011). These agreements are forged to offer air travelers more destinations, more fares to choose from and more flights while at the same time they continue delivering consistent and continuous service excellence through each of the individual airlines. In conclusion, as we have seen, the aviation industry is a key driver to the world economy. Many individuals and businesses depend on air transport in order to perform key economic activities. However the airline industry is a volatile market and is adversely affected by financial crisis. The onset of global recession back in 2008 saw the decline in air travelers and rise of fuel prices. Many airlines were forced to pause or suspend their expansion plans in order to deal with the financial crisis. The airlines utilized various strategies such as mergers, strategic alliances and business agreements in order to stay afloat during the global economic crisis. Some airlines turned to airfreight market which was considered as a byproduct of passenger transport. The financial crisis also saw the increase in takeovers and bankruptcies which had significant impact on competition and market function. Several airlines especially the medium sized went bankrupt due to the fact that they were too big to be niche player and too small to be global players. References Branson, S. R. (2008). 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