Who Benefits from the Airline Industry Consolidation - Literature review Example

WHO BENEFITS FROM THE AIRLINE INDUSTRY CONSOLIDATION? by The contemporary airline industry has and continues facing a myriad of both positive and negative effects as influenced by existing circumstances and contexts. In recent history, the events and influences of the September 11 terror attack (2001), and the aviation deregulation era, had some of the most severe economic effects. To be noted is the fact that even prior to the unfortunate attack, the industry as a whole was already facing tough times. Within the U.S., this is carried out by the federal government, through various agencies and institutional bodies pertinent to the aviation industry. There is the presence of both federal regulation and the deregulation process, as enacted after 1979 (IATA, 2012: 1). What is crucial to note, is that after the deregulation process, the American industry witnessed huge growth volumes. Of significant importance is the fact that low cost carriers (LCC’s thereafter), especially those concentrating on short-haul routes, have become empowered, to get a greater share of the existing market. As Njegovan (2006) portrays, this has been viewed by some pundits, as a disguise of ‘protectionist’ measures, implemented by the successful American administrations (Njegovan, 2006: 36). The presence of open-skies agreements, have further affected network airlines as a whole, and individually. This has been brought about by the existing price-conscious consumer base, with the fields of international and local tourism air travel, being significantly impacted upon (Njegovan, 2006: 38). The Aviation Industry: General Environment and Performance In the aviation industry, cost efficiency is a critical aspect of an airline’s competitiveness, in terms of survival and future growth. However, this does not necessarily necessitate all airlines to seek to become the lowest existing cost operator. This is informed by the fact that there still are varied competitive advantages gained from a high quality, efficiently delivered network model. The contemporary arena, has witnessed a marked growth in terms of the numbers of no-frills LCCs, which has inadvertently altered the very fabric of competition (Oum, Zhang & Zhang, 1993: 174). This has been within the lucrative local and international airline industry. This is especially true, with regard to local short-haul routes, which increasingly have witnessed the LCCs venture enterprises. The larger, national and supra-national network airlines have in fact been forced to respond adequately or risk failure and collapse. Unit costs, with regard to major network airlines, vis-à-vis LCCs, when differential in nature, do have impacts and effects on the aviation industry (Gillen, Morrison & Stewart, 2003). Nationally, the emergence and subsequent growth of LCCs has introduced new competitive advantages to existing, and once dominant network airlines. These processes often lack formal market mechanisms i.e. the crucial bidding process; instead only requiring proof of the airline’s operations being in the best interest of the public/populations present (Internists, 2007:4). In addition, has been the gradual deregulation of international routes, through continuous bilateral open-skies agreements. This has essentially enabled more competitive space for existing airlines, which can consequently fly into different territories, without much restriction. To be noted is that these agreements do not necessarily enhance competitiveness, as they do not allow foreign carriers conduct business within the U.S. Both European and U.S. network airlines have managed to achieve progress, about cost cutting measures, thereby lowering overall unit costs (InterVISTAS, 2007:6). This is particularly in the field of non-fuel unit cost expenditures incurred, since the year 2001. This has been through reduced overhead and distribution cost categories, thereby enhancing cost efficiencies. However, the presence of cost gaps, exist across overhead, infrastructural, operational and labor costs. These aspects have been sufficiently filled up by the input and capacity of emerging LCCs. Little difference in terms of infrastructure costs within the U.S. necessitates LCCs to concentrate on their primary short-haul routes and airports. It is these gaps, which are filled by the thriving LCC presence, enhanced by existing international and federal laws, in terms of government regulation (InterVISTAS, 2007:9). However, the network model, as utilize by the large transnational airlines, can also provide an array of competitive advantages. This can be achieved through enhanced product quality assurance, with focus being on efficient differentiation. There is thus an improvement of cost efficiency, through pro-active response by network airlines. As Alperovich and Machnes (1994) allude, this has enabled low cost operators to enhance their viability and competitiveness, through this form of government ‘protection’. In addition to this is the significant impact of federal regulations, in the U.S.A., which are relevant to specific airports. Airports such as New York, Washington, D.C., and Chicago, are uniquely subjected to federal ‘slotted’ regulations. Here, airlines need to obtain a slot, so that their aircrafts can land or take off (Alperovich & Machnes, 1994: 164). Air Travel: Supply and Demand The demand for air travel was majorly impacted by the New York terror attack, and policies regulated thereafter. In addition to this was the impact of open-skies agreements, within regional and global market areas. In the U.S., there is uniqueness of both deregulation, and specific forms of regulation existing side by side, providing a clear distinction found there. Government regulations, in addition to the broadened competitiveness created by the open-skies agreements, have enabled low cost operators, increase their overall market share (Alperovich & Machnes, 1994: 166-7). Low costs carriers have tactfully tapped into the market, providing descent travel to the millions of American passengers. Adding to this is the presence of incomes and economic growth, which are vital to the demand curve of the market. As Pearce (2008) provides, this is of particular importance to the developing markets of the Asian region. Prices, though being a driver of demand, are majorly focused in the local markets, essentially inter-state travel. This is vividly portrayed in the boom of the low-cost travel operators, who have gradually increased their market share (Pearce, 2008: 83). In addition, has been the capacity of the internet, in terms of connectivity, transparency and information communication. The intense competition found within the deregulated markets, is a core pointer to the sensitivity of air passengers to prices. In addition, other factors such as quality of service and convenience exist in terms of time management in addition to globalization and market liberalization (Pearce, 2008: 84). The supply, in terms of passenger volumes, has been enhanced by the positive uptake of local airline travel, hence booming the demand for this choice of travel. With low costs, descent travel and timely arrival, many Americans have embraced this mode of transportation, especially for inter-state travel. Drivers of this demand for air travel are varied, with special attention being on the government influence, in terms of regulation. In terms of advantages brought about by existing economies of scale, these are varied such as reduced overall costs; enhanced logistical capabilities and customer volumes (Pearce, 2008: 85). The presence of government regulation, also serves as a form of ‘subsidy’ enhancer, providing local airlines with a chance to venture into the competitive market. The most affected segment of air travel is the short-haul routes; which reflect higher price elasticities (Pearce, 2008: 88). Increased incomes, as well as general wealth accumulation further add to the demand present, as well as future growth. This is estimated by being proxied to national GDP, thereby providing an assessment of logistical statistics. However, to a majority of global air passengers, price has and continues being the major factor, with regard to passenger volumes, travel areas and overall population transfers. Passenger demand elasticities are fundamentally influenced by the price factor, especially with regard to leisure travel. Market structure and Competition Policy: Regulation and Deregulation In the U.S., the presence of both aspects of federal (government) regulation, and deregulation measures, makes it a unique market arena. This is in terms of overall viability, competitiveness, passenger volumes, and thus profit realization. There has been a boom, of emerging LCC competition, which has necessitated significant structural adjustments and changes within network airlines amongst other major airlines (Oum, Zhang & Zhang, 1993: 177). The shift has been focused towards identifying and subsequently achieving the necessary cost efficiencies, vital in enhancing overall competitiveness. This is in particular, very important with regard to the fact that airline passengers are concerned with core issues. These are inclusive of aspects such as the price factor, time management and quality assurance. Through policy change and procedural measures, future competition became inevitably stiffer, with regard to the pricing of tickets charged, as well as the routes of flight taken. As Gowrisankaran (2002) portrays, the deregulation process, initially began in the year 1979, thereafter resulting in varied changes and effects on global aviation. Prior to this, the Civil Aeronautics Board was in charge of both the pricing of tickets, as well as the assigning of routes taken by different airlines. After the process, any airline (even domestic) that possessed the capacity could fly on any route in the domestic territory. The DOT – Department of Transportation – was the agency tasked with the enforcement of the standards and laws as the chief regulator (Gowrisankaran, 2002: 1). The deregulation process, in terms of route assignment and ticket pricing, has enabled the improved performance of local, low cost operators. By plying specific local routes, coupled with their cheaper rates of ticket pricing, they have gradually enlarged their overall market share. However, there is still a huge part of the industry, under government/ federal regulation. Local governments, which often own and even manage existing regional airports, are able to affect significantly on the prevailing industry contexts (Gowrisankaran, 2002: 2). To be noted is that while end-consumer reality faces a market-driven price menu, with regard to airline tickets, fundamental inputs continue being allocated through utility of non-market mechanisms. This is influential in the existing aspect of government regulatory measures present within the aviation industry (Gowrisankaran, 2002: 3). The presence of the – hub-and-spoke system – as utilized within the U.S. has influenced the connectivity of passengers; abate at the expense of increased airline concentrations at major hubs. Thus, there has been the net effect of an increase in the choice of carriers inclusive of LCCs, at various non-hub cities. This has been in addition to the increase of service frequency rates, as well as market concentration at hub cities such as Chicago, New York, and Denver. The competitiveness has also resulted in the increase of both mergers and acquisitions. Many of the once-major airlines have but shut down, or better yet, acquired by other more competitive airlines i.e. Ozark, Pan Am, Texas Air, Eastern, TWA and Piedmont amongst others (Kincaid & Trethaway, 2007). This therefore provides a vivid example of the dynamic nature of not only the American, but also global aviation industry. The increase in competition, both locally and internationally, has hugely affected major airlines, inclusive of national carriers. While some have been able to survive, because of varied measures towards enhanced competitiveness, others have had to fold, enter into mergers or even faced acquisitions (InterVISTAS, 2007:20). Conversely though, has been the upward surge, with regard to the growth and gradual increase in market share of LCCs. The fundamental influence has been the latter’s capacity to fill in the influential cost gaps, often found within larger airlines. In conclusion, since the beginning of the deregulation process, the American aviation industry has witnessed tremendous growth. Current global trends, influenced by the prevailing local and international contexts, have affected fundamentally on the network model of aviation entrepreneurship. This is informed by the increasing success of LCCs, in not only the American aviation industry, but other regional arenas as well. This necessarily does not mean that network airlines are not able to strategically improve their overall output, but that core factors must be considered. Of core consideration are local and global influences and subsequent effects (IATA, 2007: 2). Nature does have an impact on the aviation industry, as witnessed whenever there is severe weather, or in the event of a natural occurrence such as volcanic eruptions. However, drivers of demand i.e. cost prices/ expenditure, quality assurance, time management and dependability are also crucial in the industry. Reference List Alperovich, G & Machnes, Y 1994, The Role of Wealth in the Demand for International Air Travel. Journal of Transport Economics and Policy, 28(2): 163–173. Gowrisankaran, G 2002, Competition and Regulation in the Airline Industry. FRBSF Economic Letter, 2002-01: 1-4. Gillen, DW, Morrison, WG & Stewart, C 2003, Air Travel Demand Elasticities: Concepts, Issues and Measurement. [Final Report. Department of Finance, Canada]. Retrieved from: http://www.fin.gc.ca/consultresp/Airtravel/airtravStdy_e.html. IATA 2012, Airline Cost Performance. IATA Economics Briefing [Report No. 05: 1-2]. Retrieved from: www.iata.org/economcs IATA 2007, Air Travel Demand. IATA Economics Briefing [Report No. 09: 1-2]. Retrieved from: www.iata.org/economcs InterVISTAS 2007, Estimating Air Travel Demand Elasticities [Final Report: 1-50] Kincaid, I & Trethaway, M 2007, Estimating Air Travel Demand Elasticities. InterVISTAS. Oum, TH, Zhang, A & Zhang, Y 1993, Inter-Firm Rivalry and Firm Specific Price Elasticities in Deregulated Airline Markets. Journal of Transport Economics and Policy, 27 (2): 171–192. Njegovan, N 2006, Elasticities of Demand for Leisure Air Travel: A System Modeling Approach. Journal of Air Transport Management, 12(1): 33–39. Pearce, B 2008, What is Driving Travel Demand? Managing Travel’s Climate Impacts. The Travel & Tourism Competitiveness Report [World Economic Forum, 1.8: 83-90]. Read More