The Airline Industry in Europe - Report Example

The Airline Industry Table of Contents The Airline Industry Table of Contents 2 Introduction 3 European Airline Industry: Trends and Development 3Competition Rivalry in Airline Industry 7 Justification of the Research Methodology 9 Change in the structure of the report depending upon the user 9 Conclusion 10 Reference 11 Introduction “The Airline Industry encompasses a single aircraft conveying cargo articles and mail to different places to the numerous aircrafts carrying passengers to the different parts of the world” (Economywatch, “Airline Industry”). The services of the airline companies can be limited to regional or domestic services or it can be extended between the continents. Undoubtedly, a thorough analysis of airline industry must take into consideration all the above. This report is an effort to take a look at the European airline industry to evaluate its trends, developments and rivalry among its players. European Airline Industry: Trends and Development The European airline industry is dynamic in nature as it changes its trends according to the general European economy. Starting from the year 1950 till 1960, the airline industry experienced a consistent annual growth of approximately 15 %. Later on in the 80s and 90s, the airline industry consistently displayed annual growth ranging from 5 % to 6 %. The sharp decline in the annual growth rate happened due to several reasons; deregulation being one of them. With the introduction of deregulation, the airline industry experienced flexibility in the airfare values. As a consequence, the airfares saw a dip in its values by raising the air traffic. In some countries, Government regulates the airline industry. Even in the countries where the airline industry is privatised, it is required to be in compliance with a number of norms and regulations laid down by the Government. All these norms have been established after taking into account consumer safety, political and economic conditions. According to the industry trends, it had been noticed that during the period 2000 to 2002, the airline industry was enjoying a profit of 6 % (Economywatch, “Airline Industry”). The sector has seen several changes on both supply and demand sides. The driving forces governing the recent changes depend mainly on political, economic, social, technological, environmental and legal forces. “The industry has evolved from a system of long established state owned carriers operating in a regulated market to a dynamic, free market industry.” (Cento, “Introduction”) Until deregulation, few airlines used to fly in the European routes and the airfares were regulated by state bilateral agreements. The process of deregulation and consequent privatisation has changed the industry in a considerable way. The European deregulation initiative started off in 1988 and it came into force in the year 1997. Within the European Union, airlines were now able operate within two member countries via their home countries. They are even able to fly domestic flights within other member states of European Union. The airlines now operate freely in routes, prices, frequencies and service levels. Thus the earlier state owned carriers, which used to belong to a single country, were ready to be privatised in a stronger network structure. Deregulation has changed this industry broadly in terms of network development, pricing behaviour, relationship between the airlines and airports. From that time till now, the industry has experienced a number of developments in the field of political, economic, social, environmental, legal and technological issues. All these developments have affected the industry in one way or the other. Political and Legal Factors Deregulation and privatisation has changed the way of operation in the airlines industry. The last few decades did not see much of consolidation practices in this industry. However, recent developments have displayed the fact that the government is encouraging mergers of airlines. In 2004, the merger of flag carrier Air France and its counterpart KLM was one of the major airline mergers of the decades. The result was that the operating profit of the merging company had increased by around 35 %. Despite this, the European airlines industry has seen little merger and acquisition activities in these years. Later on several economic and political factors have been influential in encouraging mergers. Recently the European Union has ruled that the governments should not be allowed to subsidize the loss making airlines. This has created trouble for the airlines as in the recent recession a number of airlines have been experiencing financial turmoil. Economic Factors European Airline industry has experienced a number of challenges since September 11, 2001. The terrorist attack led to lower consumer spending, increased reluctance to fly, security concerns, corporate cost. These coupled with decreasing business travel, rising oil prices and worsening credit crisis have made it difficult for the airlines to maintain their profitability. In the recent recession, Europe is one of those economies which had been considerably affected. The weakening economy of Europe has decreased the purchasing power of the travellers. The last two years have experienced a decline in the number of travellers. In this situation, the airlines have been experiencing a considerable decline in the demand side. For the last two years the industry has been making huge losses. Fluctuations in the oil prices have worsened the situation. It has been noticed that the low cost airlines were doing comparatively well than the traditional ones. However, both suffered because of this financial downturn. With the increase in fuel prices, it would have been critical for the low cost airlines to create economies of scale and gain more compared to the flag carriers as they have already squeezed every possible way to save on their operational cost. Social Factors Adverse economic environment has reduced the purchasing power of the population. At the time of recession, the intensity of tourist arrivals also decreased. As a consequence, the airlines have experienced low demand. With oil prices experiencing fluctuations in their values, the airlines increased their airfares. This also contributed to the reduced demand in this industry. Technological Factors One of the significant factors which have been the driving force of the airlines industry is technology. In the recent years, there have been a number of technological developments in this industry. Airline Industry is regarded as technology intensive industry. Now-a-days, a huge number of airline tickets are booked online, either through their websites or through some third party websites. In the year 2006, British Airways has mentioned that their investment in technology has been a significant driving force that led to 20 % increase in the airline’s profit. The airline sold more than 87 % tickets online which in turn had helped the organisation to cut down the cost and simplify its operation. To survive the competition and enhance the profitability, the airlines are reducing their cost to a considerable level. Fuel efficiency has been identified as one way to curtail the energy consumption. In future, aircrafts fuelled by liquid hydrogen can take the lead. To fight with the carbon emission issues, European Union Commission has finally come up with a tool to estimate the fuel consumption and hence the amount of carbon-di-oxide emission. The tool has been developed taken into consideration factors like individual flights, actual route length and statistically sound fuel consumption relationship. However, the tool is appropriate for those airlines with few carriers as it uses simplified monitoring system to lessen the emission. In the recent years, a number of innovations have been made to reduce the adverse effect on environment. Aircraft Emission Measurement (AEM) is such a technological advancement. This tool is equipped enough to measure the carbon emissions. Environmental Factors In the wake of environmental awareness, the airlines are supposed to cut their emission rate. The European Union Emission Trading Scheme has recently been extended to the airlines industry. However, this has emerged as an issue in the low cost airlines industry. The low cost airlines mostly operate in shorter routes. As a consequence, the frequency of their flying is more than the traditional ones, which cover up much larger ones. That is why the amount of carbon emission is much more in case of low cost airlines. Few Airlines like Air France, Delta and KLM have their own voluntary emission control programs. Noise pollution has been another significant environmental concern in recent days. The airports levy higher landing charges on carriers with louder noise. Carriers thereby face tremendous pressure to introduce new and much quieter engines with enhanced fuel efficiency. The airline industry is also looking forward to introduce alternative renewable fuel sources. The IATA has forecasted that in 2010, the European airline industry would incur a loss of $1.3 billion. Recently in April, the volcanic ash cloud crisis has led to the shutdown of European airspace for five days. The airlines have incurred a huge amount of loss due to this reason. SAS has estimated that it caused around $ 85- 90 million deficits, while Finnair has incurred a loss of $ 20 million. In short, the effect of this incident was considerably adverse for both the aviation industry and the European economy. Competition Rivalry in Airline Industry As mentioned earlier, a number of economic and other factors have been influential to curb the already slim profit of the airlines. With low demand and troubled economic condition, it has been quite tough for the carriers to retain their market shares and profitability. After the terrorist attack in 2001, the airlines have experience reluctance among the travellers to fly. At the same time, with the advent of economic downturn, the purchasing power of the customers has also reduced. Cost cutting in every business sectors has made travellers look for cheaper flights. The airline industry has experienced the same condition in the wake of recent global recession. The number of tourists around the globe decreased drastically. All these factors have instigated the price war among the airlines. Majority of the population look forward to low cost airlines. As a consequence, the airlines are trying every possible way to cut down costs and offer quality service at a lower cost. Hence, competition is considerably high in this industry. Southwest Airlines, Easy Jet and Ryan air are the three significant players in the low cost carriers. The carriers are no frill carrier and offer no complementary food on board. Cost effectiveness has been the competitive advantage for these airlines. However, it has been tough for them in the wake of rise in prices, environmental control and the entrance of traditional airlines into this business. The low cost airlines mostly use secondary airports to reduce the parking charges. However, this way they lose on some of the business travellers who could have emerged as prospective clients. On the other hand, traditional airlines pay a lot of charges as they mostly use the primary airports. However, the number of travellers is quite less as most of them preferred to avail the low cost counterparts. As a result, some traditional airlines have introduced their low cost arms. For instance, British Airways introduced its low cost arm Go Airlines. At the same time, it has been noticed that in many countries of Europe, the vacation spots are quite nearby. Herein, people would prefer to take train or move in their cars to reach the vacation spots. So, even the airlines face pressure to compete against road transportation mediums in that region. Overall, the intensity is competition is quite high in the industry which could spell disaster in the long run. Justification of the Research Methodology In this report secondary research methodology has been adopted. The data and information presented and analysed, are taken from different secondary sources such as books, journals, news articles and some online websites. As this is a business report, secondary research would be preferred as it would not take the personal viewpoint of any individual or entity. As airline is a significant industry in Europe, sufficient data is expected to be available online. However, constraints may arise while collecting financial data on the same. Change in the structure of the report depending upon the user Small and medium enterprises are expected to look forward towards the supply side of the airline industry. Focusing more on aircraft manufacturers, bargaining power of the supplies would be of much interest to them. However, all the above mentioned factors would also be significant as they affect the industry in one or the other way. The multinational enterprises can be investors, clients or the suppliers of this airline industry. The report is required to be changed according to their choice or interests. For the investors, a financial analysis is required to be incorporated in the report along with an in-depth analysis of the performance of individual airlines. Conclusion There is no doubt that the airline industry is going through a tough time. With decreasing number of travellers, troubled economic condition and tightening regulations, the competition is high among the airlines. The traditional airlines are also lowering the airfares making the situation more competitive for the airline companies. Recent years have experienced a number of developments in the industry; most of which have been in the case of technology. The industry has introduced new technology to minimise the operational cost and minimise the adverse effect on the environment. Hopefully, in future, European airline industry would be able to secure sustainable profitability through better service and cost effectiveness. The report can be extended further with the introduction of more industry specific analysis. Strategic tools such as Porter’s five force analysis as well as financial analysis of the industry can be considered further to enrich the report. Reference Cento, A. The Airline Industry: Challenges in the 21st Century. Italy: Springer, 2008. Economywatch. “Airline Industry”. No Date. World Industries. December 01, 2010. . Read More