Aviation in the Global Context - Essay Example

Running head: aviation in the global context 29th November Introduction In order to ensure thatresidents easily access the public and government services, most governments worldwide have adopted the initiative of taking the services from the central location to local areas. One of the major complaints by citizens of any given country especially in the emerging economies is poor access of services such as transport, health, education, and banking services. Additionally, strict regulation by governments has hindered competition in industries such as airline and road transport leading to provision of low quality services that do not meet the needs of the customers. This papers aims at critically evaluating the challenges and opportunities faced by airport planners today as well as critically accessing the response of airport operators in view of new airline customers and their needs. The evaluation is based on the statement that deregulation and liberalization have resulted in challenges and opportunities for both airlines and airports. Business models and networks continue to evolve. Temporal configurations of European airline networks and introduction of wave system One of the major factors that are notable in the European aviation market according to Button et al, 1998 was the deregulation that was done in three packages that is in 1987, 1990, and 1992. Major aspect that led to deregulation of airline industries across the world was the deregulation of the domestic passenger air transport market in US in 1978. As the result of reducing the level of government regulations, most airline companies benefited from new opportunities that exposed them to increased profits even though there emerged challenges that needed the airline planners to make costly adjustments. Busby et al (1997) indicates that within the European market, significant number of trunk carriers reorganized their networks from point –to point into hub-and-spoke networks. Additionally, in their efforts to connect with other hubs worldwide, direct flights from medium airports to other medium airports were increasingly replaced by indirect flights through a central airport or hub. As the result of deregulation, Airey (2002) depicts that European airlines adopted wave-systems structures or intensified the existing structures. One of the notable challenges is that for the airlines to provide quality services that were in line with the government policies, they needed to intensify their wave-system structures by adding more waves or increasing the quality of the wave-system structure. For example, Air France adopted a six wave system at Paris CDG, which resulted into configuring the airport in a real traffic pump. On its part, Alitalia introduced the four wave system at Milan Malpensa. Similarly, in its effort to achieve temporal complementarity between the Munich and Frankfurt hubs, Lufthanasa established three waves at Munich (Busby, 2005). Within Great Britain, the past 2 decades have created some of the most stimulating as well as challenging market conditions that have made the regional airports to make changes in the way they provide their services (Busby, 2003). Notable regional airports that have been affected by deregulations include Bristol (BRS), Cardiff (CWL) and Exeter (EXT). The deregulation of air services within the European Union was initiated in 1987. This entailed introduction of limited level of competition in the market. The process of deregulation within Europe was significantly protracted affair with the third package taking quite a number of years before being approved by the government. The first package of deregulation according to Airey, and Tribe, (2005) entailed stimulation of new entrant huge carriers to the airline industry, banning capacity sharing strategies in addition to elimination of airline abilities to set fares based on the tariff systems. The second package, which was introduced by the European Union in 1990, entailed the elimination of price fixing practices as well as the creation of various designation carriers. Lastly, in 1993, David and William (2005) stipulates that EU regulations introduced full open access to the market with a relaxation on European ownership rules and harmonization of licensing requirements. According to Burghouwt and Hakfoort (2007) deregulation has comprehensively created a period of volatility within airport traffic flows. On their part studies on impact of deregulation on airline performance and services delivery. Ni.jkamp (1996) indicates that deregulation has also created an increment level of uncertainty for airport managers. One of the notable impact of deregulation of air services within Europe was that it changed the dynamics of the monolithic Full Service Network Carriers (FSNCs), for instance British Airways, Lufthansa, Air France and Olympic. The FSNCs were not only supposed to take on Low Cost Carriers (LCC), to uphold their market share but also they needed to develop strategies to protect themselves from the expanding levels of competition that they experienced from the new Middle Eastern carriers for example Qatar Aurways, Emirates, and Etihad. Another challenge that the deregulation brought to FSNCs as compared to companies in the non-liberalized setting especially in the emerging markets, was intense competition from the established Asian carriers of Malaysia, Cathay Pacific and Singapore Airlines. As indicated by Williams (2002), deregulation has radically altered the manner in which airlines are managed and operated. The unperturbed world of the past whereby carriers were under the protection from the onslaught of stiff competition by the techniques of regulators has now been replaced by one in which each of the stakeholders has to ensure its own wellbeing. With the introduction of deregulation, Reynolds –Feighan (2000) indicated that smaller airports have become vulnerable due to the FSNCs adjusting their network characteristics as the result of introduction of the free market and economic downturns. In the US market, domestic aviation market was deregulated by a single act in 1978. As a result, the airline companies found themselves under entirely new, free operational environment (Busby, 2003). One of the challenges that the companies faced that their counterparts in non-liberalized regions did not face was that they discounted any sort of governmental subsidies for non-profitable services. However, Bailey et al., (1985) indicates that out of the US government deregulation, an opportunity emerged in the sense that the airlines were allowed to fly everywhere they wanted and freely set up their airfares. Just like in EU, the first package in US allowed the airline companies to increase their capacity shares bon the route as long as the resulting overall shares between two states were not being outside the range between 55% and 45% until the month of October 1989. Thereafter, it the range was increased to 60% to 40%. Another opportunity that the deregulation brought to airlines was that two or more airlines were allowed to schedule services between two points once they reach a certain threshold. For example, aircrafts having less than 70 seats were exempted from capacity share limits. Another aspect that the first package brought to the airline companies operating in liberalized settings was that the average economy class fare was adopted as the reference for designing discount fare (which ranged at 65-90% of the referenced fare) and deep-discount fare (ranged from 45% to 60% of the reference fare). The second package allowed the use of airlines’ capacity for the fifth freedom to rise to 50%. Additionally, air fares were allowed to be deep discounted without governmental approval. This is still an aspect that the current airline companies are still adopting in the sense that in their efforts to maintain strong relationship with their customers, they are at liberty to give discounted prices without consulting governments. The second package also allowed adoption of appropriate mechanisms for controlling and sanctioning predatory pricing. The third package provided US airlines with protection against discrimination by their nationality in the cases of getting the licenses in different members’ states. Additionally, it allowed the airlines to freely set up the airfares. In their studies on Regulation, competition and network evolution in aviation, Gillen and Niemeier (2008) indicates that prior to the deregulations; some airlines had already organized themselves into hub-and-spoke networks. For instance, Delta Airlines had organized its Atlanta network into a hub that included multiple spokes. Such companies were reluctant to shift to hub-and-spoke based on two reasons. First, the regulations required that firms be given permissions to exit the markets and such exit requests would lead to entrance of another carrier in the market. Secondly, the airlines noted that under regulation, it was difficult to achieve the demand side benefits associated with networks due to the regulatory barriers to entry. Deregulation of the US domestic airline industry was the precursor of similar moves in regions such Canada, Europe, New Zealand, and Australia. This led to emergence of new carriers and customers. On their part, the airport operators responded in various ways to deal with the outcomes of the deregulation. Assessment of the response of airport operators in view of new airline customers and their needs Strong merger and groups Reynolds-Feighan (2010) indicates that for small communities with few air services, deregulation would result to competition and network reorganization that focus on major airports resulting to reduced services or loss of services for smaller communities. In order to protect their markets from the effects of deregulations, expand market share, and gain the customers’ confidence airline FSNCs established in 1990s a range of agreements referred to as alliances which were focused at reducing competition while at the same time offering quality services. According to Doganis (2001), the increment in competition has forced airlines to look for extensive protection from commercial realities by creating airline groups. However, the formation of alliances as a way of dealing with the effects of deregulation and meeting the needs of the customers has impacted on regional airport facilities. Airlines have been able to reduce the level of service offered bas they are now able to share their codes with their alliance partners. The reduction of services has created vulnerabilities within airport operations due to the reduction in destinations resulting to lower revenue that is not adequate to operate the facilities or to invest in new projects. Formation of strong merger is a major form of response that huge carriers adopted in order to ensure that the needs of the customers worldwide are effectively met. Morrison and Winston (1995) argues that during the first phase of market liberalization between 1987 and 1991, there was establishment of three types of airline mergers which includes corporate mergers, simple airline alliances, and strong airline alliances. Corporate merger involves joining of airlines from different states and coming up with common objectives that result to the gradual expansion of the partners. Good examples of corporate merger are, SAS in Europe that originated from 3 Scandinavian countries and Air Afrique that was formed by 12 countries. European FSNC consolidation is candidly indicated by the merger of KLM and Air France as well as the recently formed International Airlines Group that involved Iberia, Vuelling, Sun-Air, Air Nostrum, and British Airways. Lufthansa Group on the other consists of Lufthansa, Lufthansa, Brussels Airlines, Eurowings, Air Dolomiti, and Australian Airlines. Another strategy that airport operators have adopted to deal with the challenges of the deregulations is network consolidation. This is undertaken through the purchase of carriers which have allowed them to gain synergies in addition to reduction of potential competition. However, this strategy as indicated by VISTAS, the University of West London journal has implication in the sense that it increases the prospect of network duplication (VISTAS, 2011) Simple airline alliance Related to the formation of groups, airline companies have also been involved in establishment of simple alliances. In his studies on Liberalisation of European aviation: analysis and modelling of the airline behavior, Doganis ( 2001) indicates that airlines that are aimed at provision of quality services to the new as well as existing customers forms simple alliances. This involves marketing agreements between certain airlines originating from the same or different countries. Some of the notable aspects of the alliances, whose aim is to exchange air traffic, include pooling agreements, network routes, joint venture on common network routes, sharing capacities and services of airport terminals. Hendricks et al (1995) argues that apart from coordination of timetables and code sharing, airlines that aims at meeting the needs of the customers engage in other forms of coordination that includes sharing of Computer Reservation System (CSR), ticket reservations and sales cooperation, development of information systems, maintenance of aircraft, and training of employees among others. Elimination of competition through synergy Majority of airlines, especially the larger flags have also embarked on formation of alliances across the border of their countries. For example, by providing feeding traffic at both ends of their continental and intercontinental flights, the cooperated ion has resulted to alleviation of potential competition at the foreign and domestic markets (David, 2012). Such firms have started indirect competition with specific airlines operating on the same markets as their partners. For instance, through Austrian Airlines and KLM alliance, the companies have not only enriched each other but also they have effectively strengthened their weak domestic markets. Similarly, competition between EU scheduled airlines as well as charters and other modes of transport that serves short and medium –distanced markets in a particular member states is another strategy that is adopted by airlines. Low Cost Carriers (LCC) initiatives While most of the FSNCs, supports consolidating their positions at fortress hubs, Low Cost Carriers have embarked on establishing themselves far from these primary airport facilities at more cost effective secondary airports. As indicated by Airey and Tribe (2005) the key reason of adopting this strategy the by the LCC includes reduction of congestion, employing less complicated airport infrastructure and lowering airport charges. This has created a challenge where airports have been noted to make efforts to attract airline such as easy jet, Norwegian, and Ryanair (Burton, 1991). Another notable strategy that Low Cost Carriers have adopted is a significant move by them into business markets as the result of maturing of their past route operations as well as the need to drive expansion. LCC targets business markets that were initially flown by those states FSNC. Even though the competition has been welcomed by customers, it has generated bitter rivalry between FSNC and their LCCs counterparts. Conclusion Removal of regulations in airline industry was a move that was pioneered by US in 1978. Before the deregulation, few airlines existed due to the low profits that existed in the market as well as strict rules that the government enacted. Some of the notable opportunities that emerged as the result of deregulations included increased profits, provision of quality services, and increased chances of investment for personal entrepreneur. Even though the deregulation and liberalization brought about improved service delivery for US and EU airlines, it created challenges that were costly to handle (Airey, 1979). For example, the reorganization of networks and introduction of new flights was expensive for the companies. Other challenges included addition of waves, delay in the approval of third package in Europe, and increase in the level of uncertainty for airport managers among others. Once the deregulation took place, it led to more carriers getting into the industry as well as increased number of customers. This implied that apart from coming up with strategies to contain the competition, existing airport operators were supposed to come up with ways to respond to the new airline customers and their needs (Airey, and Johnson, 1999). Major strategies that operators adopted include forming strong mergers and groups such as SAS, International Airlines Group and Lufthansa Group among others. Additionally, the operators embarked on reduction of competition at the foreign and domestic markets. Low Cost Carriers embarked on establishing more cost effective secondary airports rather than depending on primary airport facilities. Taking into consideration the importance of air and road transport in the developing the economy of any country, it is imperative for government worldwide to adopt deregulation of these services to avoid creation of a monopoly market structure. This would not only avoid exploitation of customers but also it will attract local and foreign investors thus raising the level of employment locally and globally. References Airey, D. (1979) Tourism education in the United Kingdom. Revue de Tourisme, 2(79), p. 13-15. Airey, D. (2002) Growth and change in tourism education. In: Vukonic, B. & Cavlek, N. (eds.) Rethinking of education and training for tourism, p. 13-22. Zagreb: University of Zagreb, Graduate School of Economics and Business. Airey, D and Johnson, S. (1999). The content of tourism degree courses in the UK, Tourism Management, 20, p.229-235 Airey, D. and Tribe, J. (2005). An international handbook of tourism education. Oxford: Elsevier. Bailey. E. LI. Graham, D. R. and Kaplan, D. 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