what is the airline industry

8/12/2019 What is the Airline Industry

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What Is the Airline Industry?

The airline industry is a global market based around the transport of goods or passengers by air. Airline corporations range insize from huge multinationals, making hundreds of flights daily, to a tiny regional company that depends on a single plane.Airlines provide crucial support to businesses, governments and individuals who depend on international travel or commerce.Despite some rocky financial periods, the airline industry plays an essential role in maintaining a global economy.

History

Commercial flights began within a decade of the invention of aircraft in the early 20th century. World wars I and II left a surplus ofaircraft and pilots worldwide. By the 1950s, airline companies created the framework of international travel and commerce thatexists to this day. While some airlines are state-owned, independent companies are vulnerable to economic uncertainties. Changesin government regulations and an intensely competitive market have created hardships in the industry, as did the terroristhijackings of Sept. 11, 2001.

Passengers

Internationally, airlines transport more than two billion passengers annually. Passenger transport creates more than $400 billion inannual airline revenue. Passengers fly for a variety of reasons, including corporate and government business. But the majority aretourists; international tourism is a $900 billion-a-year industry. While some passengers experience discomfort and anxiety, others

enjoy flight so much they fly for its own sake, including in specialized aircraft like gliders and hot-air balloons.

Cargo

Air freight accounts for between $40 billion and $60 billion in airline revenue annually. Express delivery services such as FedEx, thelargest cargo airline, depend on their worldwide network of aircraft, which are in constant use. Shipping customers use air transportfor a variety of cargo that requires speedy delivery, such as food or emergency supplies. Air cargo can range from non-essentialluxury items, such as live lobsters, to life-saving materials, like organs for transplant.

Economics

Air travel demands a high level of specialized labor and equipment that cannot be safely compromised by such corporate cost-savingmeasures as budget cutbacks and employee downsizing. Consequently, most large airline corporations operate at a far slimmerprofit margins than other companies of comparable size. Bankruptcies and mergers have been commonplace since airlinederegulation in the 1970s, even among storied companies like Pan Am and Eastern, two pioneers that no longer exist in any form.

Security

The nature of air travel creates security scenarios that demand special attention. Hijackers sometimes seize passenger aircraft, forreasons ranging from political extremism to simple theft. Criminals often employ cargo shipments to transport dangerous or illegalmaterials, with or without the knowledge of airline employees. Most countries have enacted security measures to counter theseactivities, including checkpoints equipped with X-rays and metal detectors, air marshals and drug-sniffing dogs. Other safetyconcerns include accidents, mechanical failure and environmental dangers. Security has been a primary concern of airlines fordecades, and especially since 2001.

Market Structures of the Airline Industry

Airlines take passengers across the country and across the world. They service business passengers, tourists and leisure travelers,as well as commercial enterprises. Airlines are structured to service the types of passengers and products they transport. Thestructure of the industry is based on the geography, the people, the types of products that the airline is in business to transport andthe revenue potential.

International

Airlines must have stringent licensing and approvals in place to travel across borders. In the United States, an airline must obtainapproval from the Department of Transportation (DOT) and the Federal Aviation Authority (FAA) to cross U.S. borders. The airl inemust also receive permissions, licenses and approvals to f ly and conduct transportation business from the governing agencies of therespective country where they plan to land. Obtaining international licenses and permissions to market international airtransportation services can take years for a new or non-established carrier to achieve, if at all.


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National

In the United States, an airline must receive approvals and pass testing to transport passengers to and from states, coast to coast.Once approved, an airline has national status. The FAA and DOT are the governing bodies to grant licensures and approvals. Theairline must meet a comprehensive base of requirements, including passenger seating and safety, to become a national airline. Inaddition, the airline must obtain, license and purchase gates from the airports that it plans to arrive and depart from. Typically, anational airline must have airplanes that seat between 100 to 150 people and generate revenue of $100 million to $1 billion annuallyto qualify as national airlines, and market themselves as such.

Regional

Airlines with revenues less than $100 million are categorized as regional airlines. Local airlines are often developed to offset traveland provide alternatives to major carriers. Major airlines will often acquire regional carriers or set up partnerships with otherairlines to complete routes, thus servicing cities and markets outside of their major hubs.

Commercial Cargo

Transporting cargo is a major revenue source for airlines. Companies, such as FedEx and United Parcel Service, rely on airtransportation to provide overnight delivery services to businesses and consumers. In addition, cargo capabilities are importantrevenue sources for airlines. Companies rely on airplanes to transport everything, from imported flowers, parts and supplies, toanimals. Companies develop and market their facilities for cold storage, customs inspections, FDA and USDA certification to marketthese additional services to commercial enterprises for importing and exporting products, perishables and even livestock.

Challenges for the Airline Industry

Many airlines found themselves in dire straits during the decade of the 2000s. This is attributed to both internal changes withinthe industry and external events such as the September 11, 2001 terrorist attacks on the World Trade Center and the rise in theprice of oil, as noted by academic Peter W. Jones of the Economic Development Institute. Those airlines that have survivedthrough this turmoil now face a rocky road to recovery that includes a number of substantial challenges.

Cash Reserves

Airlines must carefully manage the amount of cash they have to support themselves to avoid going bankrupt. These cash reservescan be heavily drawn upon and drained in the event of another external shock, such as the aftermath of the 9/11 terrorist attacks,which caused a worldwide slump in air travel. According to Global Times, airlines in 2009 were in a more positive position in termsof cash reserves than in 2001, with airlines reserving 13 percent of their revenues in case of an emergency. However, the DirectorGeneral of the International Air Transport Association (IATA), Giovanni Bisignani, has warned that even these cash reserves maynot last if the airline industry continues to have a slow, drawn-out recovery.

Security

The need to protect its passengers from threats such as further terrorist attacks has necessitated that airlines the world over increasethe level of security that they employ. All this extra security is costing the industry some $5.6 billion per year, according to "USAToday" in 2007. The airline industry needs a way to pay for all of this, and these costs therefore have been borne out by airlinepassengers through extra fees and other charges, something that's not pleasing frequent airline users. The airline industry is seekingways to provide security to passengers without passing these extra charges to its customers. As reported in "USA Today," onesuggestion by the IATA involves persuading governments to handle these security measures by spreading the costs through the tax-paying citizens of each country.

Climate Change

Climate change is very much a concern for many governments throughout the world in 2010. According to "USA Today," somegovernments have targeted the airline industry in a bid to cut down on the carbon emissions that cause climate change. The UnitedKingdom, for instance, has placed a tax on aircraft arriving and departing from the country, adding up to some $2 billion in tax totravelers per year. The airline industry must come up with more money to pay these new taxes, or else convince worldwidegovernments that such taxes are unjust.

Economics in Airlines


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Economics is an important part of any business venture. No business, large or small, can succeed without taking into account thevarious aspects of business and industry that affect its profitability. There are a number of different economic factors that affectthe airline industry and the amount of profit that airlines can earn.

Airline Revenue Sources

Airlines make money by transporting people and goods from one location to another. All of the revenue generated by airlines isgenerated for transportation purposes. Airlines sell their services rather than a physical product.

Airline Expenses

All airlines have expenses that are associated with doing business. Expenses include the cost of airplanes and related equipment,employee salaries, leasing of business locations inside airports and insurance for both the passengers and goods that aretransported. Expenses also include maintenance and the ever-increasing cost of fuel.

Internal Economic Factors that Affect Profit

Economic factors that affect airline profits include internal aspects such as whether or not each flight is filled to capacity, how muchpassengers pay for their tickets and what services, such as complimentary food and drinks, are provided.

External Economic Factors that Affect Profit

Economic events that occur outside the airline industry can affect airline profits. Rising fuel costs due to political or economic eventsreduce airline profit. Weather conditions, such as snowstorms, can negatively affect air travel. Events such as airplane crashes canaffect people's willingness to travel by air. All these may cause a temporary loss of profits.

Forecasting

Airlines have to be able to accurately predict travel demand several years into the future in order to be able to provide enough routesand airplanes to handle the needs of passengers. The economic success of an airline will in part depend on its ability to accuratelymake such predictions and plan accordingly.

Airline Industry Key Success Factors

In the service industry, particularly the volatile, capital-intensive airline industry, success factors cover a wide spectrum--people,service product, route system, revenue/cost control and financial management.

People

High-caliber staff is critical in this service-oriented business. Training programs focusing on front-line communicative skills withcustomers and internal employee-management problem solving with customer-focused continuous-improvement objectives areessential ingredients.

Service Product/Promotions

The actual product--aircraft seating space, aircraft type, class of service offerings and booking ease--must be at least industry-competitive for success. Promotions, particularly those targeted to frequent high-revenue travelers, create loyalty and repeatbusiness.

Route System

An airline's route system is perhaps the most consistent success factor. Where to fly and how often are factors that must be matchedto customer demand, and at the same time, scheduled to maximize aircraft utilization.

Revenue/Cost ControlMaximizing revenue through competitive and innovative pricing schemes to attract and maintain a customer base is critical forsuccess. Just as important is cost management, notably fuel procurement and price hedging during volatile periods.

Financial Management

Net-unit revenue is the measure of profitability, representing all revenues minus all costs divided by the total seats flown. Successfulmanagement of this key indicator enables airlines to tap investment for growth.

Strategic Analysis of the Airline Industry


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Performing a strategic analysis of the airline industry involves some thinking not just about the airlines but the factors thatimpact them, both directly and indirectly. The best approach to lay out the strategic implications is to map them by factor type.Once you've gone through the exercise, then the strategic issues become apparent and potential directions for the airlines in thefuture become clearer.

Assess the Marketplace

The airlines' marketplace is their bread and butter. The ups and downs of the economy directly affect these companies' bottom lines.Both short-term and long-term implications have direct impact on cash flow and profits. The trick is to determine how and when theeconomy will rear its head with impacts.

Use Porter's Five Forces Template

A clean, simple way of assessment for the airlines is to use Michael Porter's five categories of market force in an industry. Theseinclude the substitute problem, suppliers, buyers, new players and competition. Combined, all five categories create the rollercoaster environment an airline must function in. Some categories will be stronger than others, depending on the company and itsown strengths and weaknesses.

Supplier Power

Look at the resources that the airlines need to function, aside from personnel. These could include repairs, equipment andconsumables. When oil prices shot up in 2007, suppliers had significant power over airlines that had to buy jet fuel on the openmarket. Alternatively, airlines like Southwest that locked in prices with long-term contracts suffered little impact from suchsuppliers.

Buyer Power

Clearly the airlines have to jockey for buyers in ongoing price wars. However, buyers have strengths and weaknesses depending onhow the airline industry is structured. Some airlines dominate certain regions and types of trips. Others only deal with long-rangetravel and charge expensive prices for having to arrange short hops. Buyers will only be as strong as an airline is weak in a particulararea.

The Risk of New Players

In the airline industry, almost all the players are well-established. So the risk of a new entry is minimal. While small regional carrierswill try to expand to bigger status, few survive long enough to matter. Only two have been able to function in recent years as newplayers: Jet Blue and Virgin Airlines. As a result, an analysis should be looking for new players with significant cash flow to pay forhigh entry costs, otherwise it's a moot point.

Substitution

For the airline industry as a whole the substitution factor is almost nil. An analysis would have to compare the practical benefit ofcar, boat and train vs. plane. In most cases beyond 500 miles, the plane wins out on every factor: cost, distance, speed, andefficiency.

Competition

An industry analysis could spend chapters on the airline industry's competition issues. Price battles are stiff and fierce. Well-developed airlines constantly encroach on each others' turf. Millions of dollars are spent on marketing and advertising, particularlyon holidays and toward business clients. There are plenty of statistics available on consumer flow and comparisons between playersin different regions, cities, markets and distances.

Conclusion

A strategic analysis of the airlines should, at a minimum, cover the above factors. Plenty of data and research is available both fromthe press, industry reports, and from the airlines' trade industry association. A good analysis will use all of these resources and thenanticipate issues outside of the conventional projections for the industry.

Strategies for the Airline Industry


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No-Frills Airlines

Travelers are very sensitive to cost, particularly for short flights. No-frill airlines can offervery low prices by eliminating unnecessary luxuries, like in-flight meals or business-classseating. Given the high level of congestion at most hubs, low-cost airlines can also take theless expensive late-night and early-morning slots to further drive costs down.

Network Airlines

Network airlines and mainline carriers follow a more traditional strategy, offeringcomfortable flights with a relatively high level of amenities. What customers value in anairline depends considerably on the length of the flight, and mainline carriers may beperceived as a better proposition for long-distance flights. Network airlines that decide tocut costs by reducing the quality of in-flight amenities and service risk becoming stuck in anundifferentiated middle ground. But at the same time, cost reductions can be achieved bymeans of improvements in processes and logistics. For example, in a hub and spoke system,services from smaller airports are fed into a central hub, increasing coverage and seatutilization while keeping costs down.

Regional Airlines

Regional airlines can compete by providing service in areas where there is not sufficientdemand to attract service from major network or no-frills airlines. Those carriers tend tooperate shorter sectors using low-capacity aircraft. They can either deliver passengers to thehubs of major airlines or fly in mainline markets during times and days where the demanddoes not warrant the use of the larger planes operated by mainline carriers.

Charter Airlines

Charter airlines tend to differentiate by using a vertical integration strategy. Their low-costflights are integrated to a chain that includes travel agencies, hotels and groundtransportation providers. While some can compete directly with low-cost carriers, most willuse their vertical integration to generate demand in areas where seat-only service would not

be competitive.

what is the airline industry

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