Global Airline Industry Challenges

Global Airline Industry Challenges

Introduction

The global airline industry has had its share of dominance in the market for quite an extended period, and it continues to date. The players in the industry continue to grow dynamically serving the same customer layer, and this has led to reduced revenue growth. Like other industries out there, the field is filled numerous factors in achieving a good market niche and profitability. These factors can include high fuel prices, competition, insecurity and terrorism among other factors. The airline industry is dynamically changing the customer’s preferences are also changing, so this requires the players in the industry to leverage their resources to match the current trends in the field and try and find new ways to create value. Initially, airplanes were used to deliver mail and drop insecticides but with advancement in technology saw these aero planes as a potential for fast and efficient human and baggage transport. This led to increased demand that passenger travel was ultimately viewed as nearly a public convenience. Despite the industry’s incredible growth, it has not come close to returning the cost of invested capital with small profit margins.

Initially, airlines were state-owned as profits were not a primary concern as such. This involved regulation and setting of rates, schedules and fares which are termed to bring profitability but it was contrary to their basis. The bodies governing this industry dictated how many seats could be offered, which airlines could fly where and the fares to charge. To increase affordability and profitability of flights they would cut costs about 40% leading to increased number of people flying which led to flight delays and reduced revenue since the flights were very cheap (ATA, 2007). Unprofitable routes are still kept afloat by various legislations in different nations. These courses are usually subsidized and in turn leading to the low profitability of the airlines prying these routes. This is usually an effort to increase the affordability of flights in the expense of revenue.

Input costs are usually volatile and require a high level of cash that is hard to maintain even for the established players in the industry. Inputs such as fuel do fluctuate from time to time which affects profitability since they do not want to frustrate their customers. Even if fuel prices escalate, the ticket prices remain the same thus making losses. Labor as a fixed input rather than oil, is now the largest cost for airlines since airlines require a large labor force to run the complex operations (ATA, 2007). Aircraft are costly from procuring to maintenance and airlines have to continue being involved in this dynamic to stay in the market. Even though large jets have a lifetime as long as 26 to 30 years, they have to be routinely maintained for the safety of the passengers and the goods aboard thus more increased maintenance costs, and due to technological advances in the industry, an airline has to keep up with the trends. This involves purchasing of new and improved aircraft with state of the art technology which can be a basis of competition from rivals. This leads to more and more money capital being poured into investment and less money emanating from the capital invested leading to losses.

Deteriorating labor, management relations and constraints on aviation infrastructure also play a role in the plunging profitability of the industry as they tend to increase congestion and flight delays leading to dissatisfied clients due to the perception of poor service delivery in general. This, in turn, leads to reduced number of passengers to the airlines thus decreased revenue.

The introduction of some legislative acts such as the 1978 deregulation act led to the interference of the government in aspects of the industry from setting and regulation of fares and rates to make flying affordable for most people. This resulted in decreased revenues for the airlines in the field since they could not adjust the fares accordingly for compensation and some airlines filed for bankruptcy. The consequences of such acts have been very adverse, and apparently, it has led to low profitability of the aviation industry worldwide to solve the pricing, cost and operating problems. Competition as a result of liberalization of air travel has also led to decreased profitability over time in the commercial airline industry from the upstarts to the established players. Competition, in essence, makes an industry undergo transition. This usually involved being forced out of business especially for the incumbent airlines or being obliged to improve which included more use of resources while still struggling to be competitive. This leads to mergers and acquisitions of the struggling airlines which have made losses in an effort for survival in the industry (Park et al., 2004). This competition can also be as a result of the floundering airlines will stay in business; thus partnering with governments for funding. This leads to lower pricing which leads to the other established and active players been adversely affected by this move since they will lack the pricing power and be compelled to reduce their prices too or risk losing their market niche (Alamdari & Fagan, 2005).

There is also the issue of safety which is usually paramount in the airline industry. For example, the Concorde jets were quite efficient and fast but were discontinued after an incident where one of the planes caught fire and crashed. This event saw the discontinuation of use and manufacture of these planes which were fetching more revenue due to their efficiency and speed. A lot of capital had been invested in acquiring such modern aircraft and shutting down such a huge operation led to massive losses over one incident which could be curbed in the future through various modifications and safety measures (Belobaba et al., 2015).

The industry is also affected by outside shocks and events such as terrorist attacks, outbreaks of illnesses and natural disasters which can drastically affect their passenger demands and operations. Terrorism has made a profound impact on the airline industry globally by instilling fear among the customers. This is evident especially from the 9/11 attacks and other attacks that have occurred worldwide (Heimlich, 2007). This leads to customers preferring other modes of transport such as by sea or by road which is cheaper and also considered safer leading to a plunge in passenger demand and revenue. So the airlines have to add security costs to their operating budget which is usually a high-cost structure (Goetz & Vowles, 2009).

Taxes have also played a role in the low profitability of the airline industry. There have been several additional taxes to the cost of flying which includes passenger facility charges, segment tax, security fee to mention a few. This is attributed to the rise of low-cost carriers and the inability of the legacy players in the industry to adjust to the dynamics of the industry (O’Connell & Williams, 2005). Many airlines continue to operate despite years of large losses reason being that some stakeholders cannot afford to allow for them to close down or undergo consolidation or acquisition. Closing down of an unsuccessful airline would mean the loss of many jobs, inconvenience to many travelers, loss of national pride and not to mention millions of losses for the creditors of the airline. All those issues factored, an airline will keep on going on making losses while still operating (Bisignani, 2006).

Some airlines have a reputation for hassle and poor service delivery especially when it comes to public relations, long queues due to security procedures at the check-ins, poor service and inconvenient schedules which are among the list of complaints by travelers. This has led to the view that air travel is an excruciating ordeal, yet the passengers already have a preconceived expectation of the service making it difficult for the airlines to charge a premium for their services to return to profitability. The media has propelled numerous accounts of such accounts which can be referred to as public relations disasters regarding individual airlines such as a security personnel forcing a traveler out the plane among others. Due to these hassles, especially the passengers on business travels have resulted to other alternatives like paying premium air fares, teleconferencing and other modes of travel. This led to the industry’s passenger revenues dropping by over 20% (Belobaba et al., 2015).

Conclusion

Airlines do provide a vital service and have been an essential part in the making of a global economy. The industry itself is a major economic force regarding its impacts and operations with other sectors. Factors including continued presence of loss making airlines, low cost structure, vulnerability to external events and a status for poor service delivery pool to present a vast barrier to profitability. This has been experienced by airlines all over the world and over the years. Many factors have a role in the profitability of this industry, and these disruptions seem like they are not likely to be less in the future since the industry is dynamically changing and has to keep up with the trends to bridge this gap of performance and profitability.

References

Air Transport Association of America (ATA), 2007 Economic Report, www.airlines.org

Alamdari, F., & Fagan, S. (2005). Impact of the adherence to the original low‐cost model on the profitability of low‐cost airlines. Transport Reviews25(3), 377-392.

Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. John Wiley & Sons.

  1. Bisignani, “State of the Air Transport Industry”, Address to the Annual General Meeting, International Air Transport Association, Vancouver, June 2006, www.iata.org.

Goetz, A. R., & Vowles, T. M. (2009). The good, the bad, and the ugly: 30 years of US airline deregulation. Journal of Transport Geography17(4), 251-263.

  1. Heimlich, “Outlook: Reaching for the Skies?”, Air Transport Association of America, www.airlines.org. January 2007

O’Connell, J. F., & Williams, G. (2005). Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines. Journal of Air Transport Management11(4), 259-272.

Oum, T. H., Park, J. H., Kim, K., & Yu, C. (2004). The effect of horizontal alliances on firm productivity and profitability: evidence from the global airline industry. Journal of Business Research57(8), 844-853.

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