Enlightened Engagement

 MIT has a global airline industry program. Research reports and academic books on airlines are very rare. Here are few interesting facts on global airline industry and US airline industry published by MIT.  

• The global airline industry consists of over 2000 airlines operating more than 23,000 aircraft, providing service to over 3700 airports.
• In 2006, the world’s airlines flew almost 28 million scheduled flight departures and carried over 2 billion passengers.
• The growth of world air travel has averaged approximately 5% per year over the past 30 years.Historically, the annual growth in air travel has been about twice the annual growth in GDP. 
• In the US airline industry, approximately 100 certificated passenger airlines operate over 11 million flight departures per year, and carry over one-third of the world’s total air traffic.
• US airlines enplaned 745 million passengers in 2006 and reported over $160 billion in total revenues, with approximately 545,000 employees and over 8,000 aircraft operating 31,000 flights per day.
• After the world airline industry posted 4 consecutive years of losses totaling over $22 billion from 1990 to 1993, as a result of the Gulf War and subsequent economic recession, it returned to record profitability in the late 1990s, with total net profits in excess of $25 billion being reported by world airlines from 1995 to 1999.
• Airline industry plunged into record operating losses and a financial crisis between 2000 and 2005, with cumulative net losses of $40 billion.
• The profitability results for 2006 were positive for most conventional airlines, while several Low Cost operators struggled financially. The US industry as a whole posted an aggregate net profit of $3 billion (excluding restructuring and bankruptcy costs).
  The US industry is expected to post a $4 billion net profit in 2007.

Source : MIT global Airline industry program

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“The Economic Impacts of a Terrorist Attack on the U.S. Commercial Aviation System” by four scientists at the University of Southern California Center for Risk and Economic Analysis of Terrorism Events appears in a special homeland security issue of the peer-reviewed journal (Vol. 27, No. 3, 2007), which is published by the McLean-based Society for Risk Analysis (www.sra.org).

Peter Gordon, James E. Moore II, Ji Young Park and Harry W. Richardson used a careful, conservative analysis of the after-effects of September 11 to model a single attack on a major airport, causing an initial shut-down of the entire U.S. commercial air transport system followed by a recovery period.

Their key findings are:

• An initial seven-day shutdown would be three days longer than the shutdown after 9/11 because protection against future attacks would require not only controlling who gets on planes, but also a search of areas surrounding airports and installation of stronger protective and security services at or near airport perimeters.
• This seven-day shutdown would cost $12.5 to $21.3 billion, including airline tickets, ground transportation, accommodations, food, gifts/shopping and amusements, as well as all air freight (20 percent of total air revenues).
• After operation resumes, commercial aviation would take two years to recover. Air freight transport would proceed normally, but passenger travel would be diminished due to psychological aftereffects of the attack.
• Overall loss estimates for the two years range from $214 to $420 billion.

These loss estimates capture the economic consequences that would follow an attack, but exclude the costs associated with the loss of life and the replacement cost of aircraft that would be incurred as the result of an attack.

This research was supported by a grant from the U.S. Department of Homeland Security.

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No-frill or low-fare airlines’ operating strategy or how they really differ from the network or traditional airlines.

• Low fares on a higher percentage of seats, fairly simple structure
• No frequent flyer programme
• Cheaper product design (no assigned seating: no free food or drink)
• Use of secondary airports with excess capacity (lower charges and less congestion means airlines can increase punctuality rates and gate  turnaround times)
• Non participation in alliances (code sharing and baggage transfer services lowers punctuality and aircraft utilisation rates raise handling costs)
• Point to point (No costly hub and spoke)
• Standardised fleets (lower training and maintenance costs- Boeing 737 is there favourite)
• Maximise aircraft utilisation (due to emphasis on fast turnarounds,of uncongested secondary airports etc.)
• Reduce customer service costs (outsource capital intensive activities,e.g. passenger and aircraft handling)
• Concentration of leisure and VFR passenger Segments
• Uncompromising pursuit of cost elimination throughout the value chain
• Minimise personnel costs
• Lower travel agent fees (reduce travel agent commission, encourage direct reservations via Internet and telephone booking)

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These are freely available in the respective companies websites. These studies and forecasts are must read for anyone interested in or researching commercial aviation.

• AIRBUS market forecast
• BOEING market forecast
• ICAO outlook for Air transport
• ICAO Intra Asia/pacific and transpacific forecast
• Association of European Airlines Forecast
• IATA annual Report and Market Forecast
• ESCAP Asian air transport study and forecast
• World tourism highlights(By World Tourism Organisation)
• World Air Transport Statistics (By IATA)
• State of the U.S. Airline Industry, (By ATA)
• Current Market Outlook, (by Boeing)
• Civil Aviation Statistics of the World, (By ICAO)

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Deregulation changed the operating system of airlines from ‘point to point’ to ‘Hub and spoke system’. After deregulation, the airline industry in the USA and Europe is consolidating rapidly through mergers, alliances and joint ventures. Cost efficiency is the key to survival in the deregulatory environment. Many of the new entrants left the market having failed to develop the necessary economies of scope and scale. Other airlines were taken over, either because they fell into financial difficulties. On the negative side, there is firm evidence of predatory pricing, creating barriers of competition through CRS, hub and spoke domination, FFP and slot allocation by mainly the large airlines.

Deregulation made airlines more productive than ever before. Decontrol of price means airlines can offer heavily discounted fare to fill up the unused seat. Deregulation also helped to gain efficiency through outsourcing, optimum use of equipment and personnel.

The airline industry is far more competitive than it was & the benefits of that competition have been widely distributed. Though the impacts of competition are not evenly distributed amongst markets, routes and carriers; and that competition on equal terms amongst carriers plays an important role in maintaining the effectiveness of deregulation. Although liberalization has merits, it also has defects- notably a tendency to generate cut-throat competition, the pressure it places on safety related expenditures, the creation of monopolies or oligopolies, and the exclusion of some countries from effective participation in international markets. Airfares which are generally trending downwards irrespective of whether or not markets are liberalized tend to rise in markets that become concentrated after liberalization . Without acceptable safeguards, liberalization is anyway in principle unacceptable to the majority of the countries. The deregulation of the USA market and more recently the creation of single aviation market in Europe mark a dramatic shift toward more market-based outcomes. During this time, the structure of the industry has evolved from point-to-point service to hub-and-spoke and finally now moving to global-alliance based networks built on the linking of hub-and-spoke structures across the globe .

Market deregulation happened in these two regions in a different macro-economic situation . In US, deregulation happened in a period of escalating oil prices and world recession. In the EU, on the other hand, deregulation happened during a period of escalating economic growth and rapid expansion of air travel. Airlines ownership is still very much restricted all over the world. For example, in the USA, foreign investors are not authorized to acquire more than 25 per cent of the voting capital of airlines and carrier boards must be controlled by US citizens. European Union Member countries, and Australia-New Zealand, as well as all other OECD countries have similar foreign investment restrictions, generally at higher thresholds such as 49 per cent .

Non-US airlines are somewhat behind the deregulation “learning Curve”, because they did not have to face the consequences and open competition situation until recently. For example, the proliferation of low-fare carriers in Europe and their rapidly extending market share raised serious concern about some of the major European airlines on their ability to achieve financial stability or sustain in absence of state support or regulation.

Deregulation, liberalization and competition have fundamentally changed the management strategies and practices of airlines. Cost management and productivity improvements have been the major focus of airlines everywhere after the deregulation. It is widely believed that- global liberalisation of airline markets, will increase disparities between airlines with respect to their ability to compete effectively, and may ultimately lead to the demise of weaker carriers.

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