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  1. 1. Introduction to Airline management:Every organization has goals, whether they are profits, market share, growth, quality of productsor services, community image, or any combination of these. Management is the process ofthrough the coordinated performance of five specific functions: Planning, Organizing, Staffing,Directing, and controlling.Years ago, when the major carriers were in their formative period, the management process wasmuch simpler. The few employees truly felt that they were part of the team, and they couldclearly see how their efforts contributed to meeting the company’s goals. Everyone knew whatthe objectives of the firm were and how each particular job related to them. The lines ofcommunication and span of control were very short. There was an esprit de corps among theemployees, from president to the most unskilled worker. In fact, the president probably kneweach employee personally.Today, the major carriers employ as much as 80,000 people. No longer does the president knowthe men and women on the line, and many workers on the line have as much allegiance to theunion they belong to as they do to the company they work for. It is difficult for individualemployees to see exactly how their particular jobs contribute to the corporate goals. The linesof communication are long, and the decision making process is complex. The airline tends toassume a remoteness from the individual and to become a“ thing” that exists, survives, andgrows not because of the people who compose it, but in spite of them.According to Chris Argyrus, a noted management theorist, “ the organizations emerge when thegoals they seek to achieve are too complex for any one man. The actions necessary to achievethe goals are divided into units manageable by individuals- the more complex the goals, otherthings being equal, the more people are required to meet them”.An organization is the framework within which the management process can be carried out. It isa structure that enables a large company to attain the same efficiency or a greater efficiencythan a small firm run effectively by a few employees. In the highly competitive airline business,an effective organizational structure may prove to be the necessary advantage one firm has overanother.Management:Levels of Management:Terms such as top management, middle management and operating management are commonlyused in business to distinguish the levels of management within an organization.Unfortunately, there is no clear definition of each level, and meanings attached to the termssometimes differ from one company to another. However, a firm’s top management is generallyconsidered to be the policy making group responsible for the overall direction of the company;middle management is responsible for the execution and interpretation of policies throughout the
  2. 2. organization; and operating management is directly responsible for the final execution of policiesby employees under its supervision.Figure 7-1 shows a typical airline pyramid of authority including all three levels of management.The nature of activity carried on at each level is illustrated, with examples showing theorganizational breakdown of two administrations and the typical titles of individuals heading upeach unit. The term administration is generally used to describe a major unit within thecompany, such as flight operations, marketing, or personnel.Department are the nextmajor breakdown with administrations; divisions within departments,and so forth.The board of Directors. The Chief governing body of a corporation is the board of directors,which is elected by the stakeholders. This board ranges in size from 3 to 20 or more membersand represents a cross-section of prominent individuals from various fields, including banking,insurance, law, and accounting. Airline boards typically include individuals from the hotel andfood-processing industries, as well as former political and military leaders. The board of directorsis the Chief policy-making body of the corporation and the forum to whom the president reports.This body decides such broad questions as, should the company be expanded? And should thecompany diversify into other fields? The board also has the sole responsibility for the declarationof dividends. The basic decision about dividend involves other decisions, such as whatpercentage of the year’s earning should be retained for company use and whether the dividendshould be paid in cash or in stock.The directors of the corporation are responsible for the appointment of a president, the secretary,treasurer, and other executive officers who handle the actual details of management. Often, theboard elects some of its own members to fill these important posts.Top Management. Top management is the highest level of management in the organization. Thejob of top management is to determine the broad objectives and procedures necessary to meetthe goals established by the board directors. Top management will also make recommendationsto the board regarding the goals of the company. What distinguishes top management frommiddle management is not always clear in a given organization, but the individuals in this groupusually have many years of experience in all phases of management. Often called keyexecutives, senior executives, or major executives, they usually bear the title of president,executive vice-president, or senior vice president.President. This individual is the Chief executive officer of the corporation and is responsible forthe proper functioning of the business. In the case of airlines, this individual often is a prominentbusiness or political leader with very little airline experience, because the president’s primary roleis to deal with the financial community, various segments of government, community groups, andso forth.Executive vice president and general manager. This individual generally has years of airlineexperience and is responsible for the day-to-day operation of the company. Generally, the seniorvice-presidents report to this individual.Senior vice-president. This title generally is reserved for those individuals who head up a majoradministration, such as flight operations, marketing, or engineering and maintenance.
  3. 3. Middle Management. Middle management is the second level of management in theorganization and is responsible for developing operational plans and procedures to implement thebroader ones conceived by top management. Middle management may be given much leeway inthe development of plans, so long as the end result is keeping with top management’srequirements. Decisions on which advertising media to use, how many reservations agents areneeded, and what new equipment to purchase are examples of those made by middlemanagement.Middle Management includes individuals who head up departments or divisions within a majoradministration, such as the advertising department under marketing or the flight procedures andtraining department under flight operations. Or it might include the simulator division head, whoreports to the flight procedures and training department head.Typically airline titles for individuals in charge of departments and divisions are vice-presidents,directors, and, in the case of maintenance facilities, superintendents.Operating Management.Operating management is the lowest level in management. It includesmanagers, assistant managers, section chiefs, general supervisors, and supervisors who head upsections, groups or units that report to division or department heads.Example might include the manager of display advertising or the general supervisor of the sheetmetal shop. Members of the operating management groups are primarily concerned with puttinginto action operational plans devised by middle management; generally, they do not initiate plansof their own.Although the direction an airline takes is established by top management, the operatingmanagement level is extremely important. Top management makes policies, and middlemanagement makes plans to carry out the policies, but operating management sees that the workthe plans call for is done. Top management is secure as long as the profit picture is favorable.When a carrier is in serious trouble financially, the board of directors may make changes in thetop echelon. Sometimes, a new president and executive vice-president are employed. When thisis done, changes at other management are not always made the new top management, becausemiddle management can still make plans to carry out policy, and operating management can stillimplement plans.General managers:Manage several different departments that are responsible for different tasks, for example, themanager of a supermarket are responsible for managing the entire department within the store.The produce managers, grocery manager, bakery manager, and floral manager all report togeneral manager. Because general manager manage diverse departments. Their technical skillsmay not be as strong as the skills of the people they manage, however, they make up for incommunication skills. General managers must coordinate and integrate the work of diversegroups of people. They responsible for ensuring that all the discrete parts of their organizationsfunction together effectively so that the overall goals of the organization can be achieved.
  4. 4. Levels of Management:Managers exist at various levels in the organizational hierarchy. A small organization may haveonly one layer of management, whereas a large organization may have several. Consider, forexample, the number of levels of management in a single-unit family restaurant versus a largerestaurant chain such as Chili’s. While the small family restaurant may have only one level ofmanagement( the owner), Cili’s has several layers, such as general store managers, areadirectors, and regional directors.In general, relatively large organizations have three levels of managers: First-line managers,middle managers, and top-level managers.Figure1.3 illustrates these managerial level, as well as the Operatives, or the individuals who arenot in the managerial ranks, but who actually deliver the product or service of the organization.The pyramid shape of the figure reflects the number of managers at each level. Mostorganizations have more first-line managers than middle managers, and more middle managersthan top-level managers. As we will see later in this chapter, however, the trend of the 1990swas to reduce the number of employees in organizations in an effort to improve efficiency. Thenet effect of such downsizing was a significant reduction in the number of middle managerswithin many corporate structures.The skills required of managers at different levels of the organizational hierarchy vary just astheir job responsibilities vary. In other words, managers at different levels have different jobresponsibilities and therefore require different skills. The skill necessary for First-line managersto be effective are not the same as the skills needed by middle managers differ from thoseneeded by top-level managers.While managers at each level must generally possess planning, organizing, leading, andcontrolling skills, certain job-specific skills are more important at one level than at another. Top Managers Middle Managers First-Line Mnagers Opretational Employees
  5. 5. Functions of management:The main functions of management are planning, organizing, staffing, directing, and controlling.The key tools of management are supervisory skills, which must be learned and practiced.Planning:Managers at all levels of the organizational hierarchy must engage in planning. Planning involvessetting goals and defining the action necessary to achieve those goals. While top-level managersestablish overall goals and strategy, managers throughout the hierarchy must developoperational plans for their work groups that contribute to their efforts of the organization as awhole. All managers must develop goals that are in alignment with and supportive of the overallstrategy of the organization. In addition, they must develop a plan for administering andcoordinating the resources for which they are responsible so that the goals of their work groupscan be achieved.Planning:An airline is dependent for its very existence on the ability of its top planners, failure to forecastthe demand of air travel and to plan how to meet a rising or shrinking demand spells thedifference between success and failure. The management process begins with planning, whichsets the stage for what the organization will do, both globally and specifically.Goals should be established for the company as a whole and for each administration anddepartment, as well as for individual activities. A goal is anything that an organization or group isseeking to do. Some goals are large, such as buying a hotel chain or building a new kitchen toserve a growing hub airport. Other goals are small, such as getting a report completed by Fridayor handling more reservations calls per hour than last month.Management by Objectives: Many carries operate by a system popularly referred to asmanagement by objectives ( MBO), in which employees at all levels are given tangible goals andare held accountable for achieving them. A strategy might include increasing the number ofdaily flights, including those serving full meals. In a well-designed MBO program, overall goalsand strategies of the company and of individual employees are established through discussionsbetween managers and subordinates. Feedback is provided through follow-up discussionsduring the period of time set for achieving the goals. Feedback may be in the form of dataquantitative results( such as Dollar sales, new accounts, unit costs, aircraft turnaround time, ormechanical delays) or data qualitative results( such as customer complaints, reductions inerrors, improvement in image, or development of subordinates) person to personcommunication, through day to day coaching, is particularly important.
  6. 6. With MBO, because employees receive timely, accurate, and fairly complete information ontheir performance results, they are in a position to take a corrective action when necessary.The whole MBO approach assumes that employees will accept responsibility for achieving ofcompany goals and that they will become committed when the goals are meaningful, attainable,and established through mutual planning.The final stage of the MBO is the appraisal of results. At the end of performance period, themanager and the employee check the employee’s progress in achieving the goals.Policy and Procedures as part of Planning:Every airline has a policy and procedures manual, usually prepared by the personnel departmentand containing major sections pertaining to each of the administrations. A policy is broadlystated course of action that employees should follow in making decisions. The policy is a guide;employees do have some discretion in its implementation. For example, an employment policyfor all staff positions above a certain level might be that “ preference in employment will begiven to college graduates with a management background.” Hundreds of policies are in effectat any major carrier, and those of a broad nature are established by top management. Power tomake specific policies for the guidance of each department usually delegated to administrationor department heads.A procedure is somewhat like a policy, but it specifies in more detail the kind of action requiredto handle a specific situation. There are procedures for ordering suppliers, training newemployees, fueling aircraft, handling customer complaints, and hundreds of other processeswithin the various administrations, departments, divisions, and so forth.Organizing:The managerial function of organizing involves determining the tasks to be done, who will dothem, and how those tasks will be managed and coordinated. Managers must organize themembers of their groups and organization so that information, resources, and tasks flowlogically and efficiently through the organization. Issues of organizational culture and humanresource management are also key to this function. Most important, the organization must bestructured in light of its strategic and operational goals so that it can be responsive to changes inthe business environment.Organizing:Once plans have been made and policies determined, the job of carrying them out becomes oneof organization and operation. Organizing involves the division of work among employees andthe determination of how much authority each person will have. More specifically, organizingmay be defined as the process of logically grouping activities, delineating authority and
  7. 7. responsibility, and establishing working relationships that enable the employees, and thus theentire unit, to work with maximum efficiency and effectiveness. Involves stationing people to work in the positions provided by for the organizational structure.It includes defining work force requirements for the job to be done, as well as inventorying,appraising, and selecting candidates for positions compensating employees, and training orotherwise developing both job candidates and current employees to accomplish their taskseffectively.Leading:Managers must be also capable of leading the members of their work groups toward theaccomplishment of the organization’s goals. To be effective leaders, managers must understandthe dynamics of individual and group behaviour, be able to motivate their employees, and beeffective communicators. In today’s business environment, effective leaders must also bevisionary-capable of envisioning the future, sharing that vision, and empowering theiremployees to make the vision a reality. Only through effective leadership can the goals of theorganization be achieved.Directing:Includes assigning tasks and instructing subordinates on what to do and perhaps how to do it.Because the supervisor’s job is to get things done through other people, effectiveness is closelytied to communicating directives clearly and in a way that will bring about the desired action. Itis essential that subordinates understand the orders, or they will not be able to carry them out.In directing people it is important to know how much information and what kind of informationto give them. Order should be fitted to the receiver; the new employee needs to be instructed indetails, but the experiences worker may need to know only the objectives and then be capableof choosing the means to attain them. Orders should be fitted to the receiver; the newemployee needs to be instructed in details, but the experienced worker may need to know onlythe objectives and then be capable of choosing the means to attain them.Controlling:Managers must monitor the performance of the organization, as well as their progress inimplementing strategic and operational plans. Controlling requires identifying deviationsbetween planned and actual results. When an organization is not performing as planned,managers must take corrective action. Such as actions may involve pursuing the original planmore aggressively or justing the plan to the existing situation. Control is an important functionin the managerial process because it provides a method for ensuring that the organization ismoving towards the achievement of its goals.With the four functions of the management in mind, let’s move on to examine the manager.
  8. 8. Managers are the people who plan, organize, lead, and control the activities of the organizationso that its goals can be achieved.Controlling:Is the measuring and correcting of activities of subordinates to ensure that events conform toplans. Thus it involves measuring performance against goals and plans, showing wheredeviations occur and, by putting in motion actions to correct deviations, ensuringaccomplishment of plans. Basically, control involves three steps: (1) setting performancestandards or the work, (2) comparing actual performance with the standard, and (3) takingcorrective action to bring performance in line with the standard.The process of management:As mentioned previously, four major functions are associated with the process of management:1-Planning 2-Organizing 3-Leading 4-ControllingFigure 1.1 illustrates these functions and shows how they relate to the goal of the organization. Planning Organization Leading Goals Organizing Controlling
  9. 9. Scope of the responsibility:The nature of the manager’s job will depend on the scope of his or her responsibilities. Somemanagers have functional responsibilities, whereas others have general managementresponsibilities.Functional Managers: are responsible for work groups that are segmented according tofunction. For example, a manager of an accounting department is a functional manager. So arethe managers of a production department.Business Environment:Conceptualizing the environment of business:Business Environment is usually refer to the business external context comprised of the widersocial, economic, culture, Legal, political, Technological, and other systems in which businessesoperate and internal context comprised of human resources, organizationculture...>>>Businesses Environment is varied in settings or contexts{Business organizationsoperate in different environmental settings or contexts/ Different types of business organizationoperate in different environmental settings or contexts}.The external and internal dimensions of the business organization environment are very muchrelated since business decisions (cross over this boundary-they have internal and externalaspects.). For example, it worth mentioning that Businesses have to not only ensure recruitmentof the right candidates from the external labour market but also to manage them internally todeploy human resource effectively within the organization considering that the quality ofinternal processes pretty much affecting the speed and effectiveness with which organizationcounter the external threats and opportunities. Indeed the internal environment may be shapedby the way the organization responds to its external environment.Environmental Uniqueness:Each Business organization, even those in the same industry operate in different environmentthat is, to some extent, Unique. This thought warns against over-generalization when analyzingthe business environment, and emphasize that organizations should consider only particularaspects of the environment that affect the organization and the way it respond to changes!However, we shouldn’t take this idea too far- at its extreme it would suggest that businessshould refer to textbook to get to know how things are in general terms, or that intended to betrue in most cases that is useful approach in business and management, since there are generalaspects of the environment that influence most businesses, firms should combine betweengeneral and particular approach in order to operate successfully.
  10. 10. How can Business react to the environment:Responsiveness:Successful organizations should be able to respond effectively to the environment and be ableto counter the threats effectively and take advantages of opportunities or at least, is able to doso as well as or better than its competitors.Influence:Nevertheless, business success may depend on the ability of the organization to influence theenvironment in which they operate. Advertising is a very good example of business activity thatis aimed to influence its environment and be able to create new tastes within the society.Changes in consumer preferences and spending behaviour as a result of changes in lifestylesand/or life value, population, income rate, economic growth and prosperity may pose threats oropportunities to which businesses must react.Choice of environment:Beyond responding to or influencing the environment, businesses may be able to choose afavourable environment in which to operate. For example, businesses may be able to shift thegeographical basis of their operations-moving into more favourable environments and awayfrom unfavourable ones.When businesses expand into new markets, for example exporting to new countries, open newroutes destination they are searching for favourable geographical areas in which to sell theirproducts. The phenomenon of international trade is driven by the geographical expansion ofbusiness searching for opportunities for sales in new markets overseas. Whether these newmarkets will provide favourable trading environments will depends on factors such as culture,consumer tastes and income level within the society.The nature of the internal environment:The internal environment concerns all those activities and relationships within the organizationthat are involved in the transformation of inputs into outputs.The internal activities and relationships add value to the inputs. A successful business has tomanage the internal environment effectively as well as interact with the external environment.Of course, the internal environment is not sealed off from the external one, rather there is aninterface or relationship between the two.
  11. 11. Businesses are, in other words, open systems that interact with their environments, not closedsystems. Some internal activities involve relationships with external people and organizations,most obviously suppliers and customers. For example, in a retail business and other services theinterface with the external environment in the guise of customers is the core activity of thebusiness. Therefore, managing the internal environment is, in part, concerned with managingtheir relationship or interface. Further, the internal environment may need to be adopted to suitthe particular characteristics of the external environment if the business is to be successful. Thismeans that there might not be just one way of organizing and managing the internalenvironment, but a variety of possible ways, depending on what works best in the particularsituation of the firm. For example, if the external environment is characterized by rapid changeor volatility it may be important to ensure flexibility of staffing or tasks within the business. Onthe other hand in a stable and predictable environment a more rigid, bureaucratic and rulesbased approach might work well. Just as the external environment of each business is, in somedegree, unique, the same can be said of the internal environment.Analyzing the internal environment involves looking at businesses as particular types oforganizations. An organization can be defined as a group of people that comes together for thepurpose of achieving a specific goal or objective, and which involves a series of activities andrelationships undertaken within a framework of some kind of rules or procedures.Environmental Analysis:Undoubtedly, for any Business It is Important to study the surrounding Circumstances andconditions in which they operate. A regular environmental analysis is needed because theenvironment is changing – it is dynamic. If the environment were static it is likely to plan forfuture on a basis of what was done in the past- to carry on the same way. But because it isdynamic business must operate under a general assumption that the future is different from thepast. And thus it is crucial to understand the way the environment change and be able to takethe corrective action to respond or influence these changes in a way that it helps the firm toattain its goals. Bearing in mind the point about environmental uniqueness, some organizationsoperate in a more unstable environment than others. Therefore, business success depends ondealing with change effectively.Uncertainty and bounded rationality:Business can never have knowledge on how the environment will change. There are alwayslimitations on knowledge, and therefore businesses must operate in somewhat uncertainenvironment. Although businesses may strive to act rationally in monitoring the environmentand responding to change in the most effective way, their rationality is always bounded bylimited knowledge. It is sometimes said that by the time firms have monitored environment
  12. 12. change, analyzed their findings and formulate a response it is too late to do anything. If thiswere true then environmental analysis would be a waste of time. Certainly businesses have tomake judgments about the resources and energy they invest in environment analysis in terms oflikely benefits of the exercise. However, we return to the point that some level of understandingof the environment is essential to business. The question then is not so much whether but how.In this section we will outline briefly some of the more familiar methods.PEST and its Variants:Thinking about the external environment in terms of inputs and outputs is useful but notsufficient. It focuses attention on relationships with sellers or suppliers, competitors, and buyersor consumers. But there are other important types of organizations, processes and relationshipsin the external environment. The external environment is not just made up of markets but alsoincludes political, legal, social, culture, technological and other factors and influences; it is inother words, multi-faceted and complex.PEST is a simple framework for environmental analysis that distinguishes four categories areas.Political:Terrorism fears/ Political instability:The years at the beginning millennium are turning out to be some of the most difficult that theaviation industry has ever faced.The industry was undoubtedly heading for challenging times in any case, but there can be nodoubt that the events of September 11 2001 caused unprecedented crisis. Armed hijackersseized four aircraft in the USA, and used these to attack the world trade centre in New York andPentagon in Washington.The effects on the airline industry were catastrophic. For four days, the airspace over theeastern USA was closed; resulting in direct loses to airlines (for which admittedly, they havemostly been compensated). More serious still, the fear of further terrorism attacks caused asteep decline in demand, both in the USA, on international routes to and from the US, and to alesser extent to elsewhere.The time since the September 11 attacks has seen little improvement further, very seriousterrorist attacks have occurred in places as far apart as Mombasa and Balli. The second Gulf warfought in March and April 2003 seemed to have fanned the flames of international terrorismrather than causing the improvement in the situation which it was presumably intended to bringabout.
  13. 13. Assessing the longer-term impact of the fear of terrorist attack on the size of the aviationmarket is very difficult.Deregulation and open skies:Throughout its history, the airline industry has been constrained by decisions made bypoliticians and governments. Government have controlled where airlines can fly, and aspects oftheir product planning and pricing policies. They have also had a major involvement in theindustry through the ownership of airlines. Finally, political decisions have often affected theextent, nature and geographical distribution of demand.Almost from the inception of the commercial aviation industry, government regulated airlines.They have always had a role in regulating airline safety standards, a role that remains importantand, in principle, relatively non-controversial. Government regulation, though traditionally wentvery much further than this. For many years, and in almost all aviation markets, governmentcontrolled airlines route entry and capacity and frequency decisions. Very commonly too, andastonishingly by today’s standards, governments intervened to stop airlines engaging in pricecompetition.In recent years, substantial regulatory reform has taken place, giving carriers the challenge andthe opportunity of responding to a freer economic environment.In describing the system of economic regulation of the airline industry, a fundamentaldistinction has always been between the regulation of domestic services, which are solely underthe control of one government and international services, which require the agreement of atleast two.Until relatively recently, almost all domestic travel markets were highly regulated. An extremecase was the USA. Despite the United States supposedly being the home of free market thinking,airlines commercial freedom was constrained by what now seems a very burdensome system ofeconomic regulation. Between the passing of the Federal Aviation Act in 1938 and the AirlineDeregulation Act in 1978, carriers could only enter new routes by going through a cumbersomeand extremely slow bureaucratic procedure.Another extreme case of a highly regulated domestic market was those of Australia. For manyyears prior to 1990, Australia pursued a so-called “Two Airline” policy. Under this, only twoairlines were granted access to Australian domestic trunk routes. Ansett Airlines & and Trans-Australia Airlines. Even though these carriers were supposed to compete with each other, inpractice almost all the areas where competition might have occurred were regulated, includingthe question of price levels.The situation with regards to domestic aviation markets today has undergone substantialchange, though in one very important sense we are still (with one exception) very far from true“ deregulation”.
  14. 14. In terms of regulatory change, the USA led the way with the passing of the Airline DeregulationAct in 1978. This allowed for much greater freedom for airlines to enter new markets and toexploit them free of constraints on capacity or pricing policies. However, one importantregulatory limitation remained- that of ownership.Regulatory reform in the United States has been followed by a similar pattern in many othercountries. Today many countries would claim to have deregulated their domestic aviationindustries.The situation regarding regulatory change in international markets has inevitably been morefragmented and diffuse, but even here, the state-of- play is significantly different from the onewhich prevailed only a few years ago.For more than fifty years, international aviation has generally been very tightly regulatedindeed. Early attempts were made by the USA to establish a liberal environment at the so-calledChicago-Convention of the 1944. These were decisively rejected and in the ensuringcompromise, the world fell back on a system of controls through intergovernmental Air ServicesAgreements.Until 1978, the U.S. government through the Civil Aeronautics Board , regulated many areas ofcommercial aviation such as fares, routes, and schedules.The Airline Deregulation Act of 1978, however, removed many of these control thus changingthe face of civilization in the United States.The deregulation of the airline industry in the European economic area had importantimplication for tourism. The intensification of competition has often resulted in lower fares andoccasionally in improved service quality, highly flight frequency, punctuality and better serviceon board in the last decade.Open skies:Open skies agreements are bilateral agreements between the U.S. and other countries to openthe aviation market to foreign access and remove barriers to competition.They give airlines the right to operate air services from any point in the U.S. to any point in theother country as well as, to and from third countries.The U.S. has open skies agreements with more than 60 countries, including fifteen of the 25 EU.nations. Open skies agreements have been successful at removing many of the governmentimplemented barriers to competition, and allowing airlines to have foreign partners, access tointernational routes to and from their home countries and freedom from many traditional formof economic regulation.
  15. 15. A global industry would work better with a globally minded set of rules that would allow airlinesfrom one country to establish airlines in another country and to operate domestic service in theterritory of another country.These agreements still fail to approximate that most industries havewhen competing in other global markets.Economic:The Demand for Air Travel is characterized by a very high income elasticity. Therefore, as theworld economy grows, the demand for air travel can be expected to increase too. Thiscontinuing growth gives both enormous opportunities and great challenges to the airlineindustry. The opportunities come with the chance to exploit a growing market, something whichwould be the envy of managers in many other industries. The challenges are to accommodatethe growth through suitable infrastructure development and without unacceptableenvironmental consequences and to exploit the demand whilst achieving the stable profitswhich the industry has so often found elusive.Beside a clear pattern of growth, growth rates are uneven through time. Just as one wouldexpect, air transport industry growth rates are tied closely to those in the world economy. Ifgrowth in the economy is rapid in a particular year, so is the increase in air travel demand.Periods of economic stagnation see a significant slowing of the rate of increase in demand.This pattern has immense strategic and marketing implications. It is not sufficient for carriers toimplement policies which allow for profits during prosperous periods if these same policiesresult in heavy losses or bankruptcy during the downturns in the trade cycle.Unfortunately, the industry’s past record is not encouraging. Too often, periods of buoyantdemand have seen airlines over-invest in additional capacity. They have also commonly giventoo much emphasis to the first and business class market, a market which tends to be verystrong when times are good, but which suffers particularly severely during a downturn whenfirms require their executives to travel in economy/coach class to save money. A final problemoften is that in upswing periods, insufficient attention may be given to the control of costs,particularly labour costs. Pay increases that can easily be financed in good times may turn out tobe crippling burden when in downturn, yields are forced down because of an overcapacitysituation, to levels which do not allow costs to be covered. The upswing of the middle and late 1990s illustrated all these shortcomings. Large orders fornew aircraft were placed with the aircraft manufacturers, with many of these planes actuallydelivered in 2000 and 2001 when market conditions were much less favourable. Labour costswere allowed to rise, with some airlines-notably so United Airlines-leading the industry bygranting unprecedented increases in wages and salaries to a number of their work groups.Finally, some airlines changed their entire business class strategy during 1997 and 1998, to focusvery heavily on the booming market of so-called “premium” travellers in First and BusinessClass. The flaws in this strategy became very obvious in 2000 and 2001, when recession endedthe growth in this market and made its exceptional growth rates in the late 1990s look very
  16. 16. much an aberration, far above any sustainable long-term level. British Airways is an example ofan airline that appeared to make this serious strategic mistake.Since September 11 2001, there has been a tendency to blame the several financial problemsbeing experienced by many airlines on the New York and Washington terrorist attacks and theiraftermath. The impact of these was undoubtedly serve but they merely substantially increasedthe extent of serious problems which already existed. These problems can be traced to thefundamental error of failure to take adequate account of the trade cycle in setting business andmarketing strategies.The economic environment:Markets and how they operate:It is vital for businesses to be able to understand the nature of the market for their products sothat they can use this information to their commercial advantage. Microeconomics isfundamentally concerned with developing techniques to understand the operation on individualmarkets. To build a picture of the individual characteristics of each one would be a nigh onimpossible task but the good news is that by using a technique called equilibrium analysis weonly need build a model surrounding one commodity and see how that market operates andthen using the same techniques applied to that market we can apply this to other markets tosee how they behave.Demand and supply:In a market there are consumers who demand the product and suppliers who would like tosupply it. The first two questions then are: o What influences a consumer’s decision to demand the product( the determinants of demand)? o What influences a producer to supply the product(the determinants of supply)? What are the most likely influences on you if you considered buying a pair of jeans? Obviously the price of the jeans is the key one but so would your spending power or disposable income, fashion tastes and comfort, the prices and attributes of other types of jeans or trousers in general( or substitute commodities), the cost of going out to socialized ( and other such complementary activities) and your general confidence in future and expectations of the future course of prices. What about the motives of the producer of the jeans? Well for the private business its primary aim is to make a profit and so its willingness to supply will depend on the price level
  17. 17. it can get for each pair sold. However, this is not the only influence on supply. The business could supply other types of jeans or different types of product entirely. Profits depend on the cost of the resources that go into production and costs often depend on the state of existing technology……………………………….<<<<<<<<<<<<<<<<<<<<<<<<<<Social and Cultural Environment:In broad terms, social-cultural environment includes everything that is not included in theeconomy or the political system. Economic life is organized primarily through a market in whichindividuals relate to one another as buyers and sellers and the purpose is production.What has it got to do with business? Society, culture and business:As with other aspects of the environment, the relationship between business, culture andsociety involves a two-way interaction. Although we tend to think of business as operatingaccording to a distinctive instrumental rationality of profit-and-loss and the ‘the bottom line’ it isalso influenced by the social-cultural setting in which it is embedded. At the same time businessaffects the wider culture and society profoundly. For example, a good deal of what we think ofas making up the culture of modern society consists of the outputs of private sector businessesin what might be called the culture industries, such as popular music, films, literature,newspaper and magazine.Social:Trends in social factors will have widespread consequences for airline marketing-indeed, insome senses, this is the most significant component of the PEST analysis model as far asmarketing policies are concerned.The Aging population:In Europe and North America in particular, the average age of the population is now increasingsteadily, fewer babies are being born, and improving medical provision is allowing more peopleto live longer. ( It should be born in mind, of course, that an ageing population is not yet at allcharacteristic of most countries in the third world.)
  18. 18. The ageing of the population has some obvious, and some more subtle implications for theairline management. Clearly the product that airline offer will have to evolve, with moreprovision being made for disabled passengers and those needing helps at the airports, andmedical care services will have to be improved. There may also be opportunities for specialistbrands to be launched, reflecting the needs and aspirations of older people.Changing Tastes and fashions in holidays:Partly but not exclusively, reflecting trends in age and family structures , the modern travelindustry is having to adjust to a marked broadening in the range of requirements of vacationers.When holidays by air first began to become popular in the 1960s, most people wanted littlemore than a relaxing opportunity to sunbath by a hotel swimming pool. This is not so today.Better education, growing experience of air travel and fears about the health risks of excessiveexposure to the sun are all meaning that to a greater and greater degree, holidays must reflect alife style based on individual choice. People expect to be able to pursue their hobbies while theyare in holiday, with skiing, golf, history and trekking holidays all now well-established sub-segments of the market. They expect to be able to take holidays of different lengths in order tofit in with their available vacation time. They also require opportunities to visit new andinteresting often long-haul, destinations.Overall, the trend in the holiday market is often, and appropriately, described as “ depackagingin the package”. People increasingly want a holiday experience which reflects their ownindividual requirements. They don’t expect to be treated as part of the herd cattle, to suit theconvenience of the travel provider.Technology and business competitive advantage:According to Porter in competitive advantage- creating and sustaining superior performanceemphasizes the importance of technology in creating the competitive environment at the levelof the individual firm( Porter, 1985). He also emphasizes the danger of seeing technology as agoal in itself. Technology is not an end in itself but is best understood as a means to improvingcompetitive performance and boosting profitability. All too often it is easy to assume that anytechnological change is good and further that the more costly and sophisticated the investmentin technology the better this will be. However, as we have seen technological change doesn’thave to be so costly and complicated. Using the concept of value chain, porter shows how everyactivity of a business in combining value. In practice a firm is a collection of differenttechnologies that can be applied, enhanced or implemented across all the different activities ofthe business.A value chain can be seen as consisting of the following technologies:
  19. 19. Horizontal functions or support services of a business in terms of its basic infrastructure(finance, planning, information systems, office technology), human resources (training anddevelopment ), technology development and purchasing departments.Vertical or primary business operations in terms of inbound logistics ( transport, handling,storage, information systems), production operations ( process, materials, machines, packaging,design and testing) outbound logistics, marketing and sales and finally service.All these activities together comprise the value chain and each operation involves the use oftechnology to combine inputs into outputs so there is the opportunity for technologicalimprovement across the range of activities to improve the profit margins of the business.Case study: EasyJet and the Internet:Low cost air travel can have many business models. The first low cost carriers tended to use oldplanes which they either leased or bought to operate on routes with little direct competition.Easyjet broke with this. Helped by changes in the competitive environment as a result oflegislation to allow competition on routes, EasyJet used brand new planes which it bought tooperate on competitive routes. In order to be competitive and pay the considerable fixed costsof the aircraft and the landing slots provided by the airports used, easyjet explicitly recognizedthe need to go for economies of scale by using their planes as much as possible and by fillingeach plane to reduce the average cost of each passenger. It engaged in ruthless cost cutting forall other operations such as not using the services of travel agents or catering services for in-flight meals, i.e. a no frills service.Originally, it was envisaged that people would book flights over the phone, however, it was tobe the Internet revolution that really enabled EasyJet to take off.Technological change can improve the competitiveness of the firm if it either reduce costs or if itallows a business to differentiate its products or services from that of its rivals. We have seenalready the complexity of cause and effect in relation to technology and other factors. Changesin the external market can create the possibility of untapped economies of scale that in turn callfor technological response to boosting production.Technology can’t be ignored by business and it can either boost a firm’s individual position orimprove the profitability of the industry in which it operates. Conversely it can lead to a businessdeclining as its competitors develop a technological advantage or technological change boostsalternative industries.It is important for a business to adopt a technology strategy that enables it to respond toexternal changes as well as one which allows it to develop a consistent approach in relation toits goals.A major decision businesses need to make is whether to try and be technology leaders ortechnology followers. In general terms this requires a balance of risks.
  20. 20. If it is likely that a business would be able to maintain the technological advantage over timethen there is an incentive for firms to innovate and/or develop new products. This can be thecase where firms are able to assert their intellectual property right through patents or whetherthe cost of the research and development is so high as to deter competitors. As we shall see,some firms may try to simply outspend their rivals and then hope that the market appeal ofsuch products is such to allow costs to be more than recouped without the prospect of analternative using cheaper technology. The rapid pace of technology though means that thismight be a possibility.Moving first can mean that a business is able to establish a reputation that survives even whenalternative competitors enter the market. Being first mean that a business can develop a stronglead and help it establish a position that it can set industry standards or develop favourablechannels of distribution. Conversely, there is a huge risk in going first. Considerable sums ofmoney can be expended and there is the risk that someone else can learn from your mistakesand develop a learner and fitter product.Summary: In conclusion,  Successful use of technology improves the performance of business both in terms of performance and productivity. Whilst this can involve new inventions of products and processes more often than not it is technological innovation that is the key.  Technology is a major factor in shaping the forces that affect the competitive advantage of businesses. Businesses can choose to be leaders or followers and need to constantly review how technology impacts across the length of the value chain.  Technology can cause harm as well as good and it is important that we develop an ethical framework in which to analyse its effects.Technology:Video conference:Looking at the possible effect of video-conference on the demand for air transport, theconclusion is that it is unlikely to lead to a decline in the demand for air travel. It will, though,result in future growth rates for business air travel growth which are disappointing by historicstandards. Business travel growth will tend to be below the growth rates for GDP rather thenabove them as has commonly been the case in the past. It will also increase the airlineindustry’s already very substantial vulnerability to downturns in the trade cycle.The internet:The mid-1990s saw the beginning of airline interest in the marketing possibilities opened up bythe internet. At the time of writing almost all major airlines have websites which they use for
  21. 21. promotional purposes, with these sites supplying time table and product information and alsohaving interactive component which allow people make bookings.Sites are also being used as a way of increasing the attractiveness of an airline frequent flyerprogramme by permitting programme members to check on their mileage accounts and also bygiving the availability of flights with the surplus seats available for redemption.Surface Transport Investment:Today, many countries have seen a resurgence of interest in surface-especially railway-transport investment. Railway operators have largely won the battle to be viewed as the mostenvironmentally acceptable form of transport.Investment is taking place in both new railways to provide fast city centre to city centre links,and in the tunnels to enable railway operators to extend their networks, this investment wasespecially notable in Europe, where during the 1990s as a whole, investment in railwayinfrastructure was more than three times as great as that in infrastructure for the aviationindustry.Surface Transport investment provides both problems and opportunities in airline marketing.The problems come from the fact that, beyond question, railway investment can have asignificant negative impact on the demand for air transport. The evidence from countries suchas France, where new railway developments compete alongside formerly busy air routes, is thatonce rail can offer a city-centre to city centre journey time of less than three hours, the effect onthe air market will be a substantial one.Worse still, the traffic that is lost tends to be the so-called point to point demand. Those whohave been using air services to connect onto a long haul flight at a hub will continue to do so.The opportunities provided by surface transport come with the options which is opens up forairlines to co-operate rather than compete, with railway operators. The future growth of theairline industry is now being jeopardised by growing shortages of runway and passengerhandling capacity. Also for most airlines, short haul services tend only to be marginallyprofitable. The high incidence of fixed cost such as landing fees has always made it difficult toachieve satisfactory profits on these routes. On the other hand, most long haul routes tend tobe more profitable.The opportunity of surface transport developments is for airlines to lobby for improved publictransport links to major airport. And thus train operators will be able to deliver long-haulpassengers to airline hubs, and freeing valuable airport slots for further long-haul services.We have now discussed the essential framework of the airline environment. The next challengeis in formulation of a sound strategy. In one sense, the good news here is that there is no single,
  22. 22. unique strategy that must be followed in today’s airline industry if success to be achieved. Thereis a range of possible strategies available. What is essential, though, is that one strategy must beselected from this range, and it must be then implemented well. And continued on long termbasis. The aim of the next section is to discuss the type of possible strategies an d theiradvantages and disadvantages.Porter’s “ Five Forces” and their application to the airline industry:in understanding these strategic options, a useful start can be made by looking at some of theideas of the Harvard professor, Michael porter. Porter states that in different industries,strategic issues are coloured by the interplay of the five forces of the rivalry amongst existingfirms, substitution, new entry, the power of the customers and the power of suppliers, whichwill be examined in details in the following section.1.1 Threats of Rivalry:Porter argues that, in many industries, often little of the true competition and the drive orchange comes from long established firms. These long established firm often resemble oneanother in terms of strengths which they have, and in their problems and weaknesses. Theytherefore can identify benefits from aggressive competition at the margins of their activities.In the air transport industry, the policies of the long established airlines of Europe illustrate thispoint only too well, especially in their short-haul markets. There are now no regulatory reasonswhich preclude intense competition between them. Since April 1997, the airlines of EuropeanUnion have competed in a single Aviation Market where there have been only the very loosestcontrols over entry, capacity and fares. Yet, one would hardly know this in those situationswhere the old established airlines have faced one another in head-to-head competition. Theyhave mostly flown similar aircraft, and placed in them identical or near identical seatingconfigurations. Frequencies and timing have been very similar, with few airline prepared toallow their competitors a frequency advantage. The onboard products have been comparable.Finally and most tellingly, until recently these airlines have pursued an almost identical pricingpolicy . very high fares >>>>>>>>>???? Change to future tense!!!1.2 Substitution:Porter argues that disturbance to the competitive equilibrium set up by the long establishedfirms come from two possible sources, the first of these being that of substitution. Substitutionoccurs when firm in another industry find a new and better way of meeting the same customerneeds as are being targeted by the existing players.There are number of substitution issues affecting airlines at the present time. Of these,potentially the most serious is the effect of electronic methods of communication on the marketfor business air travel. Video conference, teleconference and email all have the potential to
  23. 23. mean that business travellers will travel less, and still satisfy their needs for effectivecommunication.Surface transport, especially by rail, also raises important substitution issues. Unlike airlines,railways can provide city centre to city centre travel, and have been shown to severely impacton the business travel market once these city centre to city centre journey can be brought downbelow three hours.1.2 New EntryIn some industries, new entry is difficult or impossible. In others, it is commonplace. In themodern aviation industry, the later is very much the case, especially in short-haul, point to pointmarkets. This is because of the many possible so-called “barriers to entry”, most have becomelow or are now non-existent.A first possible barrier to entry may result from regulatory limitation, it is true that, there arestill regulatory barriers to entry in many international markets, and airlines are constrained intheir market entry policies by out-of-date and anachronistic limitations on ownership andcontrol. However, it is now the case that many of the largest domestic market such as those inthe United States and the European Union, now operate without any significant entry controls,apart from those applying to so-called “Cabotage Rights”.In other cases, resources may act as barriers to entry. If vital resources are unavailable or verycostly, entry will clearly be constrained. In the aviation industry, airport slots provide a classicresource barrier to entry. It will be very difficult for new entrants to gain access to attractively-timed slots at congested hub airports.Slot constraints may provide some comfort to existing airlines in Europe today, but they canderive little more from the remaining possible resource constraints to entry especially duringdownturns.This certainly the case with the question of the aircraft fleet that will be needed by a newentrant airline, in a recessionary period, aircraft manufacturers will be prepared to strike veryattractive deals for the white-tailed aircraft which result from order cancellations. Also there willbe large numbers of parked aircraft-many of them owned y leasing companies- where theowners will offer extremely low lease rates in order to get their idle aircraft flying once again.There are several more issues need to be covered in assessing the nature of barriers to entry inthe airline business. Some industries are characterized by marked economies of scale, wherelower unit costs can be obtained by large scale producers. In the airline business, there are someaspects where existing players are protected against new entry by scale of economies. Inparticular, hubbing operations where short-haul passengers are collected together in order tofeed long-haul services are increased in their effectiveness by being undertaken at a substantial
  24. 24. scale. It is hard for small new entrants to break in. In point to point markets, however, no suchprotection for incumbents exists. Economies of scale in areas like pilot training and maintenancequickly run out with increasing size, and are counterbalanced by the bureaucracy and poor staffmorale often characteristic of large organizations.In some industries, incumbents have a lot of protection against new entrants because of so-called “Learning Curve effects”. In these industries, mature firms achieve lower costs than newentrants because the intricacies of the production process mean that substantial experience isrequired before optimum cost levels can be achieved. Aircraft manufacturers and Aero0Engineproduction both illustrate this form within the aviation industry, with unit costs of productionfalling steadily as an airframe or engine family matures. Airlines, on the other hand, seem toshow the opposite effect, with the concept of start-up economics a well-established one. Airlineoften achieve their lowest costs of operation during the first five years of their existence. Lateron, cost tend to rise as more staff ascend seniority scales towards higher rates of pay andbureaucracy and declining staff morale start to impact on cost levels.One final issue with regards to entry into the airline industry is difficult to analyse, but veryimportant. Over the last twenty years, the list of airlines which have entered the industry andthen left it again through bankruptcy is a depressingly long one. All the evidence one couldpossibly require is there to illustrate the point that investing in and setting up a new airline is, atbest, highly spectulative, with an overwhelming likelihood of failure. From this, one mightassume that new entry into the aviation industry would largely be a thing of the past, especiallygiven the depressed state of the industry in the early years of the new century.As an overall conclusion, incumbent airlines must prepare themselves for a continuing challengefrom new entrants, especially in their short-haul, point to point markets.1.3 Power Of Customer:Porter argues that power of their customers will be crucial determinant of profitability for thefirms in any industry. In turn, customer power will be related to variables: the number ofcustomers firm has, and the existence-or otherwise-of so-called switching costs.In principle, the point about the number of customers and some of these defect to thecompetition, there will still be a large number of customer remaining. If on the other hand, thefirm has only two or three customers, the loss of one of them will result in a third or more of itsbusiness being lost. In such a situation, customers will have extreme amounts of bargainingpower. They will be able to cut deals on terms which are extremely attractive to them, holdingdown the profits of the companies from which they are buying.In the aviation industry, a common situation where a customer turns into a competitor occurswhen a tour operator grows bigger and bigger, giving larger amounts of business to existingcharter airlines. Often, a point arrives where it will make sense for the tour operator to buy it
  25. 25. own aircraft, in order to set up its own airline to carry its own passengers and perhaps also tocompete in the open market for other airlines passengers as well.The problem for airline is that they don’t have the Switching Cost protection which assistsaircraft manufacturers to retain their customer base. An airline may be getting a worthwhileamount of business from major customer as a result of having corporate deal with them. It willbe a simple task, though, for another carrier to come along and offer the customer a moreattractive level of discount, with the result that the corporate deal with the first airline iscancelled and transferred to the second. Of course, the first airline will hope that its frequentflyer programme will be of some value in fending off predatory attacks by its rivals, in that manypeople who actually travel for the firm in question will wish to continue to build their mileagebalance, and retain their privileged status, within the programme. Overall, the question ofpower of their customers is very difficult one for the airline to address, and goes a long waytowards explaining the poor profit performance of many carriers in recent years.1.4 Power Of Suppliers:Porter argues-again, the point is obvious-that when a firm is totally dependent on monopolysuppliers of crucially needed resources, these suppliers will be able to charge prices whichensure handsome profits for themselves, but which severely limit profits of the firms that theysupply.For airlines, the list of suppliers who either actually or potentially have this monopoly power is adepressingly long one. Obviously, suppliers of air traffic control and airport services may have it,with many airlines having no choice but to pay whatever ATC and airport charges are levied onthem.Sometimes, airlines fleet planning can be affected by powerful supplier issues. The Boeing 747was introduced into airline service in 1970, and was unchallenged by any other aircraft for thenext 25 years. If a carrier’s requirement was a long range aircraft with 400+ seats, the 747 wasthe only option available for them. Not surprisingly, the aircraft became a very profitable projectfor Boeing. In the future a similar situation may develop with the 555 seat Airbus 380, where it isnow clear that there will be no Boeing competitor when deliveries of the aircraft begin in 2006.
  26. 26. Threats of new entrants Bragaining Threats Bargaining Power od of power of supplier Rivalry buyers threats of substitutesLike any other businesses, airline management faces Three level of interacting decisions,Strategic, Planning and operations decisions.Strategic decisions : Typically require a long lead time before implementation and require aconsiderable monetary investment, they are also expected to have a significant impact on theform of the airline in the long term. Example of strategic decisions, include Growth andexpansion, fleet sizing ( aircraft orders), hub locations, merging with other airlines, allianceparticipation.Mergers, acquisitions and alliances are all equally powerful corporate growth strategiesavailable for companies. The selection of any single approach depends on both internal andexternal factors. Given the many successes and failures alike experienced by companiesworldwide, it would be advisable for companies to primarily understand the strategicimplications of each approach and then to diligently evaluate each approach.As each market and each company is unique. Selection amongst these three approaches wouldsubstantially differ. But companies can minimize their risk by following guidelinesBefore suggesting a frame work to choose among the three models, it is very important thatconceptualizations of these terminologies are terminologies are clear.Merger: A merger refers to a process in which two companies become one by coming together.In such a case, no one company rules over the other. Usually the management of bothcompanies shares the control of the resultant company and names of both companies areretained for the resulting companies.
  27. 27. Acquisition: Acquisition on the other hand refer to processes in which one company buys theother company. In such situation the buying company absorbs the bought company into theexisting company. Acquisitions can be carried out either to eliminate competition by absorbingthe competing company or to expand the corporate portfolio by retaining the acquired companyas an independent entity under the overall corporate management. The purpose of thisconglomerates is to enter a highly lucrative market.Alliance: Alliance is an approach in which two or more companies agree to pool their resourcestogether to form a combined force in the marketplace. Unlike a merger, an alliance does notinvolve the emergence of a new combined entity. Each participant in the alliance retains theirindividual entity but choose to compete against competitors as a unified business force. Jointventure is a very popular form of an alliance.In today’s competitive environment, airline mergers and acquisition have been a growing trendin several countries across the globe. However, mergers and acquisitions in the aviation industryare highly strategic in nature and are undertaken after taken into consideration severalimportant factors.While the airline industry remain a highly competitive market, more and more airline aroundthe world have been finding ways to engage in Joint venture, Merger, Acquisition or alliances fortheir natural benefit and to ensure their long term viability.Throughout the history of commercial air transport, carriers have after preferred the comfort ofcooperative rather than competitive relationship.The alliance landscape that is now considered common place in the travel industry is actuallyrelatively young. The three major global alliances are; star alliance, skyteam, and one word-eachwere created in the past 15 years.Since then, more than 50 individual airlines have partnered with one of these alliances, andmore are being added continually. Today, these three alliances account for more than 60percent of total passenger traffic.Apart from the basic naming classifications, in practice it can be difficult to determine thedifference between airline JVs and alliances, especially because they can be structureddifferently around the world, and because the many existing partnerships vary in terms ofmaturity, sophistication, and transparency to the buyer.The focus for airline in an alliance is to combine their respective footprints to create expandedglobal networks, to align schedules for maximum efficiency, to engage in some combinedmarketing efforts, and in some cases to share revenue. Conversely, airline participating in JV arealigned quite closely as part of a narrow relationship that includes fewer total carriers.
  28. 28. Some JVs consist of just two carriers, whereas others are slightly broader, such as Delta, Air-France, KLM, Alitalia emphasis on transatlantic routes allowing Delta to promote nearly 250daily flights to nearly 500 destination on its homepage.JV often share revenue as well as costs and may fly under a shared operating certificate, makingthe partnership transparent to travel buyers and travellers.There is one final element of the current alliance scene which shouldn’t be overlooked. Someairlines have not joined any of the global alliances. Virgin Atlantic, South African Airways, andEmirates are all examples. Emirates in particular, has taken a strong position of preffering tomaintain its independence rather than become enmeshed in what the airline’s Chief Executivehas called the straitjacket of membership of a single alliance.Deciding factors: (why airlines to engage in M&A or alliance?):1. Level of competition in the market One of the fundamental reasons that companies engage ineither M&A or an alliance is to tackle competition in any market. Companies around the worldhave to come to believe that consolidation with a market would allow them proportionatemarket presence and power to claim the leadership position.2. Barriers to entry M&A are usually resorted to either for increasing scale or cutting costs andalliances are preferred to enter new markets or segments. As such, one of the important factorswhich should be considered is the level of barriers present for entering a new market. Somemarkets are characterized by high barriers to entry such as regulatory constraints, establishedcompetitors, highly volatile markets that does not justify initial entry investments and so on. Insuch cases, alliances are the preferred option as they allow companies to leverage the existingknowledge and resources through collaboration. On the other hand, where barriers to entry arelow, companies can gain a very strong foot hold in the market either through mergers orthrough acquisitions.3. Synergies and resources Along with the previous two factors, synergies and resources areequally important in deciding among the three options available to companies. Mergers andalliances between companies have been proven to work efficiently if there is a high level ofsynergy between companies that come together. Synergies can be in the corporate culture,product portfolio, strategic goals, and supply chain or logistic systems. When such synergiesexist, companies can productively implement the purpose of a merger or an alliance. Similarly,for an acquisition option, an important factor is the availability of financial resources. Asacquisitions take place at prices much higher than the book values of the companies beingacquired, acquiring companies should possess or have access to considerable resources.
  29. 29. From the customer point of view merger and Acquisition may lead to increased airfare this isbecause mergers and acquisitions reduce the number of operators thereby reducingcompetition and pushing up the price.Overall, it is clear that the formation and growth of alliances has been a central theme of theairline industry over the last decade, it is not hard to see why? , a combination of theory andpractice shows that, potentially, alliances can bring their members significant benefits to theirbottom line.Theoretical principles show that the benefit of greater size-which airline alliances are essentiallyaiming to tap into- can be divided into two economies of scale, which consist of cost reductionsachieved through size, and economies of scope, which reflect the revenue benefits ofco=operation, normally brought about by increased marketing muscle power.In investigating each of these area in today’s aviation industry, we are immediately faced with adifficult question.” What is an alliance?” the word is used very loosely. It can mean anythingfrom the most distant and loose of and control rules allow. It also may, or may not, involve thepartner in minority equity stakes.Having said this, it is clear that airlines which enter into co-operative alliance relationship areseeking forecast reductions as a result of doing so they may engage in joint purchasing activity.A common expedient is co-operation in ground handling, if alliance partners can negotiatetogether this may increase their bargaining power with the often-intransigent suppliers ofairport services.Like any other businesses, airline management faces Three level of interacting decisions,Strategic, Planning and operations decisions.Strategic decisions : Typically require a long lead time before implementation and require aconsiderable monetary investment, they are also expected to have a significant impact on theform of the airline in the long term. Example of strategic decisions, include Growth andexpansion, fleet sizing ( aircraft orders), hub locations, merging with other airlines, allianceparticipation.Planning decisions: are within a few months horizon, and can be defined as the process ofefficiently using airline’s available resources to maximize its revenue. The resources available toan airline include the facilities and personnel that operate the business, including, for example,aircraft in different fleets, pilots with different qualifications, flight attendants, maintenancefacilities, mechanics, gates, customer services agents, and ramp agents.
  30. 30. The planning decisions include forecasting the demand between every origin-destination (OD),flight schedule development, assignment of flight to different aircraft fleet( if the airline hasmore than one fleet type), aircraft routing across the different airports. With its maintenanceconsideration.Other planning decisions include the number of staff required to operate flight at differentairport s, including customer services, ramp agents, baggage handlers and so on.They also include decisions regarding fare level in each OD market, fare restrictions, and seatinventory control for each flightThe operation decisions: for the airlines are those decisions that need to be verified or updatedon an hourly or maximally on a daily basis. This include for example, the response tounanticipated incidents such as adverse weather conditions, flight delays and cancellations,aircraft breakdown and absence of crew or staff due to illness.Operations decisions also include watching revenues, booking, and anticipated demand levels inthe different markets, matching prices with competitors, and managing seat inventory on eachflight on a daily basis.Strategic decisions are expected to impact on planning decisions, which in turn affect theoperation decisions. In addition, there is a reverse feedback from the operation phase to theplanning phase.Planning decisions: are within a few months horizon, and can be defined as the process ofefficiently using airline’s available resources to maximize its revenue. The resources available toan airline include the facilities and personnel that operate the business, including, for example,aircraft in different fleets, pilots with different qualifications, flight attendants, maintenancefacilities, mechanics, gates, customer services agents, and ramp agents.The planning decisions include forecasting the demand between every origin-destination (OD),flight schedule development, assignment of flight to different aircraft fleet( if the airline hasmore than one fleet type), aircraft routing across the different airports. With its maintenanceconsideration.Other planning decisions include the number of staff required to operate flight at differentairport s, including customer services, ramp agents, baggage handlers and so on.They also include decisions regarding fare level in each OD market, fare restrictions, and seatinventory control for each flight
  31. 31. The Airline Planning Process:The objective is to provide an overview of the airline planning process, from the longest rangestrategic decisions involving aircraft acquisition to medium term decisions related to routeplanning and scheduling.The most important planning decisions faced by airline managers can be categorized as follow:Fleet planning: what type of aircraft to acquire, when and how many of each?Route Planning: where to fly the aircraft profitably, subject to fleet availability constraints?Schedule Development: how frequently and what times on each route should flights beoperated, subject to operational and aircraft limitations?This section introduces the fundamental decisions required in the airline planning process,including the major trade –offs involved, the interrelationship between these decisions>>>>Fleet Planning:Fleet composition is the most important long-term strategic decisions for an airline, in terms ofboth planning process, and ultimately its operations. An airline’s fleet is described by the totalnumber of aircraft that an airline operates at any given time, as well as specific aircraft typesthat comprise the total fleet. Each aircraft type has different characteristics related to technicalperformance, the most important of which its capacity to carry payload over a maximum flightdistance, or range.”Decision made by an airline to acquire new aircraft or retire existing one in its fleet have directimpact on the airline’s overall financial position, operating costs and especially its ability to servespecific routes in a profitable manner. The decision to acquire new aircraft by an airlinerepresents a huge capital investment with long-term operational and economic horizon. Theimpacts on airline’s financial position of such an investment include depreciation cost thattypically are incurred for 10-15 years, as well as increases in long-term debt and associatedinterest expenses. From an operation perspective, the decision to acquire a specific aircraft typecan have an even longer impact, as some commercial aircraft have been operated economicallyfor more than 30 years. For example, early versions of the MCDonnel Douglas DC-9 wereintroduced in the late 1960s and are totally still operated with proper maintenance andrefurbishment by many airlines around the world.It is therefore somewhat surprising that the decision support tools used to make these veryimportant long term decisions are not sophisticated as one would expect( or as sophisticated assome of the tools available to airlines for more tactical decisions like scheduling and revenuemanagement). The highly uncertain nature of conditions 10-20 years into the future has limited
  32. 32. the development and use of detailed optimization models for airline fleet planning, instead,most airlines rely primarily on( relatively sophisticated spreadsheet-based financial models tomake fleet planning decisions).The airline fleet decisions:The fleet planning problem facing an airline is in fact an optimal staging problem. An airline’sfleet composition is defined for a particular point in time, but it changes with every additionalaircraft acquired and every existing aircraft that is removed from the fleet. An airline’s fleet planshould therefore reflect a strategy for multiple periods into the future, including the number ofaircraft required by aircraft type, the timing of future deliveries and retirement of existing fleet,as well as contingency plan to allow for flexibility in the fleet plan given tremendous uncertaintyabout future market conditions. The definition of such multi-stage fleet plan must also recognizeconstraints imposed by the existing fleet, the ability to dispose of older aircraft, and theavailability of future delivery slots (i.e planned delivery times) from aircraft manufacturersand/or leasing companies.Commercial Aircraft Categories and characteristic:The major categories of commercial aircraft in use today and available for airline acquisition aremost commonly defined by the aircraft range and size. The range of an aircraft refers to amaximum distance that it can fly without stopping for additional fuel, while still carrying areasonable payload of passengers and/or cargo. The size of an aircraft can be represent bymeasures such as its weight, its seating or cargo capacity, as indicators of the amount of payloadthat it can carry. Thus, broad categories such as “ small”, “short haul” aircraft can include severaldifferent aircraft types, perhaps built by different manufacturers. Because aircraft types withineach category can provide similar capabilities to airlines, they are regarded as competitors” inthe airline’s fleet planning evaluations. For example, the Airbus 320 and Boeing 737-800 arecompeting aircraft types, as they are both single-aisle, twin-engine aircraft with approximately150 seats, each with similar range capabilities.Historically, it was generally the case that largest aircraft were designed for routes with thelongest flight distances. The relationship between aircraft size and range in the 1970s wasalmost linear, in that an airline wishing to serve a very long-haul non-stop route had little choicebut to acquire the largest Boeing 747 aircraft type. Over the past 30 years, the number ofrange/size product options made available by the principal aircraft manufacturers has increasedsubstantially.With the emergence of greater competition among both airlines and especially aircraftmanufacturers, airlines now have a much wider choice of products by range and capacity in eachcategory.
  33. 33. The range capability of new aircraft in the small category( 100-150 seats) has increaseddramatically, allowing US transcontinental routes to be flown with Boeing 737 and Airbus 320series aircraft, for example. The sizes of newer “ long-range “ aircraft have decreased, allowingairlines to serve certain low-demand, long-haul international routes non-stop. Example of suchoperations includes Boeing 757 service (180 seats) from the northeast USA to some Europeandestinations (e.g., Newark to Lisbon) and from the US west coast to Hawaii (e.g. Los Angles toMaui).The two remaining dominant aircraft manufacturers( Boeing and Airbus) both continue toexpand their aircraft product families in order to offer airline as many size/range combinationsas possible.These families of aircraft allow each manufacturer to be competitive in as many aircraftcategories as possible, matching the specific performance characteristics of each airline’s fleetrequirements. Aircraft families also have the appeal to airlines of the advantages of “ Fleetcommonality” as will be discussed.Fleet commonality with the airline’s existing (or planned ) fleet is a particularly important issue,as it can significantly reduce the cost associated with training pilots and mechanics, as well asthe need for new equipment and spare parts inventory for new aircraft types not previously inthe airline’s fleet, but also to having closely related aircraft types made by the samemanufacturer, as such aircraft will have similar or identical cockpit layouts, and maintenanceand spare parts requirements, allowing crews qualified to operate one aircraft type in the familyto operate all types in the family. This provides the airline much greater flexibility in crewscheduling, and leads to reduced crew costs.Route Planning:Given the airline’s choice of aircraft and a fleet plan that determines the availability of aircraftwith different capacity and range characteristics, the next step in the airline planning process isto determine the specific routes to be flown. In some cases, the sequence of these decisions isreversed, in that the identification of profitable route opportunity might require the acquisitionof a new aircraft type not currently in the airline’s fleet.Economic considerations and expected profitability drive route evaluations for most airlines.Route profitability estimates require demand and revenue forecasts for the period underconsideration. In large airline networks, traffic flow support from connecting flight can be criticalfor route profitability. With the evolution of connecting hub networks around the world, veryfew flights operated by network airlines on a route carry only >>>>Hub and spoke and network structure:
  34. 34. What do we exactly mean by Hub and spoke or point –to-point? What are the use cases? Andthey work for the success of an airline?Point to point is a typical route network where an airline focuses mainly on its Origin andDestination (O&D) traffic. This means that the airline is more interested in transportation ofpassengers originating from one city (A) to another (B) and Vice Versa. But not in connectingpassengers between C and B via A. Low cost carriers are considered to be pioneers of thisparadigm with a classic example being Southwest Airlines of US.Hub and Spoke is a route network where an airline will not only plan on transporting passengersbetween two points, but also to connect passengers between two distant cities via its hub. Anexample of a Hub and Spoke network can be seen from the following diagram.The airline uses the routes from its hub to other cities as spokes to connect each of them via itshub. The Hub and Spoke model originated with American Airlines, but perhaps the airline thatuses it the best in present day is Emirates Airline. A hub and spoke model essentially needs tohave different banks of flight departures and arrivals- in order to connect an arrival from city C,with a departure to city B, at the hub A. This paves way for the airline to attract highly lucrativetransit traffic, which at some airline contributes more to fill a flight than O&D traffic. However,this model is not without its downsides.This Saves the airline both time and money while the carrier’s ever increasing network withnaturally banked scheduling provides a good amount of connection opportunities. Another LLCthat seems to be following this path is FlyDubai which also provides connectivity to/from its bigbrother Emirates flights on selected routes.
  35. 35. Many Airlines supplement their hub and spoke model with code-shares, partner flights, or asmall commuter airline. For example, it would clearly be rather silly to fly passengers whoneeded to get to San Francisco from Los Angeles through Dallas. So, these passengers are put ona smaller commuter flight which connects these two locations. These commuter flights may alsotravel between spokes and less desirable locations which do not need to be connected directlyto the hub. The design of a hub and spoke model is highly efficient for a myriad of reasons. Thefirst involves day to day operations of an airline or freight company. By centralizing control, thecompany can afford a smaller staff which concentrates on management from a central location.In the case of freight, all packages can be sorted at the hub, rather than sorted in multiplelocations. This makes the freight company much more efficient, and reduces the risk of errorHub and spoke network structure allow airlines to serve many O-D markets with fewer flightdepartures, requiring fewer aircraft, generating fewer ASK at lower total operating costs than ina complete point to point route network. Consider a simple connecting hub network with 20flights into and 20 flight out of a single connecting bank at a hub airport. A “connecting bank”refers to a hub operation in which many aircraft arrive at the hub airport, passengers andbaggage are moved between connecting flights and the aircraft then depart with the connectingpassengers and baggage on board. Connecting banks last from approximately 1 hour in a smallerdomestic hub networks to 2-3 hours in larger international hub networks. In this example with20 arriving flight followed by 20 departing flights, each flight leg arriving or departing the hubsimultaneously serves 21 O-D markets- one local market between the hub and spoke, plus 20additional connecting markets, if we assume a single direction of passenger flow.This single connecting bank thus provides service to a total 440 O-D markets with only 40 flightlegs and as few as 20 aircraft flying through the hub. In contrast, a complete” point-to-point”network providing non-stop service to each market would require 440 flight legs and hundredsof aircraft, depending on scheduling requirements. Routing both flights and passengers througha connecting hub is more profitable for the airline if the cost savings from operating fewerflights with larger aircraft and more passengers per flight are greater than the revenue loss frompassengers who reject connecting service and choose a non-stop flight instead, if one exists(Morrison and Winston 1986).The hub airline’s ability to consolidate traffic from many different O-D markets on each flight leginto and out of the hub allow it to provide connecting service even to low demand O-D marketsthat cannot otherwise support non-stop flights. Consolidation of O-D market demands furtherallows the hub airline to provide increased frequency of connecting departures, as it likely
  36. 36. operates several connecting banks per day in each direction as its hub airport. In fact, severalconnecting departure per day (via the hub) in these O-D markets may be more convenient totravellers than a single daily non-stop flight; that is “total trip time” is lower, when scheduledisplacement (“wait time”) offered by multiple daily connecting departures through a hub. Forexample, in the large US domestic multiple daily connecting departures through a hub networkoperated by Delta, the airline is able to provide over a dozen daily connecting departurebetween Boston and San Diego. If a new entrant airline were to initiate non-stop flight per dayin this market, it might find it difficult to gain substantial market share given the connecting hubcompetition from Delta and most of the other large network airlines that operate hub networks.With the potential for the airline to offer greater (connecting) departure frequency in many O-Dmarkets, more convenient schedules schedules(less schedule displacement) can lead to highermarket share against competitors. On line connections (i.e between two flights operated by thesame airline) at the hub improve passenger convenience, compared to inter-airline connections(between flights operated by two different airlines). With larger hub networks, airlines can offergreater frequent flyer program earning and reward options for passengers given greaternetwork coverage and online service to many O-D markets.In fact, international airlines such as KLM, Singapore airlines with relatively low populationsaround their home bases would not have been able to grow to their current level of operationswithout focusing to large extent on connecting passengers through their hubs.Operational Advantages and incremental costs of hubs:The consolidation of an airline’s operations at a large hub airport has several operational andcost advantages. The airline will generally require fewer base locations for its aircraftmaintenance and crew domiciles, resulting in reduced crew maintenance expenses. There arefewer locations where passengers or bags can misconnect, and multiple connecting banks eachday can reduce the delays associated with such missed connections. The large volume ofoperations at the hub airport leads to economies of scale in terms of aircraft in terms of aircraftmaintenance operations, catering facilities and airport ground handling.Hub networks also offer some potential aircraft and crew scheduling advantages for the airline.The establishment of fixed connecting bank times at the hub allows for simplified aircraft andcrew scheduling, in that the best arrival and departure times at the hub airport are in essencepredetermined by connecting banks. It also provides more opportunities for swapping aircraft inresponse to delays, cancellations and irregular operations, given that a large number of aircraftare on the ground simultaneously during a connecting bank. To the extent that many of theaircraft are likely to be of the same fleet type, this future increases flexibility for the airline toexchange aircraft from one flight to another, as required.>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
  37. 37. Forecasting:Every day, at all levels of management within all segments of the air transportation industry,decisions are made about what is likely to happen in the future. It has been said that businessaction taken today must be based on yesterday’s plan and tomorrow’s expectations.Forecasting is the attempt to quantify demand in a future time period. Quantification can be inof either dollars, such as revenue, or some physical volume such as revenue passengermiles(RPMs) or passenger enplanements.Plans for the future cannot be made without forecasting demand. Planning also plays animportant role in any aviation enterprise, but it should not be confused with forecasting.Forecasting is predicting, projecting, or estimating some future volume or financial situation –matters mostly outside of management control. Planning, on the other hand, is concerned withsetting objectives and goals and with developing alternative courses of action to reach them-matters generally within management’s control.Not only is forecasting done for a given type of demand independently, but forecast of one typeof demand may also be based on other forecasts. Thus, the projection of flying hours for nextyear is an element in the forecast of future demand for flight personnel, fuel consumption,facilities, and a host of other considerations.Purpose of forecasting:Each type of forecast serve a particular purpose. Thus, an airline might make a short-termsforecast of total passenger enplanements between a particular pair of cities to provide a basisfor determining station personnel and ground equipment needed, gate availability, andexpenses related to these items. Short term forecasts normally span a period of one month toone year and cover such day-to-day operations as staffing stations, evaluating currentcompetitive situations in the market, and projecting short terms equipment needs.Medium-term forecasts generally span a period of one to five years and involve things such asroute planning decisions.A long-term forecast spans a period of five to ten years and might involve fleet planningdecisions and long term financial commitments.