The World Airline Industry :A European Perspective
Political Drawing on the political factors in PESTEL performed on airline industry. There are three major components that have bought change to this industry. Those are Deregulation War and Terrorists.
Deregulation The US airline Deregulation Act 1978 and Air transportation Deregulation in Europe 1978- 1997 In the aftermath of deregulation, the development of airline industry rises dramatically. Especially for the low cost airline, there are hundred of them were found in the US. One of the winners was Southwest Airline- today American’ s most profitable airline. In Europe, low cost airline carriers such as Ryanair and EasyJet are expanding very rapidly.
War After few years of deregulation in the US the world airline industry recovered. However, Gulf war strongly hit the airline industry. From 1990 to 1993 the air carriers suffered four years of losses totalling over US$ 22 billions (The World Airline Industry Case Study). People were afraid of flying, which led to a decline in passenger traffic.
Terrorists The world airline industry was severely shaken by the terrorist events of 11th September 2001 After that, the security level was increased at all the airport, that result in high cost put into airline industry, due to more personnel and further expensive security applications. More security leads to increase waiting times, makes air transportation less attractive.
Economical Economical can be another major factor for the airline industry. Due to the rate of war and terrorist event, the growth rate of economy dramatic slowdown, capacity in Europe outstrips demand, which gains the low yield to the airline industry. Moreover, oil prices increase also affect their profits
Social The social sector, which are strongly from employment perspective and safety. After September 11th 2001, not only American airlines struggled but also most European airlines laid off thousands of people during the past year.
Technological Technology in airline industry is fast moving, however it’s very costly. Alliance gives the opportunity to the major airline to offer customers a global route coverage. Shared check- in system and online ticket book also give the airline industry significant support.
Ecological Ecological factor consist of recycling, the level of pollution and attitudes to the environment. For the airline industry, pollution tends to be very important. In the early of this year, London Heathrow Airport announced, third runway and the sixth terminal will be built up and they will be operated by 2020.
Legal Legislation for the airline consist of employment laws, company law, tax law and their regulation. Redundancy, Landing right, health and safety, that are all the airlines should be considered as legal factor
Future Development on AirlineIndustry Gulf war, world trade centre disaster, Iraq war, have major impact over the airline industry. Economical and political factor has always been and continues to be the two major external environmental drivers influencing the airline industry. From 2004 until present, airline industry recovered and it become more attractive for investor.
The future development for a major airline will pay more attention on alliances with other companies. Secondly, price differentiation, which to access different target group of customer. Moreover, the major airline should have direct link with business area, which low cost airlines do not have. This is can be an advantage for the major airline.
Low cost airline is growing too fast leads to the loss of their competitive advantage. Security and cost cuts might cost their customers. Therefore they should improve their image concerning security, services, quality and alliances with other companies, in order to attract more customers.
Business Model of Low CostAirline Low cost airline has distinct business model, which is different from major airlines. It will offer the minimum standards of service and very low price for the shot distance flight. This model perfectly fits into Porter’s theory, which states that a company offering a low price product to a small and specialized group of buyers or the company, seeks a cost advantage.
The unique business model of low costcarrier contents: A single passenger class Single aircraft (airbus A320or boeing737) Unreserved seating Secondary Airport No-frills service Point to point and short-haul flight and more frequency Online ticket booking Fast turnaround time
That is the business model for cost airline to achieve cost advantage. The low cost airline structure can be defined by three key components, which are simple product, position and low operating cost.
Simple product ‘No Frills’ extra payment for food and drink on board. All the service are kept as simple as possible.
Position For low cost airline they are positioned on non- business class. Short-haul and point to point traffic with high frequencies. Using secondary airport
Low cost operating Low wages. Low landing fee. Low costs for maintenance to ensure the cost advantage.
Cost item Cost per seat reduction (a discount from the operating cost per seat of a conventional scheduled carrier)Product designUse cheaper secondary airports -6%Minimal station costs and out-sourced handling -10%No free in-flight catering -6%Higher seating density -16%Process designHigher aircraft utilization -3%No agents’ commissions -8%Reduced sales/reservation costs -3%Smaller administration costs -2%Total cost reduction -59%
Competitive Strategy Porter (1980) has described three general types of strategy that are often used by businesses. These three strategies are defined along with two dimensions Strategic scope Strategic strength In particular he identified two competencies that he felt were most important: product cost and product differentiation
Cost Leadership Low cost airline has a distinct business model, which maintain their low cost advantage over the major airline. They cost even less than 50% compare with full-service carriers
To achieve the low operating costs per passenger, low cost airlines need to have as many seats on board as possible, to fill capacity as much as possible, and to fly the aircraft as often as possible. Further more, some of the low cost airline such as Ryanair run the unique ticket less phone and internet booking system to reduce the agencies cost. It saves cost for both company and passengers.
Future Prospects for EuropeanAirline Industry Low cost airline as part of airline industry has significant leading position in price and cost which the major airline can not compete with. In Europe, most successful low cost airlines have operated primarily in domestic, it currently hold one third of the airline industry market share.
Secondly, there are around 50 low cost airlines in Europe and still new players enter in low cost competition, it will result in the supply over the demand, therefore some of the player will be out of the competition. It is very hard for them to expand by adding long-haul flight and increase the quality of the service.
To sum up, low cost airlines should maintain the existing business model and take the cost advantage to compete with major airlines. However by increasing the size, low cost airline will lose their cost advantage, therefore low cost airline will have to fight hard to persist in the future
Conclusion The outlook for the airline industry is one of aggressive growing sector. External environment could directly affect its profitability and operation. PEST analysis through Macro-Environment identify the major external environment drivers, which influence the air line industry. Technology in airline industry is fast moving, it will bring the changes in the future
The future for airline industry is bright and it also holds many challenges. The emergence and growth of no frills, low cost airline have radically altered the nature of competition within the industry. For low cost airline should continue maintain the existing business model by reduce the cost to improve their product. THANK YOU