1. Introduction to Airline management:
Every organization has goals, whether they are profits, market share, growth, quality of products
or services, community image, or any combination of these. Management is the process of
through 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 was
much simpler. The few employees truly felt that they were part of the team, and they could
clearly see how their efforts contributed to meeting the company’s goals. Everyone knew what
the objectives of the firm were and how each particular job related to them. The lines of
communication and span of control were very short. There was an esprit de corps among the
employees, from president to the most unskilled worker. In fact, the president probably knew
each employee personally.
Today, the major carriers employ as much as 80,000 people. No longer does the president know
the men and women on the line, and many workers on the line have as much allegiance to the
union they belong to as they do to the company they work for. It is difficult for individual
employees to see exactly how their particular jobs contribute to the corporate goals. The lines
of communication are long, and the decision making process is complex. The airline tends to
assume a remoteness from the individual and to become a“ thing” that exists, survives, and
grows 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 the
goals they seek to achieve are too complex for any one man. The actions necessary to achieve
the goals are divided into units manageable by individuals- the more complex the goals, other
things 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 is
a structure that enables a large company to attain the same efficiency or a greater efficiency
than 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 over
another.
Management:
Levels of Management:
Terms such as top management, middle management and operating management are commonly
used 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 terms
sometimes differ from one company to another. However, a firm’s top management is generally
considered 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. organization; and operating management is directly responsible for the final execution of policies
by 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 the
organizational breakdown of two administrations and the typical titles of individuals heading up
each unit. The term administration is generally used to describe a major unit within the
company, 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 members
and represents a cross-section of prominent individuals from various fields, including banking,
insurance, law, and accounting. Airline boards typically include individuals from the hotel and
food-processing industries, as well as former political and military leaders. The board of directors
is 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 the
company diversify into other fields? The board also has the sole responsibility for the declaration
of dividends. The basic decision about dividend involves other decisions, such as what
percentage of the year’s earning should be retained for company use and whether the dividend
should 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, the
board elects some of its own members to fill these important posts.
Top Management. Top management is the highest level of management in the organization. The
job of top management is to determine the broad objectives and procedures necessary to meet
the goals established by the board directors. Top management will also make recommendations
to the board regarding the goals of the company. What distinguishes top management from
middle management is not always clear in a given organization, but the individuals in this group
usually have many years of experience in all phases of management. Often called key
executives, 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 for
the proper functioning of the business. In the case of airlines, this individual often is a prominent
business or political leader with very little airline experience, because the president’s primary role
is to deal with the financial community, various segments of government, community groups, and
so forth.
Executive vice president and general manager. This individual generally has years of airline
experience and is responsible for the day-to-day operation of the company. Generally, the senior
vice-presidents report to this individual.
Senior vice-president. This title generally is reserved for those individuals who head up a major
administration, such as flight operations, marketing, or engineering and maintenance.

3. Middle Management. Middle management is the second level of management in the
organization and is responsible for developing operational plans and procedures to implement the
broader ones conceived by top management. Middle management may be given much leeway in
the development of plans, so long as the end result is keeping with top management’s
requirements. Decisions on which advertising media to use, how many reservations agents are
needed, and what new equipment to purchase are examples of those made by middle
management.
Middle Management includes individuals who head up departments or divisions within a major
administration, such as the advertising department under marketing or the flight procedures and
training department under flight operations. Or it might include the simulator division head, who
reports 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 includes
managers, assistant managers, section chiefs, general supervisors, and supervisors who head up
sections, groups or units that report to division or department heads.
Example might include the manager of display advertising or the general supervisor of the sheet
metal shop. Members of the operating management groups are primarily concerned with putting
into action operational plans devised by middle management; generally, they do not initiate plans
of their own.
Although the direction an airline takes is established by top management, the operating
management level is extremely important. Top management makes policies, and middle
management makes plans to carry out the policies, but operating management sees that the work
the 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 the
top echelon. Sometimes, a new president and executive vice-president are employed. When this
is done, changes at other management are not always made the new top management, because
middle management can still make plans to carry out policy, and operating management can still
implement plans.
General managers:
Manage several different departments that are responsible for different tasks, for example, the
manager 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 to
general manager. Because general manager manage diverse departments. Their technical skills
may not be as strong as the skills of the people they manage, however, they make up for in
communication skills. General managers must coordinate and integrate the work of diverse
groups of people. They responsible for ensuring that all the discrete parts of their organizations
function together effectively so that the overall goals of the organization can be achieved.

4. Levels of Management:
Managers exist at various levels in the organizational hierarchy. A small organization may have
only one layer of management, whereas a large organization may have several. Consider, for
example, the number of levels of management in a single-unit family restaurant versus a large
restaurant chain such as Chili’s. While the small family restaurant may have only one level of
management( the owner), Cili’s has several layers, such as general store managers, area
directors, 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 are
not 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. Most
organizations have more first-line managers than middle managers, and more middle managers
than top-level managers. As we will see later in this chapter, however, the trend of the 1990s
was to reduce the number of employees in organizations in an effort to improve efficiency. The
net effect of such downsizing was a significant reduction in the number of middle managers
within many corporate structures.
The skills required of managers at different levels of the organizational hierarchy vary just as
their job responsibilities vary. In other words, managers at different levels have different job
responsibilities and therefore require different skills. The skill necessary for First-line managers
to be effective are not the same as the skills needed by middle managers differ from those
needed by top-level managers.
While managers at each level must generally possess planning, organizing, leading, and
controlling skills, certain job-specific skills are more important at one level than at another.
Top
Managers
Middle
Managers
First-Line Mnagers
Opretational Employees

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 involves
setting goals and defining the action necessary to achieve those goals. While top-level managers
establish overall goals and strategy, managers throughout the hierarchy must develop
operational plans for their work groups that contribute to their efforts of the organization as a
whole. All managers must develop goals that are in alignment with and supportive of the overall
strategy of the organization. In addition, they must develop a plan for administering and
coordinating the resources for which they are responsible so that the goals of their work groups
can be achieved.
Planning:
An airline is dependent for its very existence on the ability of its top planners, failure to forecast
the demand of air travel and to plan how to meet a rising or shrinking demand spells the
difference between success and failure. The management process begins with planning, which
sets 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 and
department, as well as for individual activities. A goal is anything that an organization or group is
seeking to do. Some goals are large, such as buying a hotel chain or building a new kitchen to
serve a growing hub airport. Other goals are small, such as getting a report completed by Friday
or handling more reservations calls per hour than last month.
Management by Objectives: Many carries operate by a system popularly referred to as
management by objectives ( MBO), in which employees at all levels are given tangible goals and
are held accountable for achieving them. A strategy might include increasing the number of
daily flights, including those serving full meals. In a well-designed MBO program, overall goals
and strategies of the company and of individual employees are established through discussions
between managers and subordinates. Feedback is provided through follow-up discussions
during the period of time set for achieving the goals. Feedback may be in the form of data
quantitative results( such as Dollar sales, new accounts, unit costs, aircraft turnaround time, or
mechanical delays) or data qualitative results( such as customer complaints, reductions in
errors, improvement in image, or development of subordinates) person to person
communication, through day to day coaching, is particularly important.

6. With MBO, because employees receive timely, accurate, and fairly complete information on
their 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 of
company 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, the
manager 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 department
and containing major sections pertaining to each of the administrations. A policy is broadly
stated 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 policy
for all staff positions above a certain level might be that “ preference in employment will be
given to college graduates with a management background.” Hundreds of policies are in effect
at any major carrier, and those of a broad nature are established by top management. Power to
make specific policies for the guidance of each department usually delegated to administration
or department heads.
A procedure is somewhat like a policy, but it specifies in more detail the kind of action required
to handle a specific situation. There are procedures for ordering suppliers, training new
employees, fueling aircraft, handling customer complaints, and hundreds of other processes
within the various administrations, departments, divisions, and so forth.
Organizing:
The managerial function of organizing involves determining the tasks to be done, who will do
them, and how those tasks will be managed and coordinated. Managers must organize the
members of their groups and organization so that information, resources, and tasks flow
logically and efficiently through the organization. Issues of organizational culture and human
resource management are also key to this function. Most important, the organization must be
structured in light of its strategic and operational goals so that it can be responsive to changes in
the business environment.
Organizing:
Once plans have been made and policies determined, the job of carrying them out becomes one
of organization and operation. Organizing involves the division of work among employees and
the determination of how much authority each person will have. More specifically, organizing
may be defined as the process of logically grouping activities, delineating authority and

7. responsibility, and establishing working relationships that enable the employees, and thus the
entire 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 or
otherwise developing both job candidates and current employees to accomplish their tasks
effectively.
Leading:
Managers must be also capable of leading the members of their work groups toward the
accomplishment of the organization’s goals. To be effective leaders, managers must understand
the dynamics of individual and group behaviour, be able to motivate their employees, and be
effective communicators. In today’s business environment, effective leaders must also be
visionary-capable of envisioning the future, sharing that vision, and empowering their
employees to make the vision a reality. Only through effective leadership can the goals of the
organization 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 closely
tied to communicating directives clearly and in a way that will bring about the desired action. It
is 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 information
to give them. Order should be fitted to the receiver; the new employee needs to be instructed in
details, but the experiences worker may need to know only the objectives and then be capable
of choosing the means to attain them. Orders should be fitted to the receiver; the new
employee needs to be instructed in details, but the experienced worker may need to know only
the 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 in
implementing strategic and operational plans. Controlling requires identifying deviations
between 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 plan
more aggressively or justing the plan to the existing situation. Control is an important function
in the managerial process because it provides a method for ensuring that the organization is
moving towards the achievement of its goals.
With the four functions of the management in mind, let’s move on to examine the manager.

8. Managers are the people who plan, organize, lead, and control the activities of the organization
so that its goals can be achieved.
Controlling:
Is the measuring and correcting of activities of subordinates to ensure that events conform to
plans. Thus it involves measuring performance against goals and plans, showing where
deviations occur and, by putting in motion actions to correct deviations, ensuring
accomplishment of plans. Basically, control involves three steps: (1) setting performance
standards or the work, (2) comparing actual performance with the standard, and (3) taking
corrective 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-Controlling
Figure 1.1 illustrates these functions and shows how they relate to the goal of the organization.
Planning
Organization
Leading Goals
Organizing
Controlling

9. Scope of the responsibility:
The nature of the manager’s job will depend on the scope of his or her responsibilities. Some
managers have functional responsibilities, whereas others have general management
responsibilities.
Functional Managers: are responsible for work groups that are segmented according to
function. For example, a manager of an accounting department is a functional manager. So are
the 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 wider
social, economic, culture, Legal, political, Technological, and other systems in which businesses
operate and internal context comprised of human resources, organization
culture...>>>Businesses Environment is varied in settings or contexts{Business organizations
operate in different environmental settings or contexts/ Different types of business organization
operate in different environmental settings or contexts}.
The external and internal dimensions of the business organization environment are very much
related since business decisions (cross over this boundary-they have internal and external
aspects.). For example, it worth mentioning that Businesses have to not only ensure recruitment
of the right candidates from the external labour market but also to manage them internally to
deploy human resource effectively within the organization considering that the quality of
internal processes pretty much affecting the speed and effectiveness with which organization
counter the external threats and opportunities. Indeed the internal environment may be shaped
by the way the organization responds to its external environment.
Environmental Uniqueness:
Each Business organization, even those in the same industry operate in different environment
that is, to some extent, Unique. This thought warns against over-generalization when analyzing
the business environment, and emphasize that organizations should consider only particular
aspects 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 business
should refer to textbook to get to know how things are in general terms, or that intended to be
true in most cases that is useful approach in business and management, since there are general
aspects of the environment that influence most businesses, firms should combine between
general and particular approach in order to operate successfully.

10. How can Business react to the environment:
Responsiveness:
Successful organizations should be able to respond effectively to the environment and be able
to counter the threats effectively and take advantages of opportunities or at least, is able to do
so as well as or better than its competitors.
Influence:
Nevertheless, business success may depend on the ability of the organization to influence the
environment in which they operate. Advertising is a very good example of business activity that
is 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 lifestyles
and/or life value, population, income rate, economic growth and prosperity may pose threats or
opportunities to which businesses must react.
Choice of environment:
Beyond responding to or influencing the environment, businesses may be able to choose a
favourable environment in which to operate. For example, businesses may be able to shift the
geographical basis of their operations-moving into more favourable environments and away
from unfavourable ones.
When businesses expand into new markets, for example exporting to new countries, open new
routes destination they are searching for favourable geographical areas in which to sell their
products. The phenomenon of international trade is driven by the geographical expansion of
business searching for opportunities for sales in new markets overseas. Whether these new
markets 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 organization
that are involved in the transformation of inputs into outputs.
The internal activities and relationships add value to the inputs. A successful business has to
manage 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 an
interface or relationship between the two.

11. Businesses are, in other words, open systems that interact with their environments, not closed
systems. Some internal activities involve relationships with external people and organizations,
most obviously suppliers and customers. For example, in a retail business and other services the
interface with the external environment in the guise of customers is the core activity of the
business. Therefore, managing the internal environment is, in part, concerned with managing
their relationship or interface. Further, the internal environment may need to be adopted to suit
the particular characteristics of the external environment if the business is to be successful. This
means that there might not be just one way of organizing and managing the internal
environment, but a variety of possible ways, depending on what works best in the particular
situation of the firm. For example, if the external environment is characterized by rapid change
or volatility it may be important to ensure flexibility of staffing or tasks within the business. On
the other hand in a stable and predictable environment a more rigid, bureaucratic and rules
based approach might work well. Just as the external environment of each business is, in some
degree, unique, the same can be said of the internal environment.
Analyzing the internal environment involves looking at businesses as particular types of
organizations. An organization can be defined as a group of people that comes together for the
purpose of achieving a specific goal or objective, and which involves a series of activities and
relationships 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 and
conditions in which they operate. A regular environmental analysis is needed because the
environment is changing – it is dynamic. If the environment were static it is likely to plan for
future on a basis of what was done in the past- to carry on the same way. But because it is
dynamic business must operate under a general assumption that the future is different from the
past. And thus it is crucial to understand the way the environment change and be able to take
the corrective action to respond or influence these changes in a way that it helps the firm to
attain its goals. Bearing in mind the point about environmental uniqueness, some organizations
operate in a more unstable environment than others. Therefore, business success depends on
dealing with change effectively.
Uncertainty and bounded rationality:
Business can never have knowledge on how the environment will change. There are always
limitations on knowledge, and therefore businesses must operate in somewhat uncertain
environment. Although businesses may strive to act rationally in monitoring the environment
and responding to change in the most effective way, their rationality is always bounded by
limited knowledge. It is sometimes said that by the time firms have monitored environment

12. change, analyzed their findings and formulate a response it is too late to do anything. If this
were true then environmental analysis would be a waste of time. Certainly businesses have to
make judgments about the resources and energy they invest in environment analysis in terms of
likely benefits of the exercise. However, we return to the point that some level of understanding
of 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 not
sufficient. It focuses attention on relationships with sellers or suppliers, competitors, and buyers
or consumers. But there are other important types of organizations, processes and relationships
in the external environment. The external environment is not just made up of markets but also
includes political, legal, social, culture, technological and other factors and influences; it is in
other 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 the
aviation industry has ever faced.
The industry was undoubtedly heading for challenging times in any case, but there can be no
doubt that the events of September 11 2001 caused unprecedented crisis. Armed hijackers
seized four aircraft in the USA, and used these to attack the world trade centre in New York and
Pentagon in Washington.
The effects on the airline industry were catastrophic. For four days, the airspace over the
eastern USA was closed; resulting in direct loses to airlines (for which admittedly, they have
mostly been compensated). More serious still, the fear of further terrorism attacks caused a
steep decline in demand, both in the USA, on international routes to and from the US, and to a
lesser extent to elsewhere.
The time since the September 11 attacks has seen little improvement further, very serious
terrorist attacks have occurred in places as far apart as Mombasa and Balli. The second Gulf war
fought in March and April 2003 seemed to have fanned the flames of international terrorism
rather than causing the improvement in the situation which it was presumably intended to bring
about.

13. Assessing the longer-term impact of the fear of terrorist attack on the size of the aviation
market is very difficult.
Deregulation and open skies:
Throughout its history, the airline industry has been constrained by decisions made by
politicians and governments. Government have controlled where airlines can fly, and aspects of
their product planning and pricing policies. They have also had a major involvement in the
industry through the ownership of airlines. Finally, political decisions have often affected the
extent, 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 important
and, in principle, relatively non-controversial. Government regulation, though traditionally went
very much further than this. For many years, and in almost all aviation markets, government
controlled airlines route entry and capacity and frequency decisions. Very commonly too, and
astonishingly by today’s standards, governments intervened to stop airlines engaging in price
competition.
In recent years, substantial regulatory reform has taken place, giving carriers the challenge and
the opportunity of responding to a freer economic environment.
In describing the system of economic regulation of the airline industry, a fundamental
distinction has always been between the regulation of domestic services, which are solely under
the control of one government and international services, which require the agreement of at
least two.
Until relatively recently, almost all domestic travel markets were highly regulated. An extreme
case 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 of
economic regulation. Between the passing of the Federal Aviation Act in 1938 and the Airline
Deregulation Act in 1978, carriers could only enter new routes by going through a cumbersome
and extremely slow bureaucratic procedure.
Another extreme case of a highly regulated domestic market was those of Australia. For many
years prior to 1990, Australia pursued a so-called “Two Airline” policy. Under this, only two
airlines 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, in
practice almost all the areas where competition might have occurred were regulated, including
the question of price levels.
The situation with regards to domestic aviation markets today has undergone substantial
change, though in one very important sense we are still (with one exception) very far from true
“ deregulation”.

14. In terms of regulatory change, the USA led the way with the passing of the Airline Deregulation
Act in 1978. This allowed for much greater freedom for airlines to enter new markets and to
exploit them free of constraints on capacity or pricing policies. However, one important
regulatory limitation remained- that of ownership.
Regulatory reform in the United States has been followed by a similar pattern in many other
countries. Today many countries would claim to have deregulated their domestic aviation
industries.
The situation regarding regulatory change in international markets has inevitably been more
fragmented and diffuse, but even here, the state-of- play is significantly different from the one
which prevailed only a few years ago.
For more than fifty years, international aviation has generally been very tightly regulated
indeed. Early attempts were made by the USA to establish a liberal environment at the so-called
Chicago-Convention of the 1944. These were decisively rejected and in the ensuring
compromise, the world fell back on a system of controls through intergovernmental Air Services
Agreements.
Until 1978, the U.S. government through the Civil Aeronautics Board , regulated many areas of
commercial aviation such as fares, routes, and schedules.
The Airline Deregulation Act of 1978, however, removed many of these control thus changing
the face of civilization in the United States.
The deregulation of the airline industry in the European economic area had important
implication for tourism. The intensification of competition has often resulted in lower fares and
occasionally in improved service quality, highly flight frequency, punctuality and better service
on board in the last decade.
Open skies:
Open skies agreements are bilateral agreements between the U.S. and other countries to open
the 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 the
other 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 government
implemented barriers to competition, and allowing airlines to have foreign partners, access to
international routes to and from their home countries and freedom from many traditional form
of economic regulation.

15. A global industry would work better with a globally minded set of rules that would allow airlines
from one country to establish airlines in another country and to operate domestic service in the
territory of another country.These agreements still fail to approximate that most industries have
when competing in other global markets.
Economic:
The Demand for Air Travel is characterized by a very high income elasticity. Therefore, as the
world economy grows, the demand for air travel can be expected to increase too. This
continuing growth gives both enormous opportunities and great challenges to the airline
industry. The opportunities come with the chance to exploit a growing market, something which
would be the envy of managers in many other industries. The challenges are to accommodate
the growth through suitable infrastructure development and without unacceptable
environmental consequences and to exploit the demand whilst achieving the stable profits
which the industry has so often found elusive.
Beside a clear pattern of growth, growth rates are uneven through time. Just as one would
expect, air transport industry growth rates are tied closely to those in the world economy. If
growth 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 to
implement policies which allow for profits during prosperous periods if these same policies
result 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 buoyant
demand have seen airlines over-invest in additional capacity. They have also commonly given
too much emphasis to the first and business class market, a market which tends to be very
strong when times are good, but which suffers particularly severely during a downturn when
firms require their executives to travel in economy/coach class to save money. A final problem
often 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 to
be crippling burden when in downturn, yields are forced down because of an overcapacity
situation, to levels which do not allow costs to be covered.
The upswing of the middle and late 1990s illustrated all these shortcomings. Large orders for
new aircraft were placed with the aircraft manufacturers, with many of these planes actually
delivered in 2000 and 2001 when market conditions were much less favourable. Labour costs
were allowed to rise, with some airlines-notably so United Airlines-leading the industry by
granting 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 focus
very heavily on the booming market of so-called “premium” travellers in First and Business
Class. The flaws in this strategy became very obvious in 2000 and 2001, when recession ended
the growth in this market and made its exceptional growth rates in the late 1990s look very

16. much an aberration, far above any sustainable long-term level. British Airways is an example of
an airline that appeared to make this serious strategic mistake.
Since September 11 2001, there has been a tendency to blame the several financial problems
being experienced by many airlines on the New York and Washington terrorist attacks and their
aftermath. The impact of these was undoubtedly serve but they merely substantially increased
the extent of serious problems which already existed. These problems can be traced to the
fundamental error of failure to take adequate account of the trade cycle in setting business and
marketing 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 so
that they can use this information to their commercial advantage. Microeconomics is
fundamentally concerned with developing techniques to understand the operation on individual
markets. To build a picture of the individual characteristics of each one would be a nigh on
impossible task but the good news is that by using a technique called equilibrium analysis we
only need build a model surrounding one commodity and see how that market operates and
then using the same techniques applied to that market we can apply this to other markets to
see how they behave.
Demand and supply:
In a market there are consumers who demand the product and suppliers who would like to
supply 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. 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 the
economy or the political system. Economic life is organized primarily through a market in which
individuals 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 and
society involves a two-way interaction. Although we tend to think of business as operating
according to a distinctive instrumental rationality of profit-and-loss and the ‘the bottom line’ it is
also influenced by the social-cultural setting in which it is embedded. At the same time business
affects the wider culture and society profoundly. For example, a good deal of what we think of
as making up the culture of modern society consists of the outputs of private sector businesses
in 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, in
some senses, this is the most significant component of the PEST analysis model as far as
marketing policies are concerned.
The Aging population:
In Europe and North America in particular, the average age of the population is now increasing
steadily, fewer babies are being born, and improving medical provision is allowing more people
to live longer. ( It should be born in mind, of course, that an ageing population is not yet at all
characteristic of most countries in the third world.)

18. The ageing of the population has some obvious, and some more subtle implications for the
airline management. Clearly the product that airline offer will have to evolve, with more
provision being made for disabled passengers and those needing helps at the airports, and
medical care services will have to be improved. There may also be opportunities for specialist
brands 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 travel
industry 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 little
more 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 excessive
exposure to the sun are all meaning that to a greater and greater degree, holidays must reflect a
life style based on individual choice. People expect to be able to pursue their hobbies while they
are 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 to
fit in with their available vacation time. They also require opportunities to visit new and
interesting often long-haul, destinations.
Overall, the trend in the holiday market is often, and appropriately, described as “ depackaging
in the package”. People increasingly want a holiday experience which reflects their own
individual requirements. They don’t expect to be treated as part of the herd cattle, to suit the
convenience of the travel provider.
Technology and business competitive advantage:
According to Porter in competitive advantage- creating and sustaining superior performance
emphasizes the importance of technology in creating the competitive environment at the level
of the individual firm( Porter, 1985). He also emphasizes the danger of seeing technology as a
goal in itself. Technology is not an end in itself but is best understood as a means to improving
competitive performance and boosting profitability. All too often it is easy to assume that any
technological change is good and further that the more costly and sophisticated the investment
in technology the better this will be. However, as we have seen technological change doesn’t
have to be so costly and complicated. Using the concept of value chain, porter shows how every
activity of a business in combining value. In practice a firm is a collection of different
technologies that can be applied, enhanced or implemented across all the different activities of
the business.
A value chain can be seen as consisting of the following technologies:

19. Horizontal functions or support services of a business in terms of its basic infrastructure
(finance, planning, information systems, office technology), human resources (training and
development ), 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 of
technology to combine inputs into outputs so there is the opportunity for technological
improvement 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 old
planes 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 of
legislation to allow competition on routes, EasyJet used brand new planes which it bought to
operate on competitive routes. In order to be competitive and pay the considerable fixed costs
of the aircraft and the landing slots provided by the airports used, easyjet explicitly recognized
the need to go for economies of scale by using their planes as much as possible and by filling
each plane to reduce the average cost of each passenger. It engaged in ruthless cost cutting for
all 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 to
be 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 it
allows a business to differentiate its products or services from that of its rivals. We have seen
already the complexity of cause and effect in relation to technology and other factors. Changes
in the external market can create the possibility of untapped economies of scale that in turn call
for technological response to boosting production.
Technology can’t be ignored by business and it can either boost a firm’s individual position or
improve the profitability of the industry in which it operates. Conversely it can lead to a business
declining as its competitors develop a technological advantage or technological change boosts
alternative industries.
It is important for a business to adopt a technology strategy that enables it to respond to
external changes as well as one which allows it to develop a consistent approach in relation to
its goals.
A major decision businesses need to make is whether to try and be technology leaders or
technology followers. In general terms this requires a balance of risks.

20. If it is likely that a business would be able to maintain the technological advantage over time
then there is an incentive for firms to innovate and/or develop new products. This can be the
case where firms are able to assert their intellectual property right through patents or whether
the 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 of
such products is such to allow costs to be more than recouped without the prospect of an
alternative using cheaper technology. The rapid pace of technology though means that this
might be a possibility.
Moving first can mean that a business is able to establish a reputation that survives even when
alternative competitors enter the market. Being first mean that a business can develop a strong
lead and help it establish a position that it can set industry standards or develop favourable
channels of distribution. Conversely, there is a huge risk in going first. Considerable sums of
money can be expended and there is the risk that someone else can learn from your mistakes
and 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, the
conclusion 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 historic
standards. Business travel growth will tend to be below the growth rates for GDP rather then
above them as has commonly been the case in the past. It will also increase the airline
industry’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 by
the internet. At the time of writing almost all major airlines have websites which they use for

21. promotional purposes, with these sites supplying time table and product information and also
having interactive component which allow people make bookings.
Sites are also being used as a way of increasing the attractiveness of an airline frequent flyer
programme by permitting programme members to check on their mileage accounts and also by
giving 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 most
environmentally 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 was
especially notable in Europe, where during the 1990s as a whole, investment in railway
infrastructure was more than three times as great as that in infrastructure for the aviation
industry.
Surface Transport investment provides both problems and opportunities in airline marketing.
The problems come from the fact that, beyond question, railway investment can have a
significant negative impact on the demand for air transport. The evidence from countries such
as France, where new railway developments compete alongside formerly busy air routes, is that
once rail can offer a city-centre to city centre journey time of less than three hours, the effect on
the 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 who
have 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 for
airlines to co-operate rather than compete, with railway operators. The future growth of the
airline industry is now being jeopardised by growing shortages of runway and passenger
handling capacity. Also for most airlines, short haul services tend only to be marginally
profitable. The high incidence of fixed cost such as landing fees has always made it difficult to
achieve satisfactory profits on these routes. On the other hand, most long haul routes tend to
be more profitable.
The opportunity of surface transport developments is for airlines to lobby for improved public
transport links to major airport. And thus train operators will be able to deliver long-haul
passengers 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 challenge
is in formulation of a sound strategy. In one sense, the good news here is that there is no single,

22. unique strategy that must be followed in today’s airline industry if success to be achieved. There
is a range of possible strategies available. What is essential, though, is that one strategy must be
selected from this range, and it must be then implemented well. And continued on long term
basis. The aim of the next section is to discuss the type of possible strategies an d their
advantages 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 the
ideas 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 existing
firms, substitution, new entry, the power of the customers and the power of suppliers, which
will 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 or
change comes from long established firms. These long established firm often resemble one
another in terms of strengths which they have, and in their problems and weaknesses. They
therefore 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 this
point only too well, especially in their short-haul markets. There are now no regulatory reasons
which preclude intense competition between them. Since April 1997, the airlines of European
Union have competed in a single Aviation Market where there have been only the very loosest
controls over entry, capacity and fares. Yet, one would hardly know this in those situations
where the old established airlines have faced one another in head-to-head competition. They
have mostly flown similar aircraft, and placed in them identical or near identical seating
configurations. Frequencies and timing have been very similar, with few airline prepared to
allow their competitors a frequency advantage. The onboard products have been comparable.
Finally and most tellingly, until recently these airlines have pursued an almost identical pricing
policy . very high fares >>>>>>>>>???? Change to future tense!!!
1.2 Substitution:
Porter argues that disturbance to the competitive equilibrium set up by the long established
firms come from two possible sources, the first of these being that of substitution. Substitution
occurs when firm in another industry find a new and better way of meeting the same customer
needs 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 market
for business air travel. Video conference, teleconference and email all have the potential to

23. mean that business travellers will travel less, and still satisfy their needs for effective
communication.
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 impact
on the business travel market once these city centre to city centre journey can be brought down
below three hours.
1.2 New Entry
In some industries, new entry is difficult or impossible. In others, it is commonplace. In the
modern aviation industry, the later is very much the case, especially in short-haul, point to point
markets. This is because of the many possible so-called “barriers to entry”, most have become
low or are now non-existent.
A first possible barrier to entry may result from regulatory limitation, it is true that, there are
still regulatory barriers to entry in many international markets, and airlines are constrained in
their market entry policies by out-of-date and anachronistic limitations on ownership and
control. However, it is now the case that many of the largest domestic market such as those in
the 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 very
costly, entry will clearly be constrained. In the aviation industry, airport slots provide a classic
resource 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 can
derive little more from the remaining possible resource constraints to entry especially during
downturns.
This certainly the case with the question of the aircraft fleet that will be needed by a new
entrant airline, in a recessionary period, aircraft manufacturers will be prepared to strike very
attractive deals for the white-tailed aircraft which result from order cancellations. Also there will
be large numbers of parked aircraft-many of them owned y leasing companies- where the
owners 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 in
the airline business. Some industries are characterized by marked economies of scale, where
lower unit costs can be obtained by large scale producers. In the airline business, there are some
aspects where existing players are protected against new entry by scale of economies. In
particular, hubbing operations where short-haul passengers are collected together in order to
feed long-haul services are increased in their effectiveness by being undertaken at a substantial

24. scale. It is hard for small new entrants to break in. In point to point markets, however, no such
protection for incumbents exists. Economies of scale in areas like pilot training and maintenance
quickly run out with increasing size, and are counterbalanced by the bureaucracy and poor staff
morale 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 new
entrants because the intricacies of the production process mean that substantial experience is
required before optimum cost levels can be achieved. Aircraft manufacturers and Aero0Engine
production both illustrate this form within the aviation industry, with unit costs of production
falling steadily as an airframe or engine family matures. Airlines, on the other hand, seem to
show the opposite effect, with the concept of start-up economics a well-established one. Airline
often achieve their lowest costs of operation during the first five years of their existence. Later
on, cost tend to rise as more staff ascend seniority scales towards higher rates of pay and
bureaucracy 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 very
important. Over the last twenty years, the list of airlines which have entered the industry and
then left it again through bankruptcy is a depressingly long one. All the evidence one could
possibly require is there to illustrate the point that investing in and setting up a new airline is, at
best, highly spectulative, with an overwhelming likelihood of failure. From this, one might
assume that new entry into the aviation industry would largely be a thing of the past, especially
given 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 challenge
from 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 the
firms in any industry. In turn, customer power will be related to variables: the number of
customers 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 the
competition, there will still be a large number of customer remaining. If on the other hand, the
firm has only two or three customers, the loss of one of them will result in a third or more of its
business being lost. In such a situation, customers will have extreme amounts of bargaining
power. They will be able to cut deals on terms which are extremely attractive to them, holding
down the profits of the companies from which they are buying.
In the aviation industry, a common situation where a customer turns into a competitor occurs
when a tour operator grows bigger and bigger, giving larger amounts of business to existing
charter airlines. Often, a point arrives where it will make sense for the tour operator to buy it

25. own aircraft, in order to set up its own airline to carry its own passengers and perhaps also to
compete 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 assists
aircraft manufacturers to retain their customer base. An airline may be getting a worthwhile
amount of business from major customer as a result of having corporate deal with them. It will
be a simple task, though, for another carrier to come along and offer the customer a more
attractive level of discount, with the result that the corporate deal with the first airline is
cancelled and transferred to the second. Of course, the first airline will hope that its frequent
flyer programme will be of some value in fending off predatory attacks by its rivals, in that many
people who actually travel for the firm in question will wish to continue to build their mileage
balance, and retain their privileged status, within the programme. Overall, the question of
power of their customers is very difficult one for the airline to address, and goes a long way
towards 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 monopoly
suppliers of crucially needed resources, these suppliers will be able to charge prices which
ensure handsome profits for themselves, but which severely limit profits of the firms that they
supply.
For airlines, the list of suppliers who either actually or potentially have this monopoly power is a
depressingly 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 on
them.
Sometimes, airlines fleet planning can be affected by powerful supplier issues. The Boeing 747
was introduced into airline service in 1970, and was unchallenged by any other aircraft for the
next 25 years. If a carrier’s requirement was a long range aircraft with 400+ seats, the 747 was
the only option available for them. Not surprisingly, the aircraft became a very profitable project
for Boeing. In the future a similar situation may develop with the 555 seat Airbus 380, where it is
now clear that there will be no Boeing competitor when deliveries of the aircraft begin in 2006.

26. Threats of
new
entrants
Bragaining Threats Bargaining
Power od of power of
supplier Rivalry buyers
threats of
substitutes
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 a
considerable monetary investment, they are also expected to have a significant impact on the
form of the airline in the long term. Example of strategic decisions, include Growth and
expansion, fleet sizing ( aircraft orders), hub locations, merging with other airlines, alliance
participation.
Mergers, acquisitions and alliances are all equally powerful corporate growth strategies
available for companies. The selection of any single approach depends on both internal and
external factors. Given the many successes and failures alike experienced by companies
worldwide, it would be advisable for companies to primarily understand the strategic
implications of each approach and then to diligently evaluate each approach.
As each market and each company is unique. Selection amongst these three approaches would
substantially differ. But companies can minimize their risk by following guidelines
Before suggesting a frame work to choose among the three models, it is very important that
conceptualizations 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 both
companies shares the control of the resultant company and names of both companies are
retained for the resulting companies.

27. Acquisition: Acquisition on the other hand refer to processes in which one company buys the
other company. In such situation the buying company absorbs the bought company into the
existing company. Acquisitions can be carried out either to eliminate competition by absorbing
the competing company or to expand the corporate portfolio by retaining the acquired company
as an independent entity under the overall corporate management. The purpose of this
conglomerates is to enter a highly lucrative market.
Alliance: Alliance is an approach in which two or more companies agree to pool their resources
together to form a combined force in the marketplace. Unlike a merger, an alliance does not
involve the emergence of a new combined entity. Each participant in the alliance retains their
individual entity but choose to compete against competitors as a unified business force. Joint
venture is a very popular form of an alliance.
In today’s competitive environment, airline mergers and acquisition have been a growing trend
in several countries across the globe. However, mergers and acquisitions in the aviation industry
are highly strategic in nature and are undertaken after taken into consideration several
important factors.
While the airline industry remain a highly competitive market, more and more airline around
the world have been finding ways to engage in Joint venture, Merger, Acquisition or alliances for
their natural benefit and to ensure their long term viability.
Throughout the history of commercial air transport, carriers have after preferred the comfort of
cooperative rather than competitive relationship.
The alliance landscape that is now considered common place in the travel industry is actually
relatively young. The three major global alliances are; star alliance, skyteam, and one word-each
were created in the past 15 years.
Since then, more than 50 individual airlines have partnered with one of these alliances, and
more are being added continually. Today, these three alliances account for more than 60
percent of total passenger traffic.
Apart from the basic naming classifications, in practice it can be difficult to determine the
difference between airline JVs and alliances, especially because they can be structured
differently around the world, and because the many existing partnerships vary in terms of
maturity, sophistication, and transparency to the buyer.
The focus for airline in an alliance is to combine their respective footprints to create expanded
global networks, to align schedules for maximum efficiency, to engage in some combined
marketing efforts, and in some cases to share revenue. Conversely, airline participating in JV are
aligned quite closely as part of a narrow relationship that includes fewer total carriers.

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 250
daily flights to nearly 500 destination on its homepage.
JV often share revenue as well as costs and may fly under a shared operating certificate, making
the partnership transparent to travel buyers and travellers.
There is one final element of the current alliance scene which shouldn’t be overlooked. Some
airlines have not joined any of the global alliances. Virgin Atlantic, South African Airways, and
Emirates are all examples. Emirates in particular, has taken a strong position of preffering to
maintain its independence rather than become enmeshed in what the airline’s Chief Executive
has 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 in
either M&A or an alliance is to tackle competition in any market. Companies around the world
have to come to believe that consolidation with a market would allow them proportionate
market 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 and
alliances are preferred to enter new markets or segments. As such, one of the important factors
which should be considered is the level of barriers present for entering a new market. Some
markets are characterized by high barriers to entry such as regulatory constraints, established
competitors, highly volatile markets that does not justify initial entry investments and so on. In
such cases, alliances are the preferred option as they allow companies to leverage the existing
knowledge and resources through collaboration. On the other hand, where barriers to entry are
low, companies can gain a very strong foot hold in the market either through mergers or
through acquisitions.
3. Synergies and resources Along with the previous two factors, synergies and resources are
equally important in deciding among the three options available to companies. Mergers and
alliances between companies have been proven to work efficiently if there is a high level of
synergy between companies that come together. Synergies can be in the corporate culture,
product portfolio, strategic goals, and supply chain or logistic systems. When such synergies
exist, 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. As
acquisitions take place at prices much higher than the book values of the companies being
acquired, acquiring companies should possess or have access to considerable resources.

29. From the customer point of view merger and Acquisition may lead to increased airfare this is
because mergers and acquisitions reduce the number of operators thereby reducing
competition and pushing up the price.
Overall, it is clear that the formation and growth of alliances has been a central theme of the
airline industry over the last decade, it is not hard to see why? , a combination of theory and
practice shows that, potentially, alliances can bring their members significant benefits to their
bottom line.
Theoretical principles show that the benefit of greater size-which airline alliances are essentially
aiming to tap into- can be divided into two economies of scale, which consist of cost reductions
achieved through size, and economies of scope, which reflect the revenue benefits of
co=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 a
difficult question.” What is an alliance?” the word is used very loosely. It can mean anything
from the most distant and loose of and control rules allow. It also may, or may not, involve the
partner in minority equity stakes.
Having said this, it is clear that airlines which enter into co-operative alliance relationship are
seeking 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 negotiate
together this may increase their bargaining power with the often-intransigent suppliers of
airport 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 a
considerable monetary investment, they are also expected to have a significant impact on the
form of the airline in the long term. Example of strategic decisions, include Growth and
expansion, fleet sizing ( aircraft orders), hub locations, merging with other airlines, alliance
participation.
Planning decisions: are within a few months horizon, and can be defined as the process of
efficiently using airline’s available resources to maximize its revenue. The resources available to
an airline include the facilities and personnel that operate the business, including, for example,
aircraft in different fleets, pilots with different qualifications, flight attendants, maintenance
facilities, mechanics, gates, customer services agents, and ramp agents.

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 has
more than one fleet type), aircraft routing across the different airports. With its maintenance
consideration.
Other planning decisions include the number of staff required to operate flight at different
airport 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 seat
inventory control for each flight
The operation decisions: for the airlines are those decisions that need to be verified or updated
on an hourly or maximally on a daily basis. This include for example, the response to
unanticipated 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 in
the different markets, matching prices with competitors, and managing seat inventory on each
flight on a daily basis.
Strategic decisions are expected to impact on planning decisions, which in turn affect the
operation decisions. In addition, there is a reverse feedback from the operation phase to the
planning phase.
Planning decisions: are within a few months horizon, and can be defined as the process of
efficiently using airline’s available resources to maximize its revenue. The resources available to
an airline include the facilities and personnel that operate the business, including, for example,
aircraft in different fleets, pilots with different qualifications, flight attendants, maintenance
facilities, 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 has
more than one fleet type), aircraft routing across the different airports. With its maintenance
consideration.
Other planning decisions include the number of staff required to operate flight at different
airport 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 seat
inventory control for each flight

31. The Airline Planning Process:
The objective is to provide an overview of the airline planning process, from the longest range
strategic decisions involving aircraft acquisition to medium term decisions related to route
planning 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 be
operated, 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 of
both planning process, and ultimately its operations. An airline’s fleet is described by the total
number of aircraft that an airline operates at any given time, as well as specific aircraft types
that comprise the total fleet. Each aircraft type has different characteristics related to technical
performance, the most important of which its capacity to carry payload over a maximum flight
distance, or range.”
Decision made by an airline to acquire new aircraft or retire existing one in its fleet have direct
impact on the airline’s overall financial position, operating costs and especially its ability to serve
specific routes in a profitable manner. The decision to acquire new aircraft by an airline
represents a huge capital investment with long-term operational and economic horizon. The
impacts on airline’s financial position of such an investment include depreciation cost that
typically are incurred for 10-15 years, as well as increases in long-term debt and associated
interest expenses. From an operation perspective, the decision to acquire a specific aircraft type
can have an even longer impact, as some commercial aircraft have been operated economically
for more than 30 years. For example, early versions of the MCDonnel Douglas DC-9 were
introduced in the late 1960s and are totally still operated with proper maintenance and
refurbishment by many airlines around the world.
It is therefore somewhat surprising that the decision support tools used to make these very
important long term decisions are not sophisticated as one would expect( or as sophisticated as
some of the tools available to airlines for more tactical decisions like scheduling and revenue
management). The highly uncertain nature of conditions 10-20 years into the future has limited

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 to
make fleet planning decisions).
The airline fleet decisions:
The fleet planning problem facing an airline is in fact an optimal staging problem. An airline’s
fleet composition is defined for a particular point in time, but it changes with every additional
aircraft acquired and every existing aircraft that is removed from the fleet. An airline’s fleet plan
should therefore reflect a strategy for multiple periods into the future, including the number of
aircraft 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 uncertainty
about future market conditions. The definition of such multi-stage fleet plan must also recognize
constraints imposed by the existing fleet, the ability to dispose of older aircraft, and the
availability of future delivery slots (i.e planned delivery times) from aircraft manufacturers
and/or leasing companies.
Commercial Aircraft Categories and characteristic:
The major categories of commercial aircraft in use today and available for airline acquisition are
most commonly defined by the aircraft range and size. The range of an aircraft refers to a
maximum distance that it can fly without stopping for additional fuel, while still carrying a
reasonable payload of passengers and/or cargo. The size of an aircraft can be represent by
measures such as its weight, its seating or cargo capacity, as indicators of the amount of payload
that it can carry. Thus, broad categories such as “ small”, “short haul” aircraft can include several
different aircraft types, perhaps built by different manufacturers. Because aircraft types within
each category can provide similar capabilities to airlines, they are regarded as competitors” in
the airline’s fleet planning evaluations. For example, the Airbus 320 and Boeing 737-800 are
competing aircraft types, as they are both single-aisle, twin-engine aircraft with approximately
150 seats, each with similar range capabilities.
Historically, it was generally the case that largest aircraft were designed for routes with the
longest flight distances. The relationship between aircraft size and range in the 1970s was
almost linear, in that an airline wishing to serve a very long-haul non-stop route had little choice
but to acquire the largest Boeing 747 aircraft type. Over the past 30 years, the number of
range/size product options made available by the principal aircraft manufacturers has increased
substantially.
With the emergence of greater competition among both airlines and especially aircraft
manufacturers, airlines now have a much wider choice of products by range and capacity in each
category.

33. The range capability of new aircraft in the small category( 100-150 seats) has increased
dramatically, allowing US transcontinental routes to be flown with Boeing 737 and Airbus 320
series aircraft, for example. The sizes of newer “ long-range “ aircraft have decreased, allowing
airlines to serve certain low-demand, long-haul international routes non-stop. Example of such
operations includes Boeing 757 service (180 seats) from the northeast USA to some European
destinations (e.g., Newark to Lisbon) and from the US west coast to Hawaii (e.g. Los Angles to
Maui).
The two remaining dominant aircraft manufacturers( Boeing and Airbus) both continue to
expand their aircraft product families in order to offer airline as many size/range combinations
as possible.
These families of aircraft allow each manufacturer to be competitive in as many aircraft
categories as possible, matching the specific performance characteristics of each airline’s fleet
requirements. Aircraft families also have the appeal to airlines of the advantages of “ Fleet
commonality” 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 as
the need for new equipment and spare parts inventory for new aircraft types not previously in
the airline’s fleet, but also to having closely related aircraft types made by the same
manufacturer, as such aircraft will have similar or identical cockpit layouts, and maintenance
and spare parts requirements, allowing crews qualified to operate one aircraft type in the family
to operate all types in the family. This provides the airline much greater flexibility in crew
scheduling, and leads to reduced crew costs.
Route Planning:
Given the airline’s choice of aircraft and a fleet plan that determines the availability of aircraft
with different capacity and range characteristics, the next step in the airline planning process is
to determine the specific routes to be flown. In some cases, the sequence of these decisions is
reversed, in that the identification of profitable route opportunity might require the acquisition
of 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 under
consideration. In large airline networks, traffic flow support from connecting flight can be critical
for route profitability. With the evolution of connecting hub networks around the world, very
few flights operated by network airlines on a route carry only >>>>
Hub and spoke and network structure:

34. What do we exactly mean by Hub and spoke or point –to-point? What are the use cases? And
they work for the success of an airline?
Point to point is a typical route network where an airline focuses mainly on its Origin and
Destination (O&D) traffic. This means that the airline is more interested in transportation of
passengers originating from one city (A) to another (B) and Vice Versa. But not in connecting
passengers between C and B via A. Low cost carriers are considered to be pioneers of this
paradigm 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 passengers
between two points, but also to connect passengers between two distant cities via its hub. An
example 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 its
hub. The Hub and Spoke model originated with American Airlines, but perhaps the airline that
uses it the best in present day is Emirates Airline. A hub and spoke model essentially needs to
have 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 lucrative
transit 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 with
naturally banked scheduling provides a good amount of connection opportunities. Another LLC
that seems to be following this path is FlyDubai which also provides connectivity to/from its big
brother Emirates flights on selected routes.

35. Many Airlines supplement their hub and spoke model with code-shares, partner flights, or a
small commuter airline. For example, it would clearly be rather silly to fly passengers who
needed to get to San Francisco from Los Angeles through Dallas. So, these passengers are put on
a smaller commuter flight which connects these two locations. These commuter flights may also
travel between spokes and less desirable locations which do not need to be connected directly
to the hub. The design of a hub and spoke model is highly efficient for a myriad of reasons. The
first involves day to day operations of an airline or freight company. By centralizing control, the
company 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 multiple
locations. This makes the freight company much more efficient, and reduces the risk of error
Hub and spoke network structure allow airlines to serve many O-D markets with fewer flight
departures, requiring fewer aircraft, generating fewer ASK at lower total operating costs than in
a complete point to point route network. Consider a simple connecting hub network with 20
flights 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 and
baggage are moved between connecting flights and the aircraft then depart with the connecting
passengers and baggage on board. Connecting banks last from approximately 1 hour in a smaller
domestic hub networks to 2-3 hours in larger international hub networks. In this example with
20 arriving flight followed by 20 departing flights, each flight leg arriving or departing the hub
simultaneously serves 21 O-D markets- one local market between the hub and spoke, plus 20
additional 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 flight
legs 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 hundreds
of aircraft, depending on scheduling requirements. Routing both flights and passengers through
a connecting hub is more profitable for the airline if the cost savings from operating fewer
flights with larger aircraft and more passengers per flight are greater than the revenue loss from
passengers 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 leg
into and out of the hub allow it to provide connecting service even to low demand O-D markets
that cannot otherwise support non-stop flights. Consolidation of O-D market demands further
allows the hub airline to provide increased frequency of connecting departures, as it likely

36. operates several connecting banks per day in each direction as its hub airport. In fact, several
connecting departure per day (via the hub) in these O-D markets may be more convenient to
travellers than a single daily non-stop flight; that is “total trip time” is lower, when schedule
displacement (“wait time”) offered by multiple daily connecting departures through a hub. For
example, in the large US domestic multiple daily connecting departures through a hub network
operated by Delta, the airline is able to provide over a dozen daily connecting departure
between Boston and San Diego. If a new entrant airline were to initiate non-stop flight per day
in this market, it might find it difficult to gain substantial market share given the connecting hub
competition 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-D
markets, more convenient schedules schedules(less schedule displacement) can lead to higher
market share against competitors. On line connections (i.e between two flights operated by the
same 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 offer
greater frequent flyer program earning and reward options for passengers given greater
network coverage and online service to many O-D markets.
In fact, international airlines such as KLM, Singapore airlines with relatively low populations
around their home bases would not have been able to grow to their current level of operations
without 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 and
cost advantages. The airline will generally require fewer base locations for its aircraft
maintenance and crew domiciles, resulting in reduced crew maintenance expenses. There are
fewer locations where passengers or bags can misconnect, and multiple connecting banks each
day can reduce the delays associated with such missed connections. The large volume of
operations at the hub airport leads to economies of scale in terms of aircraft in terms of aircraft
maintenance 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 and
crew scheduling, in that the best arrival and departure times at the hub airport are in essence
predetermined by connecting banks. It also provides more opportunities for swapping aircraft in
response to delays, cancellations and irregular operations, given that a large number of aircraft
are on the ground simultaneously during a connecting bank. To the extent that many of the
aircraft are likely to be of the same fleet type, this future increases flexibility for the airline to
exchange aircraft from one flight to another, as required.
>>>>>>>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>

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 business
action 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 in
of either dollars, such as revenue, or some physical volume such as revenue passenger
miles(RPMs) or passenger enplanements.
Plans for the future cannot be made without forecasting demand. Planning also plays an
important 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 with
setting 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 type
of demand may also be based on other forecasts. Thus, the projection of flying hours for next
year 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-terms
forecast of total passenger enplanements between a particular pair of cities to provide a basis
for determining station personnel and ground equipment needed, gate availability, and
expenses related to these items. Short term forecasts normally span a period of one month to
one year and cover such day-to-day operations as staffing stations, evaluating current
competitive 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 as
route planning decisions.
A long-term forecast spans a period of five to ten years and might involve fleet planning
decisions and long term financial commitments.