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The Airline Industry

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Autor:   •  January 3, 2011  •  1,607 Words (7 Pages)  •  844 Views

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The Airline Industry

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In order to understand how new aircraft might fit into the current market, one must understand the customer. For commercial transport aircraft manufacturers, the customers are the airlines. For business aircraft, military programs, or recreational aircraft, the market behaves quite differently.

The following discussion, intended to provide an example of an up-to-date view of one market, is excerpted from the British Airways web site, Jan. 2000. See also the excellent market outlooks published by Boeing and Airbus each year -- for example: Boeing Current Market Outlook (1MB pdf) and Airbus Global Market Forecast (2.5 MB pdf).

INDUSTRY OVERVIEW

Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries.

In the past decade, air travel has grown by 7% per year. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried 1.5 billion passengers last year. In the leisure market, the availability of large aircraft such as the Boeing 747 made it convenient and affordable for people to travel further to new and exotic destinations. Governments in developing countries realized the benefits of tourism to their national economies and spurred the development of resorts and infrastructure to lure tourists from the prosperous countries in Western Europe and North America. As the economies of developing countries grow, their own citizens are already becoming the new international tourists of the future.

Business travel has also grown as companies become increasingly international in terms of their investments, their supply and production chains and their customers. The rapid growth of world trade in goods and services and international direct investment have also contributed to growth in business travel.

Worldwide, IATA, International Air Transport Association, forecasts international air travel to grow by an average 6.6% a year to the end of the decade and over 5% a year from 2000 to 2010. These rates are similar to those of the past ten years. In Europe and North America, where the air travel market is already highly developed, slower growth of 4%-6% is expected. The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with rising domestic prosperity. Air travel for the region has been rising by up to 9% a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997 and 1998 will put the brakes on growth for a year or two. In terms of total passenger trips, however, the main air travel markets of the future will continue to be in and between Europe, North America and Asia.

Airlines' profitability is closely tied to economic growth and trade. During the first half of the 1990s, the industry suffered not only from world recession but travel was further depressed by the Gulf War. In 1991 the number of international passengers dropped for the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft in the boom years of the late 1980s, leading to significant excess capacity in the market. IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990 to 1994.

Since then, airlines have had to recognize the need for radical change to ensure their survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity growth and to increase load factors. At a time of renewed economic growth, such actions have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in 1996, less than 2% of total revenues. This is below the level IATA believes is necessary for airlines to reduce their debt, build reserves and sustain investment levels. In addition, many airlines remain unprofitable.

To meet the requirements of their increasingly discerning customers, some airlines are having to invest heavily in the quality of service that they offer, both on the ground and in the air. Ticketless travel, new interactive entertainment systems, and more comfortable seating are just some of the product enhancements being introduced to attract and retain customers.

A number of factors are forcing airlines to become more efficient. In Europe, the European Union (EU) has ruled that governments should not be allowed to subsidize their loss-making airlines. Elsewhere too, governments' concerns over their own finances and a recognition of the benefits of privatization have led to a gradual transfer of ownership of airlines from the state to the private sector. In order to appeal to prospective shareholders, the airlines are having to become more efficient and competitive.

Deregulation is also stimulating competition, such as that from small, low-cost carriers. The US led the way in 1978 and Europe is following suit. The EU's final stage of deregulation took effect in April 1997, allowing an airline from one member state to fly passengers within another member's domestic market. Beyond Europe too, 'open skies' agreements are beginning to dismantle some of the regulations governing which carriers can fly on certain routes. Nevertheless, the aviation industry is characterized by strong nationalist sentiments towards domestic 'flag carriers'. In many parts of the world, airlines will therefore continue to face limitations on where they can fly and restrictions on their ownership of foreign carriers.

Despite this, the airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers.

The outlook for the air travel industry is one of strong growth. Forecasts suggest that the number of passengers will double by 2010. For

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