Chaos In The Sky

Chaos in the skies - the airline industry pre- and post-9/11

Overview

The terrorist attack on the New York World Trade Center and the Pentagon on September 11, 2001, when civilian planes were turned into guided missiles flown by suicide bombers driven by religious fundamentalism and hatred for the United States not only seared themselves into the consciousness of the American people, but into the economic and business fabric of the country, and as a result, of the world. While the United States economy was slowing in the months before this tragic event, the aftermath of the bombings led the economy into a depression. The airline and travel industry were the worst hit of all industries. This is a review of the situation before and after 9/11 on industry of these attacks and an overview of responses both by government and on industry to the event.

This is a true story from the many stories of 11 September 2001.The case provides an opportunity to analyze the Airline Industry both pre- and post-9/11. It shows how one major event in the business environment can reshape many aspects in both the macro and competitive environment of an industry. In turn this requires a reshaping of strategies for most of the individual companies in the industry in order to cope with this new environment. It also provides an opportunity to recommend how airlines might better plan for, as well as react to, disruptive events such as 9/11 happening in the future.

1. Case Analysis

Key Issue

Coping with unexpected disruptive events and future challenges

Key Role Players

Global alliance Star Oneworld

Skyteam Stake holders Security

Supporting Issues

Globalization Deregulation Technology

World GDP Fuel Cost Geography

Labor cost No. of retirees Open market

Supporting Role Players:

Low Cost Carriers Westjet

Ryanair Government

2. Context Analysis

Situation before 9/11

2.1 Social Factors

World trade and investment liberalization of markets were increasing. Between 1990and 2000 airlines benefited from an increasing number of tourist passengers from 450 million up to 700 million. The main reasons for people to fly were leisure and business trips. Travelling by plane was also a symbol of wealth and success

2.2 Technological Factors

There has been made huge steps in airline technology, with the invention of more efficient engines the demand for long-distance flight could be satisfied. The internet opened a whole new and cheaper distribution channel for airlines. Furthermore airlines could improve their non-core services to get competitive advantages towards other airlines for example TV screens in the seats or faster boarding with new boarding systems.

2.3 Economical Factors

There was an increasing of US passengers travelling with planes of 160%between 1978 and 2000 (almost 660 million passengers). Through the year 2000 the operating costs for airlines went up constantly caused by higher fuel prices and rising labour costs furthermore the widening of the non-core services of airlines caused immense costs. Airlines reacted on that with reducing labour and cutting costs. Furthermore many airlines started out-sourcing their non-core services and activities in order to get back to the core-service and to save costs.

2.3.1 Competitive situation

A basic impact on the competitive situation in the airline industry was 1978 US open markets policy which enabled competitors to enter the industry. In the further development of the industry several airlines merged in order to benefit from economies of scale. In 1984, 15 airlines had 90% of the US market in1990 there were 8 airlines with a market share of 90%. The increasing competition among the airlines lowered the flight prices and airlines had to reduce costs. By the introduction of Hub and Spoke systems fix costs for airlines could be reduced and efficiency could be increased, also customers benefited from these networks. The development of the airline industry basically brought up two different models, the so called Low Cost Carriers who try to offer very low prices to their customers by eg. reducing on ground services and only offering point to point services. On the other hand there are the traditional Full Service Carriers providing the customer a broader range of services and opportunities. The Low Cost Carriers could win market share because of increasing customer price sensitivity, also business travel declined in 2001 41%. There was a trend of business travellers buying cheaper tickets-and to renounce full services.

2.4 Political factors

Basically the industry was fragmented from the constraints of national and international regulations, politics and public ownership. These small impacts were in the form of landing rights and competitive restraints.

Situation after 9/11

2.5 Social Factors

The attacks of 9/11 led to a declining of bookings of 74% of US domestic flights and 19% worldwide in the first four days. People were afraid of using air travel. Furthermore the longer check in times because of higher safety standards increased the door-to-door travelling time and customers were looking for alternatives such as video conferencing, using the car or the train. Furthermore customers were not willing to pay the prices they paid before9/11.

2.6 Technological Factors

Airlines invested huge amounts of money into new security systems and safer cockpit doors. This changeover of the aircrafts caused enormous costs.

2.7 Economical Factors

After 9/11 the economy was facing a recession. Stock market was completely closed for a week, sectors like insurance airlines decimated. Many airlines were facing bankruptcy. Furthermore insurances raised their premiums up to500% which increased operating costs for airlines.

2.7.1 Competitive situation

Full Service Carriers suffered from the customers fear people avoided long-distance flights, also business flights decreased. To

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