Airline Industry, Research Paper Example

Introduction

The airline industry is credited for offering a wide range of services.  A number of airlines have ventured in to this industry to either lease out their aircrafts or use their aircrafts to rent out the services. This industry is thus composed of very many airline companies. Some of the companies merge with others through various forms of associations with the goal of increasing their profits. The airline companies vary in their type of service provision and level of operation. Globalization is an aspect that has greatly increased the demand for the services offered in this industry. The advent of the airline industry is considered to be one of the greatest innovations in world history.  This industry has greatly transformed the entire transport network in the globe.  Undeniably, the invention of airplanes triggered a new dispensation of movement of goods and persons in a manner that has arguably revolutionized the world in a way that is unparalleled in the annals of humanity; yet questions of competition, finance and environmental concerns all wrapped in the globalization package poses eminent contemporary challenges to the airline industry.

History

First Commercial Airlines

The very first airline company emerged in 1909. This company founded by the aid of the German government was called DELAG. At the time of its inception, the company operated very light planes that could easily be propelled while in the air.  Such aircrafts are termed as airships owing to their buoyancy. Such planes were made with the most ancient technology that enabled them to survive in air on a gas filled cavity.  Airships are thus aerostatic unlike majority of modern day planes and helicopters that are aerodynamic. The Zeppelin Corporation was the company behind the construction of the airships. The company had its head office in Frankfurt. Other major airlines that emerged in the ancient time include the Netherlands KLM that came into operation in 1919, the Australia’s Qantas, and the Colombia’s Avianca alongside the Mexico’s Mexicana. For the United States of America, the first airline emerged in 1914 when Tony Jannus launched the very first flight. This airline operated on the St Petersburg –Tampa airport.  This airline there fore operated 23 minute commercial flight services that covered a number of regions.  The regions covered by the airline at the time of its inception included St Petersburg and Florida alongside Tampa (Davies, 1964).

In the February of the year 1919, yet another airline company emerged in the United States of America.  The Chalk’s air line currently chalk’s international airline was the second air line to emerge in the history of the United States.  This airline operated in a few regions including Miami and the Bahamas Island. This airline currently claims to be the long serving in the whole of the United States of America. With the uprising of the First World War, the US experienced a great emergence of aviators.  This saw the increase in the number of services offered by the airline industry (Davies, 1964).The US postal service was awarded the backing by the house of congress to conduct mail delivery services by air.   Initially mails were delivered by a number of private airline companies. However the increase in the number of accidents involving these private airlines called for the need to hand over the responsibility to the US Army (Davies, 1964).

The unreliability of the army compelled the US postal service to launch their own mail delivery services in the 1920.  The services were operated between San Francisco and New York. At about the same time there was a great boom in the provision of passenger services.  Major airlines that emerged with the increase in the demand for passenger services included the Ford motor company in 1925.  With the crusade by Juan Trippe to launch a network that traversed the whole world, there came the Pan American world airline.  This is thought to have been the very first airline to operate at the international level in the 1940s. Up until the uprising of the Second World War, there emerged a number of large carriers that included the DC-3 and the Boeing 247 (Davies, 1964).

Historical Development of International Commercial Airlines

Other major developments in the industry emerged in Europe where the Netherlands KLM was already in operation since the 1919. At about the same time, France had managed to launch mail delivery services to Morocco. The airline was later bought and renamed in 1927. This came with the injection of more capital that transformed the airline to international status. This airline that now went by the name of the Aeropostale was declared bankrupt in 1933. This saw its merger with a number of other airlines which resulted in to the emergence of the Air France. On the September of the year 1923 the Aero charter in Finland was made in to the Helsinki.  This airline managed to launch its first services in 1924.  In Germany, airline services came in to existence in 1926. This was with the launch of the Lufthansa that was seen as a very big investor in the industry. At this time, airliners made in Germany by Junkers, Fokker and Dornier happened to be the most preferred in the whole world.  The airline industry in Germany is thought to have greatly picked up in the midst of the year 1930. This came with the approval of the Zeppelin commercial services by the Nazi ministers. In the United Kingdom, the Imperial airline which later became British Overseas Airways Corporation is thought to have emerged in 1939.This airline quickly managed to attain international recognition and plunged in to a number of destinations (Smith, 2002).

Major developments in the industry are seen to have emerged after the Second World War. This is a time when various countries and companies undertook to invest heavily in both the industry and the design of aircrafts. Major developments included the emergence of the Boeing 707 and the DC-8 in 1950. Yet another major development in the industry was the design of the Boeing 747 in 1970. This was accompanied by the development of the DC-10 alongside the Lockheed-1011 which launched the Jumbo jet that gained world wide acceptance. The launch of the airbus in 1972 was yet another great transformation of the industry. This is thought to have created the most advanced modes of carriers in the industry (Smith, 2002). The United States is thought to have greatly invested in the industry as at the start of the 1980. At the end of the 19^th century, several cost friendly airline services emerged .This came with the uprising of several smaller airline companies especially in the United States of America. These smaller companies are said to have greatly increased competition in the industry.

Types of Airlines and Their Operations

Airlines are categorized with regard to the type of services they provide. Ownership of the airline is yet another aspect that is bound to determine the category within which an airline lies. Studies indicate that it is only in the US where most of the airline companies are either run privately or as state parastatals.  In various countries around the globe, majority of the airlines are owned by the government.  The categorization of airlines in the industry is an aspect that is attributed to the varying demands and needs of the customer (Bonsor, 2008).  The type of destination covered is an aspect that will determine the category of the airline.  With reference to the United States of America where ownership of airlines is shared between private institutions and the government, the revenue generated by an airline determines its rank. Classification of airlines in the United States is therefore upheld by the federal government. Airlines in the United States of America therefore fall in three main ranks (Bonsor, 2008). These ranks include what are termed as major, regional and national airlines. It emerges that each of the airlines are limited to particular routes in line with their ranking.  The bigger the airline, the more destinations and routes it covers   (Doganis, 2002).

Major/ International Airlines

With regard to the United States major airlines are generally heavy weight carriers of the industry. Such airlines are termed as airlines that have the potential to generate revenue that can amount in to more than one billion dollars in a year. Major airlines have international status and are therefore also referred to as international airlines .At the onset of the year 2000, the US boosted of twelve such airlines. These twelve included Alaska, the American West and the American eagle among others. These major airlines are presumably the major employers in the industry. Major airlines operate on majority of the international routes and destinations (Doganis, 2002).

National Airlines

National airlines on the other hand are only a step lesser than the former.  Airlines in this category have scheduled services whose annual revenue collection ranges between a billion to one hundred million dollars (Doganis, 2002).  The operations of such airlines may cover domestic routes. However such airlines are also empowered to operate on certain long and international routes. Such airlines mostly own middle size carriers. A good example of a national airline in the United States of America is the Evergreen Airline. Such airlines do not provide lots of employment opportunities like the major airlines.

Regional Airlines

Regional airlines are airlines whose service provision is limited to particular regions.  Such regions within which regional airlines are empowered to operate happen to be overlooked by both national and major ranks of airlines. Owing to the fact that they are equally many regions that such airlines may cover, operations at this level are very competitive. Studies indicate that this is the fasted growing level in the airline industry.  Regional airlines are further classified in to large, medium and small regional airlines (Doganis, 2002).  Large regional airlines are the type whose service provision is scheduled to generate between twenty to one hundred million dollars in revenue for every year.  Such airlines have carriers that can accommodate sixty and more passengers.  Medium regional airlines on the other hand are airlines whose annual revenue collection is thought to be less than twenty million dollars. Such airlines use carriers of a relatively lesser carrying capacity. Small regional airlines are generally airlines whose revenue collection is not defined. Such airlines are at times referred to as commuter airlines. The carriers owned by such airlines are such that can accommodate less than sixty passengers (Doganis, 2002).

Routes Planning

This is a very critical aspect of the aviation industry. A complex is the term coined to represent the flow of passengers destined to various regions and the arrival and take of planes at the airport. The operations at any particular airport are limited by the number of entry points and the quantity of the fleet. This limits the number of planes that are bound to land and take off from an airport (Smith, 2002).  Owing to the demand of the services and the various connections to be covered in a day, it is important for a schedule analyst to predict the destinations to be connected for every complex within a day. This explains where majority of the complexes are presumably directional such that planes land from a single direction and take off from the opposite direction. With regard to DFW for instance, all the planes that are destined to land at 4.15and 4.45 in the evening should be coming from destinations west of this airport. Planes meant to leave at 5.15 and 5.45 in the evening are headed to locations east of the DFW airport. This points to the fact that is not worthy for planes to wind up in circles and later retrace to a single location.  There are however a number of cities in the world that have complexes from two directions .A number of factors are known to influence the nature of the complex. Such factors include the size of the complex and the number of entry points at a particular airport.

The number of both takes off and landing options awarded to an airline alongside the arrival and take off rates at any airport will also influence the nature of the complex. Efficient planning of the routes is meant to ensure that planes are allocated to the most ideal destinations to increase the efficiency of service provision. Such mechanisms make it possible to spread the planes to various destinations at any time of the day. Route planning is also geared at ensuring that planes are appropriately booked in for any maintenance before the next take off. Such planning makes it possible for planes to be allocated definite destinations with outlined set of both take off and arrival time.  This strategy makes it possible to have outlined time of flying between various destinations in an effort to ease air traffic (Smith, 2002).

Pricing Policies

Pricing in the airline industry is a very major aspect.  This is because the cost of air travel keeps changing over time.  It is possible for one to pay a very different cost for two travels within the same distance in a period as short a day. However the cost of air travel is now cheaper than it was the case in as early as in the 1978.  This explains why very many people are opting for air travel over other forms of transport. The pricing of air travel is calculated with respect to the amount to be paid for every mile of the travel. In as early as the 1978, the cost paid per every mile of travel was about 19 cents. This cost has tremendously reduced to about fourteen cents for every mile to be covered by the year 1997(McCabe, 2006).

A number of factors are said to affect the pricing of air travel. These factors include the date of purchasing the ticket, the destination, the date of travel and the time. The cost of fuel is yet another factor that greatly determines the pricing in the air line industry. With regard to the date of purchasing the ticket, it emerges that tickets bought earlier are relatively cheaper than tickets bought when the time of travel is almost due.  This aspect depends on the number of days allocated for a reservation by every airline.  The type of class is also an aspect that influences the pricing with regard to the time of purchasing the ticket. First class services are relatively more costly than other lower classes of travel.  With regard to the destination, the cost is measured with respect to the distance and the popularity of the place. This is in line with the emerging demand and supply related economics such that very popular destinations are highly traveled unlike less popular destinations (McCabe, 2006).

Pricing with regard to the date and time of travel is such that flights that are bound to take off early in the day are cheaper than those that take off at other times of the day. This aspect is also in line with the demand and supply economics in the sense that very people are bound to travel very early in the day.  The date and time of travel is equally influenced by the prevailing season in the year. This explains why the cost of air travel is relatively higher during the summer vacation.  The cost of fuel is relatively important in the pricing of air travel. This is because most airlines invest heavily in fuel expenses.   Data collected by the Air Transport Association in 2000 indicate that majority of the airlines spend close to 5.4 billion dollars on fuel.  The uprising in the cost of aeroplane fuel translates in to an increase in the cost of an air ticket. This is a strategy that enables the airlines to reap back benefits on fuel expenses (McCabe, 2006).

The pricing policy in every airline is also measured by the charges pledged by rival airlines at the same level of operation.  This is an aspect that is critically evaluated in every airline to ensure that the pricing is not any higher than that of rival airlines. Many big airlines that face stiff competition use special soft wares in tracking their rival’s pricing. Pricing is also influenced by the social status held by the travelers. Studies indicate that certain dignitaries and government agents are given special consideration. It also emerges that when the entry points at a particular airport are majorly controlled by a single airline, the pricing may be relatively high. This is because such an airline is bound to operate majority of the flights such that consumers will be forced in to paying heavily if they have to travel on any of such flights.

Analysis of the Global Aviation Market

Past and Current Trends

The airline industry operates in a very competitive market. It is established in several research studies that the recent past has seen the industry being greatly shaken by a number of challenges. There has been an alarming increase in the quest to intensify both local and international air travel services. The demand for a number of services in this industry is upgrading with the drop in the pricing. The ownership of the airlines in the past was held by the government. A number of countries still have the ownership of almost all their airlines held by their government as at now. It is only the United States of America where the ownership of entirely all the international airlines has been privatized (Zinnov, 2007). The nature of this industry makes it very sensitive to aspects of costs.  The pricing for instance is an aspect that has been greatly influenced by the cost of fuel both in the past and at present.  It also emerges that major airlines are facing a very stiff competition from the many upcoming small carriers at present. This is contrary to the ancient past that was entirely dominated by legacy carriers.  Majority of the low cost airlines happen to have a very big potential of expansion compared to their major counterparts (Doganis, 2001).

Studies indicate that the inability to raise adequate funds has forced a number of weak major airlines in to mergers. Such low cost carriers have posed a threat to the major airlines such that competition is now waged on different fronts. As at now, low cost airlines in the United States of America generate up to thirty percent of the entire gross domestic profit.  It emerges that on the same flight coverage, the costs incurred by low cost airlines are lesser than those incurred by majority of the large or major airlines. With reference to the costs implicated in labor, studies indicate that majority of the low cost airlines are incurring lesser pilot costs than their large or major counterparts (Doganis, 2001).  Majority of the major airlines that were at one point declared bankrupt are now struggling to address both revenue and cost related aspects as they look forward to reconstruct. Most of the airlines have greatly been boosted by the increase in the number of business activities in the globe.

Business oriented customers remain to be a major source of revenue to this industry at present.  This is evident in both the passenger and cargo carriage. The airline industry has equally been boosted by the advent of the tourism industry.

The past seven years of operation has seen the industry changing tremendously.  These changes have been indicated by the emergence of reduced fuel costs, improved productivity of up to sixty one percent, a reduction in the costs of both sales and distribution alongside a great improvement in the efficiency of fuel. Unlike the past that was marked by the use of paper tickets, the industry is now boosting of the use of electronic tickets to enhance its service provision. The travel programs currently offered are equally faster compared to what was the case in the past.  The baggage system has equally been improved as at now.  With regard to the environmental impact of the industry, there has been a tremendous improvement in the design of environmental friendly engines at present (Strahan, 2008).

The industry has also been marked by a very enormous increase in the connectivity of the entire world.   With regard to the air craft manufacturing sector, there has been a booming competition between rival makers Boeing and airbus.  At the moment air bus has concentrated on the design of giant carriers while Boeing is working on the design of lighter and efficient carriers.  The two manufactures can boost of the efficiency of the strategies put in place owing to the increase in the demand of their makes. Unlike in the past, it emerges that at the moment it is relatively hard for any airline to boost of being both a sound and break barrier. The emergence of more airlines has greatly reduced at the moment as most companies are out to seek for strategies that can effectively cut on costs by concentrating on the most profitable routes. More and more airlines are facing bankruptcy at the moment than in was in the past.

Challenges

The activities in the airline industry are marked by various challenges. The current economic crunch has not spared the industry.  The profitability of this industry is measured by a number of elements.  The major problem facing most airliners is the prediction of the capacity in line with the available demand.  This is an aspect that calls for the need to make prior evaluation at the time of ticket issuance (Kay, 2005).  This problem has forced a number of airlines to make guesses on the quantity of the product to come up with.  This is far much a problem to the airlines than it is to the designers of the carriers.  It emerges that with a move to plan for a large capacity, it becomes relatively difficult to accommodate the extra seating positions within the inventory. A number of airlines have lost a lot of money as a result of flying with fewer passengers on board.  This point to the fact that the implicated costs of fuel and labor are fixed irrespective of the quantity carried.  The load factor is thus a measure of possibly how well an airline is operating.  Coping with competition is yet another major challenge in the industry. It is evident that the market in the industry is very competitive (Kay, 2005).

With regard to the load factor, a number of airlines with a large carrying capacity are bound to lower their charges to attract more passengers. The high level of competition emerges as a result of the fact that they are several service providers in this industry.  This offers the customers a very high bargaining power as they can choose from any of the many available options. Most airlines have absolutely no control over the pricing except for those major airlines that have a powerful command in particular regions. Other than the stiff competition in the industry, it also emerges that security threats are yet another major challenges. Acts of terrorism for instance have seen a number of airlines losing large sums of profits and overall marketability. The British airline is one among the major airlines whose marketability has been greatly affected as a result of the September 11 attack.  Other challenges in the industry include the rising costs of fuel which translates in to an increase in the cost of travel (Strahan, 2008). Other than the cost of fuel, the appropriate labor needed for this industry is also very costly to fully cater for.  Some airlines are also facing a major challenge that emanates from poor infrastructural connectivity.  Such a challenge can only be solved in more emphasis were laid on the design of routes with more demand.

Possible Policy Options

With regard to the poor connectivity in a number of airlines, there is need for the policy makers in the industry to focus on the upgrading of routes that are frequently plied than those whose demand is relatively low. Security and safety standards are a matter that can be effectively managed if all the stake holders in the industry resolved to the implementation of the ICAO safety regulations. Such measures if ideally adopted will help in the formulation of strategies that can kill acts of terrorism. With regard to the stiff competition in the industry, adoption of the Porters five forces model of competition is a very ideal strategy. This is a frame work that analyses the economical impact of the nature of competition in a business set-up. The five forces implicated in this model illustrate the intensity of the competition in a market.  These forces basically revolve around the profitability of the business investment and the fact that the competition intensity is not a chance aspect. This implies that the implicated magnitude of competition in any business is not related to good or bad luck.

The impact of competition on the industry is very influential (Investopedia: A Forbes Digital Company, 2009).The model thus points to five forces  of competition that include; the entry of  rivals or competitors, the threat implicated by substitutes, the consumers bargaining power, the supplier’s bargaining power and the existing rivalry in among the players already established . Some airlines that have effectively adopted this model have a lot to boost of (Investopedia: A Forbes Digital Company, 2009).The Singapore airline is a good example of such an airline. This airline is thought to have effectively incorporated this model in each of its efforts to earn the competitive advantage. The adoption of this model by the airline has made it hard for rivals to enter the industry by incorporating the most expensive technology. In an effort to win both the buyers and suppliers bargaining power, the airline offers very quality services that make it hard for buyers to switch to alternative service providers. This is yet an aspect that enables the airline to effectively evade the threat of substitutes.   The survival of any airline in this competitive industry is bound to be measured by the degree to which the model has been adopted (Investopedia: A Forbes Digital Company, 2009).

Conclusion

The airline industry has shown a lot of transformation since its inception.  This has been marked by the emergence of various airlines that have in turn made the industry very competitive. The demand for the services offered by the industry is relatively high especially with the rate at which the world is being globalized.  The industry is thought to be a very influential instrument in the globalization process. However, like any other industry, the airline industry has also met a number of challenges. Most of these challenges have seen a number of airline companies being declared bankrupt.  The economic crunch has greatly affected the industry and majority of the airlines are now out to adopt strategies that will enhance their survival in the near future.

References

Bonsor, K. (2008). How Airlines Work. The Pallet by International Air Cargo Association of Chicago, 64, 1-4.

Davies, R. E. G. (1964). The History of the World’s Airlines. Oxford U.P.

Doganis, R. (2002). Flying Off Course: The Economics of International Airlines. 3^rd Edition New York: Routledge.

Doganis, R. (2001). The Airline Business in the 21^st Century. New York: Routledge.

Investopedia: A Forbes Digital Company. (2009). The Industry Handbook: the Airline Industry. Retrieved September 13, 2009, from <http://www.investopedia.com/features/industryhandbook/airline.asp>

Kay, J. (2005). Airlines and the canine features of unprofitable industries. Financial Times, September 27, 2005.

McCabe, R. M. (2006). Airline Industry Key Success Factors. Graziadio Business Report, 9(4).

Smith, M. J. (2002). The Airline Encyclopedia, 1909-2000. Scarecrow Press.

Strahan, D. (2008, August 13). Green Fuel for the Airline Industry? New Scientist, 2669, 34-37.

Zinnov, LLC. (2007, January). Global Aviation Markets – Analysis. Retrieved September 13, 2009, from http://www.zinnov.com/presentation/Global_Aviation-Markets-An_Ananlysis.pdf