Challenges Facing the Aviation Industry, Research Paper Example

Introduction

The turn of the century has not been favorable to the airline industry, considering the market trends that show that most leading carriers made losses in the last six years preceding the financial crisis of 2008. Aviation plays a vital role in transportation has it is still the most efficient form of transport ever invented by man.

The profitability of significant airlines has been declining over the years resulting into bankruptcies, government bailouts, layoffs, trimming of routes and even mergers. The main culprits of these impacts are the long haul carriers who operate long routes. The volatility of the airline industry has been an enormous worry to investors. This is mainly because of rising operating costs which result into shrinking profits. The challenges will mainly affect the cost of travel, fleet makeup, airport management, regional hubs and schedules. This paper will discuss the main challenges facing the aviation industry and the best solutions that can be applied to mitigate these challenges.

Rising cost of fuel

Perhaps this is the main challenge that the aviation industry is facing at the moment. The price of petroleum has been volatile in the recent past with prices fluctuating between $40 and $140 per barrel in the international market. The cost of fuel amounted to 15 percent of the operating cost of principal airlines in the past, but in 2009 alone, most airlines spent 21 to 27 percent of their total operating costs on fuel alone. When the price per barrel of oil stood at $145 in 2008, the cost of fuel amounted to 26 to 32 percent of operating cost, making it the leading operating cost in the majority of airlines (www.investorfinancials.com).

The cost of fuel went down to $30 in 2009, but it rose to stand at $80 in 2010. The recovery of the economy will lead to increase in travel which in turn will raise the cost of fuel. The impacts of the rising cost of fuel will have destructive impacts to most airlines (www.ustoday.com). Major airlines in the United States forfeited its equity during the rise of fuel price in 2008, and other repeat of this will deal a blow to the industry.

The main reason for the rising cost of fuel is political instability in the main petroleum producing countries. The net impact is reduced supply which does not meet the demand resulting in fuel shortage. Another reason for the rise is the loss of value of the dollar during the financial crisis. Since the dollar is main currency used in international trade, fluctuations in its value have detrimental effects.

High cost of fuel results in underutilization of aircrafts. If the cost of fuel remains high for longer periods of time, most airlines will be forced to ground most of their fleet. This was the case during the 2008 period of high fuel price. Fuel prices also affect the long term planning of airlines because it kills predictability. Airlines will not be able to hedge on low fuel price currently and use it in the future. Passengers are the victims of high fuel prices because the cost is passed onto them resulting into high ticket prices (Taneja 104).

Since the cost of fuel is a key component of aviation, solutions must be availed to ensure that the industry is well cushioned from its fluctuations. One of the solutions to this is by investing in fuel efficient aircraft. Some of the aircrafts that use less fuel and have a higher carrying capacity compared to the regional jet are the turboprops. The bombardier Q 400 falls into this category, and has a carrying capacity of 74 while a regional jet, which consumes the same amount of fuel, carries 50 passengers (Morrison & Winston 182). The only disadvantage of turboprops is that they may results in delays in flight time from 10 to 20 minutes, which may not bode well with business travelers. One airline that has utilized this strategy is the continental airlines, at its hub in Newark. The Boeing 737-700s is another model of aircraft that is efficient on fuel. This is one of the strategies used at Southwest Airlines. Another strategy is to invest in aircraft that use a combination of biofuels and petroleum. This will cushion airlines in times of short supply.

Another strategy is hedging on fuel. Although this is a short term strategy and requires clear anticipation, it can save airlines from the fluctuating and the unpredictable nature of oil prices. Hedging helps in lowering the risk of investment because incase of any outcome it will only cost the hedge alone (Morrison & Winston 70). The cost of fuel can also be reduced by flying larger, but at the same time lesser aircraft. The result of this strategy is that more passengers will be transported in limited aircraft. The disadvantage of this strategy is that it will negative affect the business class segment of the industry due to time schedules. The strategy has worked for low fare airlines like easyJet (Mayer 29).

Airlines can also resort to departing from unprofitable markets, and concentrating on those that are profitable. Smaller markets are victims during periods of sustained high fuel prices. The importance f this strategy is that unprofitable spending is eliminated hence reducing operation costs.

Lain America and East Asia are regions that are showing little signs of slowing in growth despite the global financial crisis. The European market remains unfavorable to invest in; therefore airlines can concentrate on these routes especially the long haul carriers to boost their profitability and growth. The business class segment of air travel has been the backbone of the profitability of leading airlines, but the financial crisis has led to the practice of austerity measures by leading businesses, and the main victim is the reduction in business class travel (Mayer 51). The economy class is becoming the favorites again as shown by the growth of low cost airlines like Ryanair. Other airlines can emulate this strategy and focus on economy class passengers as it presence an opportunity for growth in tough economic times.

Debts

Another major problem of the airline industry is the rising amount of debts. The impacts of the September eleven attacks and the rising oil prices to the economic meltdown are the causative factors. Most airlines have resorted to mortgaging their assets which include aircraft to raise capital (Doganis 103). The total debt of the ten leading airlines in the United States exceeds the combined debt of two thirds of the globe. Although airlines in the US have liquidity that can take them through a limited crisis, a prolonged one will be catastrophic for the industry, and can result to liquidation.

Rising amounts of debts increases the possibility of liquidation, but it can also prevent it in that most lenders will lose incase of such a move because the availability of many aircraft in the market for sale lowers their value. The most effective solution to this challenge is by converting their debts to equity, and financiers like banks, aircraft makers and industry players will become the new or part owners of airlines. The net outcomes of such moves are consolidations, reduction in aircraft, services and other assets in order to aid survival.

Raising capacity

Managing capacity is another significant challenge to the aviation industry. The rising cost of fuel and debt has forced major airlines to reduce their capacities, and such moves may remain in force for the next coming years. The lowering of capacities leads to the raising of ticket prices and delays for business class travelers.

Another victim of capacity reduction is the system of operating hubs. The cost of running a hub is higher, and most airlines are forced to increase traffic into a hub for it to raise its capacity. There are enough hubs in the US to the point where some are rendered not profitable (Ben-Yôs?f 132). An airline that has seen the importance of getting rid of hubs is US Airways, which closed its hub in Pittsburgh.

The most efficient way of lowering capacity is by consolidating airlines. The current economic environment increases the likelihood of mergers in the American airline industry. Some of the carriers that can be acquired include JetBlue and Alaska airlines. An airline that merges with the latter will benefit from its hub in Seattle which is centrally located to serve the pacific region (www.investorrelations.com).

Security

Security is vital to the running of a successful airline industry because this industry is susceptible to security threats. The security of the aviation industry extends to related infrastructure like airports and communication. The mention of security concerning aviation leads to memories of September eleven when terrorists hijacked four planes in the US and rammed them into the twin towers in New York City (Ben-Yôs?f 75). There have been other cases of hijackings and blowing up of planes in many parts of the world.

The responses of the industry to security attacks are detrimental to the industry as shown in the aftermath of September eleven attacks. Passenger volumes decline as most of them cancel their travel plans, due to fears of attacks while stocks of airlines plummet because investors become wary in investing in the industry. Lenders to the industry also respond by limiting their services due to the likely risks (www.ustoday.com).

After the attacks on the world trade center, the airline industry has been forced to spend an extra $5.6 billion on security every year to boost security measures. Passengers ultimately bear this cost because they are included in security charges and surcharges, or combined in the cost of a ticket (www.bx.businessweek.com).

According to the international air travel association (IATA), it is the responsibility of the government to offer security in airports, and at the same time foot the bill (www.ustoday.com). This argument is reasonable because it will ensure that security costs are distributed to everyone instead of placing the responsibility on passengers alone.

Security of airlines can be improved by harmonizing all security measures in international airports. Concerned governments must ensure collaboration in order to limit security breaches in airports. By making use of modern technology like biometric identification and x-ray scanners, the overall cost of providing security will come down. Potential threats will also be easily identified. Such measures will reduce congestion which is typical of many international airports as a security check ups will be efficient.

Pollution and climate change

Environmental pollution is another concern for the airline industry, as the debate on carbon emission and its role in climate change and global warming rages on. One country that has charged airlines for their contribution to climate change is the United Kingdom, which charges a “green tax” on all planes operating in its airports. The tax by the UK alone will result into an additional $ 2 billion yearly on the aviation industry, and there are concerns that other countries will follow suit (www.airfinancials.com)

One of the fears of the industry is that revenue from such taxes will not be utilized in efforts directed at environmental conservation. The most efficient measure that the industry can take is getting rid of old models of aircraft that consume more fuel and acquiring modern ones that increase fuel efficiency by more than 25 percent (Doganis 49) Other future solutions will be aircraft powered by solar energy and fuel cells.

Conclusion

The challenges facing the aviation industry all narrows down to increasing the cost of operation of the industry. By taking the appropriate measures to obliterate these challenges, the industry can return to full profitability, especially due to improvement in the world economy. Airlines can integrate advanced technology like information technology to improve efficiency, which will lower operating costs in the long run.

The industry is projected to grow by 50 percent in the coming four decades, meaning that related infrastructure must be expanded to accommodate this rising capacity. Governments must take the leading role in development of these crucial infrastructures considering the role that air transport plays in economic development and national security.

Works cited

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Ben-Yôs?f, Eld?d. The Evolution Of The US Airline Industry: Theory, Strategy And Policy. New York: Springer, 2005

Doganis, Rigas. The Airline Business. New York: vRoutledge, 2006. Print.

Mayer, Florian. A Case Study of EasyJet and the Airline Industry. London: GRIN Verlag, 2007. Print.

Morrison, Steven & Winston, Clifford. The Evolution of the Airline Industry. New York: Brookings Institution Press, 1995. Print.

Taneja, Nawal. The international airline industry: trends, issues, and challenges. Lexington: Lexington Books, 1988. Print.

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