Airline Industry Has Become Increasingly essay

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By the turn of the century, though, these low-costs carriers had become profitable or at least had significantly reduced their losses due in large part to concomitant increases by major carriers that were increasing their prices in response to decreasing yields and higher energy prices (Doganis 2001).

By and large, passenger traffic across the board increased significantly prior to September 11, 2001 and all signs indicated it was continue to increase for the foreseeable future. For example, according to Janda, Flouris and Oum (2005), global air passenger traffic increased from 1.573 trillion revenue-passenger-kilometers (RPK) in 1985 to 3.394 trillion in 2000, representing a 116% increase during this decade-and-a-half period, or an average annual compounded growth of 5.26%. Furthermore, between 1985 and 2000, air freight traffic grew at even faster rate than passenger traffic (Janda et al. 2005). These authors also emphasize airlines are directly affected by the larger economy in which they compete: "Since, in the long run," Janda and his colleagues note, "levels of per-capita income and GDP are the main factors determining air passenger and freight volumes, it is not surprising to see that the long-term growth outlook for the air transport industry is excellent. Even in North America, where the airline markets (especially the United States and Canada) are saturated, passenger traffic is forecast to grow on average 4.5 per cent per year in the next 20 years" (2005:73).

Lacking an economic crystal ball, these rosy estimates may be forgiven in view of the lingering global economic downturn, but the direct connection between macroeconomic factors and the airline industry is apparent. In this regard, Janda and his associates cite a number of more recent events that have hammered the airline industry following the demarcation date represented by September 11, 2001, including the following:

1. The dot-corn collapse and the subsequent slowdown of business travel;

2. The 9/11 terrorist attacks on the United States and the subsequent war on terrorism;

3. The Afghanistan and Iraq wars; and,

4. The SARS outbreak (2005:73).

The implications of these events, particularly during a period when the airline industry was already struggling to cope with the effects of 9/11 in general, were truly profound. While the terrorist attacks of September 11, 2001 were unique in terms of the magnitude of its overall impact on world events, the potential for the types of other events listed above are always threatening to disrupt the airline industry today. In terms of the overall effects of the above-listed events on the airline industry in general, Janda et al. write, "These key events that brought the world's airlines and the associated air transport industries to their knees. Together these events completely wiped out more than three years' worth of air traffic growth and produced a more than 15 per cent reduction in air passenger volumes globally in the short run" (2005:74). In fact, the aforementioned SARS outbreak was enough to tip the balance for some airlines that were already struggling. For example, Miller emphasizes that, "This global epidemic struck Toronto particularly hard -- right at the heart of Canada's economy and its principal aviation hub. Air Canada estimates that during the month of April it lost approximately $125 million due to the SARS epidemic" (2003:267).

The adverse effects of the SARS outbreak were not restricted to April 2003 alone. Just as the Canadian airline industry was recovering from this shockwave, another outbreak of the disease the following month caused similar havoc, resulting in another decline in passenger traffic of more than a quarter (26.4 per cent) and loss of more than $200 million (Miller 2003). At the time, the president of Air Canada President reported that the company's operating revenues for 2003 would be fully $1 billion less compared to 2002, a loss that was primarily attributed to the SARS outbreak alone (Miller 2003). According to this industry analyst, this was all the struggling giant could take: "This final blow was enough to tip the precarious balance for Air Canada and, in April, it filed for bankruptcy protection under the Companies Creditors' Arrangement Act" (Miller 2003:267). In its defense, Air Canada was faced with a dual whammy from the SARS/post-September 11, 2001 environment: "What made this Perfect Storm particularly devastating was its timing. It arrived at a time when consumers were turning their backs on the traditional network carriers and flocking to low-fare alternatives. And in Canada, it came at a time when government air transportation policy was in serious disrepair" (Miller 2003:267). Clearly, though, WestJet was competing in the same turbulent regulatory environment as Air Canada, suggesting that the former was reading the signs far better than the latter.

By 2004, though, leading industry experts at the International Air Transport Association projected that the airline industry in Canada would recover to its pre-September 11, 2001 levels by 2005 (Janda et al. 2005), a projection that would have been well received by managers at both WestJet and Air Canada. The projections by Costa, Harned and Lunquist (2002) in the immediate aftermath of the terrorist attacks, though, specifically cite the business model used by WestJet as representing the solution for the airline industry's ailments. According to these authorities, "In the 1980s, increased yields drove recovery in the airline business. This time around, given the high levels of excess capacity and projected weakness in business travel revenues, we do not believe that yields will come back as strongly as in previous downturns. Instead, any recovery will have to come from long-term, structural cost reductions" (Costa et al. 2002:89). These downward and largely more accurately projections were based on the unwieldy operational structure in place at major airlines such as Air Canada compared to the more flexible and responsible approach used by WestJet. In this regard, Costa et al. add that, "For major airlines using the high-coverage hub-and-spoke model, such reductions may be difficult to achieve, and these airlines may struggle beyond 2004. In contrast, competitors that utilize a lower-cost strategy -- such as WestJet in North America look well positioned to expand their operations and profitability" (2002:90).

Although more recent performance levels are discussed further in chapter four below, it is important to note at this juncture that the overarching implication for the airline industry in general and in North American in particular was to create the need for a new business model that could respond to this changing environment more efficiently. In this regard, Whitelegg emphasizes that, "The 11 September 2001 attacks on New York and Washington DC accelerated a restructuring of the airline industry, whose net losers have been large flag carriers and whose net winners - so far, at least - the low-cost carriers" (2005:125). Unfortunately, there were ample cases to support this industry analyst's assessment of the post-9/11 environment for the Canadian airline industry. For example, Whitelegg adds that the trends were readily apparent with regards to the changing demands for lower cost alternatives during this period. "Economic prosperity was polarized: as the largest airline in the world, United Airlines, entered bankruptcy," Whitelegg reports, he also notes that "low-cost JetBlue expanded"; likewise, "as the Belgian national carrier Sabena crashed, Ryanair aggressively redrew the aviation map of Europe" (2005:125).

Significantly, these trends were there for all to see, especially the analysts at Air Canada and WestJet which form the basis for this discussion. Given the fundamental differences in their performance in recent years, it is clear that WestJet recognized a growing demand and responded, but the case can be made that this demand began before the terrorist attacks of September 11, 2001 and the successful survivors were those that read these trends more accurately than those that did not. In this regard, Whitelegg also points out that, "Airline analysts and executives now point to the low-cost model as the path of the future, and a plethora of books on the topic highlights an interested market among both academic and popular readers. . . . In the process, they document the industry's development, providing context for a story that has been running for a good deal longer than the last ten years" (2005:125). Indeed, WestJet's low-cost business model is certainly not new, with early efforts to offer low-cost alternatives also being directly tied to prevailing macroeconomic conditions. According to Whitelegg, "Attempts to provide cheap air tickets date back to the Second World War. With new holiday entitlement, workers returning from the war brought with them a thirst for foreign travel" (2005:125). The charter approach to providing low-cost flying solutions for these and other would-be air travelers became the framework on which regional and national airlines would base much of their business models in the years to come. As Whitelegg concludes, "Over the next thirty years, charters became the inexpensive link between the tourist-generating markets of northern Europe and the Mediterranean sun. They were the original low-cost carriers" (2005:125).

WestJet, though, took this low-cost business model to heart and applied it in a consistent…[continue]

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