Airline Industry Over the Past

Airline Industry

Over the past decade the airline industry has experienced a great deal of turmoil as a result in decreases in the demand for flying. Over the past two years the condition of the airline industry has continued to deteriorate and as a result airline industry is now facing serious issues that will be difficult to overcome. The purpose of this discussion is to discuss the fundamental changes are necessary in the industry to prevent wide-scale disintegration of companies in the airline industry and destruction of shareholder value, loss of community air services and other catastrophic effects. The research will draw from information provided by the industry's international regulatory and representative bodies such as International Civil Aviation Organization (ICAO), International Air Transport Association IATA, Federal Aviation Administration (FAA) and JAA. The investigation will also explore the manner in which these agencies dictate or fail to dictate the manner in which the airline industry functions. A PESTE analysis will also be conducted. The discourse will also provide a strategy, a financial analysis for overcoming the problems that are present in the airline industry.

Background

According to Borenstein & Rose (2007) during most of the history of passenger air service, the airline industry was shaped by government policy and not market forces. The authors further explain that government regulations of the airline industry developed following World War I because governments throughout the world began to understand the military benefits associated with a successful domestic aviation division. Additionally during the beginning of the industry's existence the interest in the area of aviation was greater than the financial capacity of the deteriorating airlines. In addition the economic depression of 1930s caused governments all over the world to become even more active in intervening in the functioning of the airline industry. During the early days of the airline industry the barriers to entry were actually quite low and there were many government subsidies which both encourage many small providers to enter the industry.

Eventually pressure mounted to encourage the creation of strong national carriers in the United States. This effort was propelled through the heavy regulation of the small carriers and through substantial subsidies to the large national carriers. Additionally in the United States the Post Office actually has some control over the industry because it had the ability to control airmail contract awards which led to the economic regulation of both entry and price through an independent regulatory agency in 1938. There was, however, a continuation of indirect and direct subsidies via airmail rates were still an aspect of the regulation. In addition the authors explain that

"International service was governed by tightly controlled bilateral agreements, which specified the cities that could be served and which carriers were authorized to provide service, typically a single carrier from each country. In many cases, these agreements negotiated market allocations across carriers that were enforced through capacity restrictions or revenue division agreements. Prices generally were established jointly by the airlines themselves, under the auspices of the International Air Transport Association (IATA), subject to approval by each carrier's government (Borenstein & Rose (2007)."

As it pertains to the market based aviation industry that is present today, the research indicates that this transition to the market based industry took place in the United States in the middle part of the 1970s (Borenstein & Rose 2007). The 1978 creation of the Airline Deregulation Act forever changed the U.S. airline industry (Borenstein & Rose 2007). The main purpose of this act was to eliminate price and entry regulation domestic airline industry.

This act also provided for ultimate closure of its regulatory agency, the Civil Aeronautics Board (CAB) (Borenstein & Rose 2007). Additionally there were ensuing privatization efforts that reassigned many carriers from state-owned enterprises to the private sector (Borenstein & Rose 2007). However, the U.S. And many other nations still claim a national interest in domestic ownership of airlines operating within their borders (Borenstein & Rose 2007). The article further asserts that "While there has been relaxation of regulation in some international markets, restrictive bilateral agreements continue to limit competition in most markets and most nations continue to limit foreign ownership of domestic airlines. The notable exceptions are within the European Union (EU), where formal restraints on commercial aviation have been liberalized considerably over the past 15 years with the creation of an open intra-EU aviation market, and a limited number of "open skies" agreements.3 Apart from the EU market, however, carriers continue to be prohibited from competing for passengers on flights entirely within another country (so-called "cabotage" rights) (Borenstein & Rose 2007)."

Regulatory Agencies and Governing Bodies

International Civil Aviation Organization (ICAO) is a specialized agency of the United Nations. This body serves as the international forum on civil aviation. The purpose of the ICAO is to promote safety, security and sustainable development of civil aviation by collaborating with member States including the United States ("Strategic Objectives of ICAO"). To this end the ICAO has the six following strategic objectives

1. Safety - improve civil aviation safety throughout the world

2. Security - improve civil aviation security throughout the world

3. Environmental Protection - decrease the negative impact of international civil aviation on the environment

4. Efficiency - Increase the effectiveness of aviation operations

5. Continuity - preserve the stability of aviation procedures throughout the world

6. Rule of Law -- fortify the laws that influence international civil aviation ("Strategic Objectives of ICAO")

International Air Transport Association (IATA)

Like the ICAO, IATA is also an international organization. The IATA is actually an international trade body established more than 60 years ago by a group of airline carriers ("Mission"). The association has been responsible for the development of the commercial standards upon which the global airline industry operates. Currently the IATAs mission is to represent, lead and serve the global airline industry ("Mission"). There are 230 airlines that are part of IATA. In fact IATA represents 93% of scheduled global air traffic ("Mission").

As it relates to representation IATA works to enhance the relationship in the industry among decision makers ("Mission"). The association also desires to increase awareness of the advantages that aviation produces for both the global and national economies ("Mission"). The IATA is also designed to fight for companies in the airline industry throughout the world. The IATA is known for questioning rules and charges that seem irrational, providing accountability for regulators and governments, and encouraging reasonable regulation ("Mission"). As it relates to leadership association reports that

"IATAs aim is to help airlines help themselves by simplifying processes and increasing passenger convenience while reducing costs and improving efficiency. The groundbreaking simplifying the Business initiative is crucial in this area. Moreover, safety is IATAs number one priority, and IATAs goal is to continually improve safety standards, notably through IATAs Operational Safety Audit (IOSA). Another main concern is to minimize the impact of air transport on environment ("Mission")."

Lastly, as it pertains to service that IATA makes a concerted effort to guarantee that both people and goods can be transported throughout the world through the international airline network ("Mission"). The IATA is also responsible for providing the professional support to various stakeholders through a broad range of products and services including publications, training and consulting ("Mission"). IATAs financial systems also assist airline companies increase revenues ("Mission"). There are several benefits associated with being an IATA member. These benefits are as follows:

For consumers, The IATA is responsible for making easier travel and shipping processes for consumer and keeping costs low ("Mission").

The association permits airlines to function safely, strongly, proficiently and economically governed by the necessary rules ("Mission").

IATA serves as a mediator between airlines and passengers. The association also as well as cargo agents via neutrally applied agency service standards and centralized financial systems ("Mission").

A significant network of industry suppliers and service providers developed by IATA supplies know-how to airlines in the form of many different industry solutions ("Mission").

IATA works to ensure that International governments, are made aware of the complication associated with the aviation industry to guarantee better, long-term decision-making ("Mission").

Federal Aviation Administration (FAA)

The Federal Aviation Administration is a branch of the United States Department of Transportation. The FAA is responsible for enforcing laws that have been enacted through governmental regulations. The primary mission of the administration is to supply the safest, most efficient aerospace system in the world. The FAA also endeavors to reach the next degrees of safety, efficiency, environmental responsibility and international leadership ("FAA Mission). The FAA is also accountable to the American public and stakeholders ("FAA Mission). The FAA is based on the following values

"Safety is our passion. We work so all air and space travelers arrive safely at their destinations. Excellence is our promise. We seek results that embody professionalism, transparency and accountability. Integrity is our touchstone. We perform our duties honestly, with moral soundness, and with the highest level of ethics. People are our strength. Our success depends on the respect, diversity, collaboration, and commitment of our workforce. Innovation is our signature. We foster creativity and vision to provide solutions beyond today's boundaries ("FAA Mission)."

JAA

The Joint Aviation Authorities (JAA) was developed in the 1970s by a handful of major European National Aviation Authorities when they began to join activities. The JAA was established for the purposes of developing a platform for a cooperative safety regulatory system because they desired to have a uniform high standard of aviation safety. Simultaneously, the JAA effectively became the European counterpart of the U.S. FAA ("Background").

In the time after the JAA was created the organization began to collaborate with the FAA to harmonizing rules and regulations where possible. In addition the JAA also signed Bilateral Agreements with other Aviation Authorities, including Transport Canada. In 1991 JAA established their headquarters in Hoofddorp, the Netherlands ("Background"). In addition it was during this time that more European National Aviation Authorities (NAA) became JAA Member States. Nevertheless, the rules and regulations JAA suggested for adoption were not mandatory and each JAA-NAA still had the right to maintain their national legislation if they wanted to do so ("Background"). In addition as it pertained to JAA

"A new framework for aviation safety in Europe, created by the adoption of EC Regulation 1592/2002 (Basic Regulation) of 15 July 2002 on common rules in the field of civil aviation, led to the establishment of the European Aviation Safety Agency (EASA), whose adopted rules and regulations are mandatory for each Member State. As a consequence, as of autumn 2003 JAA's rulemaking activities were gradually transferred to EASA, while the upcoming close-down of the former JAA-system was processed by means of a transition phase ("Background")."

Eventually the developement of the revised EC Regulation 1592/2002 in March of 2008, EASA seized control of all responsibilities once governed by JAA.

An ECAC Directors General meeting in 2008, determined that the JAA Liaison Office in Cologne would be broken up by June of 2009. However the JAA Training Organisation would persist "in the legal form of a Dutch Foundation and as an associate body of ECAC ("Background")."

PESTE analysis

Political

From a political point-of-view, the condition and domestic carriers has been an issue of concern. This concern has to do with the influence that the airline industry has as it relates to the economy in addition to the manner in which passengers are treated when on domestic flights. As it pertains to the former, regulation and deregulation have been the primary tools used by politicians to attempt to control the industry and ultimately the economic influence of the airline industry.

Environmental

At the current time the state of the environment is of utmost concern for many different industries. For the airline industry, environmental concerns are currently at the forefront of a great deal discussion concerning the manner in which the airlines operate. One of the most prominent issues is the subject of flying greener. According to an article entitled "A U.S./EU Dogfight Over Greener Air Travel" Many U.S. Air carriers have been reluctant to implement the new emissions rules established by the EU. However, the article points out that such reluctance seems to be ill-advised as the new emissions standards are not as intense as those of other industries. The article further explains that this new emissions standard is the initial step in the development of more strenuous European cap and trade laws (Aston, 2009). The laws require airlines to either decrease the amount of greenhouse gases it emits or pay for permits to emit these gases beginning in 2012 (Aston, 2009). U.S. airlines are apprehensive about adapting these new standards because they are already in a difficult position as a result of a decrease in demand for travel and fluctuating fuel prices (Aston, 2009). The article further explains that

"The Air Transport Assn. (ATA), which represents U.S. carriers, says the plan violates international law, and that the U.S. government is obliged to object. If the EU proceeds on its course, it faces a thicket of lawsuits, predicts Nancy Young, ATA's vice-president for environmental affairs. "We adamantly oppose their scheme," she says -- adding that having to purchase credits will stifle funding for the very innovations airlines must develop to cut emissions (Aston, 2009)."

The idea of having to pay for emissions is referred to as carbon costs. The article explains that it is unclear as to whether or not such carbon costs will increase the costs of airline tickets (Aston, 2009). However there have been aviation studies which have asserted that the yearly expense associated with American carriers landing in Europe could increase by a billion dollars each year (Aston, 2009). However, other analysts assert that this estimate is not correct and assert that the average price increase associated with a cross-Atlantic round-trip ticket at $6 to $56 by 2020 (Aston, 2009). The actual costs will be dependent upon the cost of carbon permits. As such these analysts have explained that these costs increases are consistent with what travelers are used to paying (Aston, 2009).

Additionally some environmentalists have argued that compared to other industries such as the automobile industry, are much more stringent than the airline industry as it pertains to carbon policies and efficiency targets (Aston, 2009). Environmentalists also assert that airlines have enjoyed a special status since the enactment of the Kyoto accord (Aston, 2009). This was the case because the accord failed to establish reduction targets for airlines or marine shippers, in spite of the fact that both industries were asked to develop their own strategies to reduce admissions (Aston, 2009). At the time of the accord plane flights only composed 2% of all the industrial emissions (Aston, 2009). The article also explains that

"U.S. carriers have boosted their fuel efficiency by 31% since 1990 and have promised an equal gain by 2035. Airplane and engine builders, from Boeing and Airbus to General Electric and Rolls-Royce, are researching lightweight materials and plant-based jet fuel. Airlines are seeking streamlined flight paths to avoid wasting fuel. Still, because air traffic is growing so fast globally, the sector's emissions are on track to more than double by 2035…U.S. carriers, which consume 35% of the world's jet fuel, may not be able to opt out of carbon limits much longer (Aston, 2009).

Social

From a social perspective the airline industry continues to be a an important part of society and people still utilize air transport as the most favorable ways to ravel. / However many consumers have grown weary of certain restrictions and charges that have been levied against them as a result of airlines attempting to cut costs and improve profits. These restrictions and charges include fees associated with check on baggage. These fees did not exist in the past and many consumers believe that they are being charged excessively. Chen & Mahmassani (2009) explain further that these fees have unintended consequences associated with increased boarding times and even safety. The authors explain

"From a passenger service perspective, these fees may produce unintended impacts for airlines due to shifts in passenger luggage check-in preferences. Some passengers with a low tolerance for additional trip costs may respond to fees by bringing more carry-on luggage onto an already tight-spaced plane, stuffing more into overhead bins. Other passengers may simply pack more items into fewer pieces of luggage. From a security standpoint, the higher volume of carry-on luggage may stress passenger screening systems in airports. Additionally, the higher volume of carry-on luggage may also have adverse effects on overall boarding times, due to more items that need to fit in overhead bins. Thus, passengers' sensitivity to checked baggage fees may lead to significant shifts from check-in to carry-on, causing unwanted delays in boarding and consequently turnaround times of aircrafts (Chen & Mahmassani (2009).

Society has also been fed up by the general treatment that many airlines show to customers. For instance there have been several instances in which airlines have left passengers sitting on the tarmac on hot planes with no food and overflowing toilets. Many passengers feel that the costs associated with flying should be enough incentive for airline companies to make sure that their customers are comfortable and not trapped on airplanes for hours.

Technological elements

Technology is constantly growing and changing and in many ways technology can serve as a way to alter the ways in which the airline industry operates. In the past and at the current time technology has forever changed the manner in which people purchase tickets and the types of tickets that they purchase. For instance, people have a choice as to whether or not they want and electronic ticket or a paper ticket. In addition airports have also exploited the use of technology, with such conveniences as electronic check in.

In addition to the creation of computerized systems for revenue management is a real example of the successful incorporation of IT and operations research in the airline industry. Revenue management (RM) systems are important because they are essential to determining the price at which airline tickets can be sold based on inventory. RM is also responsible for determining how inventory is displayed in various distribution channels.

The author further explains that the database requirements of advanced revenue management systems can even surpass the scheduling optimization technology that has been characterized (Belobaba et al., 2009). In addition even though a scheduling optimization problem is normally associated with demand and operational limits over an extended schedule period, network revenue management systems have to determine demand based on passenger itinerary and fare type as it pertains to each future departure date (Belobaba et al., 2009). Additionally are requirements associated with the database can be substantial (Belobaba et al., 2009). For instance a large network carrier with an O-D control RM system can be responsible for determining demands for hundreds of thousands of itinerary -- fare combinations involving thousands flights each day (Belobaba et al., 2009). The authors further explain that

"Fortunately, the network RM optimization problem can be solved separately for the airline's network (or sub-networks) for each departure date, under the assumption that the demand forecasts on different future dates are independent. Moreover, the network RM problem can be modeled as a "transportation problem" that is very tractable in mathematical terms. Relatively frequent reoptimization of RM booking limits and bid prices over an entire network of flights for a future departure date has therefore become a reality with improvements in computational speeds. These developments have occurred only in the recent past, as even in 1999 a large U.S. network airline reported that it could only perform a complete network optimization for RM purposes on the most advanced mainframe computer available at the time, once every seven days for any given future departure date (Belobaba et al., 2009)."

Future outlook

The future outlook of the airline industry is uncertain due to the current economic environment. In America and throughout the world governments are struggling to regulate the economy. Their efforts have spilled over to assisting certain industries including the automobile industry. It is unclear as to whether or the American government will intervene on behalf of the airline industry in the same manner it intervened in the automobile industry.

Additionally the current economic climate is likely to have an adverse impact on the airline industry well into the future. According to an article published the after the annual meeting of the International Air Transport Association the unexplained crash of an Airbus A330-200, the financial crisis and volatile oil prices have all taken their toll on the industry. In addition the "Demand for air travel could decline further despite signs of a more stable global economy." (Chatterjee and Webb 2009)

Strategy/Thesis

It is imperative that in the future the airline industry adopt a business strategy that is more consistent with meeting all the needs of their passengers. Under the current strategies for most of the airlines, there seems to be a disconnect between the airlines need to be profitable and the needs of customers. That is, many airline companies are so concerned with their bottom line that they are not treating passengers with respect and ignoring the fact that many of their passengers are having financial problems of their own. The failure of the airlines to make this connection will prove detrimental in the future if it is not remedied.

With this understood, a new strategy must unfold and there are a total of five issues that must be addressed in such a strategy. These five issues are as follows:

1. Safety- Safety must always be the utmost priority for airlines. The airline industry has long been known to conduct cost-benefit -- analyses as a way to determine whether or not certain "known" safety issues would be addressed. This type of mentality has to end and the airlines must end this game of putting certain monetary values on human life. The most pressing issue that needs to be addressed as it pertains to airlines is that of air traffic control and runway space. Currently there is a significant number of air traffic controllers who are retiring and there are very few controllers that are available to take the place of the retirees. As such there is a crisis brewing in the industry that must be confronted as an aspect of any business strategy. One of the ways in which this shortage may be confronted is through recruitment by the airlines. Such recruitment would be designed to encourage students to become controllers. Recruitment programs would provide financial assistance to individuals who decided to become air traffic controllers. They would also be offered incentives such as bonuses when they begin to work.

2. The Environment- it is vitally important that U.S. carriers get on board with other carriers from around the world to meet the emissions standards that were discussed earlier in the discourse. These standards are designed to ensure that as little harm as possible is done to the environment as a result of air transport. In addition marketing flying greener is good for the overall image of airline carriers. Customers want to know that the industry is making a concerted effort to decrease the amount of greenhouse emissions and decrease the amount of damage being done to the environment.

For the most part the emissions standards that U. S airlines are being asked to adopt are not that substantial. In addition, eventually the airlines are going have to adhere to lower emissions standards because the environment will not continue to be able to withstand such pollution. As such the proposed strategy must encourage compliance with environmental standards.

3. Customer Satisfaction- somewhere along the way many airlines have lost the ability to view their passengers as customers. In doing so they have increased prices and fees to levels that are ridiculous and impede upon the ability of the airline to fully realize their profit potential. Although some airlines such as Southwestern, have a good reputation as it pertains to customer service, there are other airlines that are infamous for having terrible customer service. Customer service is essential because some customers will actually pay more for a good or service if they know they are going to receive good treatment.

A. Lower rates for families-during these difficult economic times it is imperative that carriers reduce fares for families. Such a change may happen in different ways. For instance, some carriers may choose to lower the price for children under a certain age or increase the age for which parents have to buy a seat for children. These issues may seem insignificant for some but many families opt not to fly or don't fly as often as they would because of the high costs of tickets.

B. End to baggage fees-one of the most significant complaints that have arisen in recent years is excessive baggage fees. Customers often view such expenses as a nusance and an expense that few can really afford. In addition the research seems to suggest that excessive baggage fees, tend to delay boarding time and increase security risks. With these things understood the airline industry must take into consideration the real costs associated with these fees and rethink their use in the industry.