Monday, March 23, 2009
Wednesday, February 4, 2009
The Airline Industry
Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries.
In the past decade, air travel has grown by 7% per year. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried 1.5 billion passengers last year. In the leisure market, the availability of large aircraft such as the Boeing 747 made it convenient and affordable for people to travel further to new and exotic destinations. Governments in developing countries realized the benefits of tourism to their national economies and spurred the development of resorts and infrastructure to lure tourists from the prosperous countries in Western Europe and North America. As the economies of developing countries grow, their own citizens are already becoming the new international tourists of the future.
Business travel has also grown as companies become increasingly international in terms of their investments, their supply and production chains and their customers. The rapid growth of world trade in goods and services and international direct investment have also contributed to growth in business travel.
Worldwide, IATA, International Air Transport Association, forecasts international air travel to grow by an average 6.6% a year to the end of the decade and over 5% a year from 2000 to 2010. These rates are similar to those of the past ten years. In Europe and North America, where the air travel market is already highly developed, slower growth of 4%-6% is expected. The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with rising domestic prosperity. Air travel for the region has been rising by up to 9% a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997 and 1998 will put the brakes on growth for a year or two. In terms of total passenger trips, however, the main air travel markets of the future will continue to be in and between Europe, North America and Asia.
Airlines' profitability is closely tied to economic growth and trade. During the first half of the 1990s, the industry suffered not only from world recession but travel was further depressed by the Gulf War. In 1991 the number of international passengers dropped for the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft in the boom years of the late 1980s, leading to significant excess capacity in the market. IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990 to 1994.
Since then, airlines have had to recognize the need for radical change to ensure their survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity growth and to increase load factors. At a time of renewed economic growth, such actions have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in 1996, less than 2% of total revenues. This is below the level IATA believes is necessary for airlines to reduce their debt, build reserves and sustain investment levels. In addition, many airlines remain unprofitable.
To meet the requirements of their increasingly discerning customers, some airlines are having to invest heavily in the quality of service that they offer, both on the ground and in the air. Ticketless travel, new interactive entertainment systems, and more comfortable seating are just some of the product enhancements being introduced to attract and retain customers.
A number of factors are forcing airlines to become more efficient. In Europe, the European Union (EU) has ruled that governments should not be allowed to subsidize their loss-making airlines. Elsewhere too, governments' concerns over their own finances and a recognition of the benefits of privatization have led to a gradual transfer of ownership of airlines from the state to the private sector. In order to appeal to prospective shareholders, the airlines are having to become more efficient and competitive.
Deregulation is also stimulating competition, such as that from small, low-cost carriers. The US led the way in 1978 and Europe is following suit. The EU's final stage of deregulation took effect in April 1997, allowing an airline from one member state to fly passengers within another member's domestic market. Beyond Europe too, 'open skies' agreements are beginning to dismantle some of the regulations governing which carriers can fly on certain routes. Nevertheless, the aviation industry is characterized by strong nationalist sentiments towards domestic 'flag carriers'. In many parts of the world, airlines will therefore continue to face limitations on where they can fly and restrictions on their ownership of foreign carriers.
Despite this, the airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers.
The outlook for the air travel industry is one of strong growth. Forecasts suggest that the number of passengers will double by 2010. For airlines, the future will hold many challenges. Successful airlines will be those that continue to tackle their costs and improve their products, thereby securing a strong presence in the key world aviation markets.
NORTH AMERICAN INDUSTRY OVERVIEW
The commercial aviation industry in the United States has grown dramatically since the end of World War II. In 1945 the major airlines flew 3.3 billion revenue passenger miles (RPMs). By the mid 1970s, when deregulation was beginning to develop, the major carriers flew 130 billion RPMs. By 1988, after a decade of deregulation, the number of domestic RPMs had reached 330 billion (Source: Winds of Change).
The United States is the largest single market in the world, accounting for 33 per cent of scheduled RPMs (41 per cent of total scheduled passengers) in 1996. The most significant change in the history of the industry came in 1976 when the Civil Aeronautics Board (CAB) asked Congress to dismantle the economic regulatory system and allow the airlines to operate under market forces. This changed the face of commercial aviation in the United States. Congress passed the Airline Deregulation Act in 1978, easing the entry of new companies into the business and giving them freedom to set their own fares and fly whatever domestic routes they chose.
Deregulation of the industry was followed quickly by new entrants, lower fares and the opening of new routes and services to scores of cities. The growth in air traffic brought on by deregulation's first two years ended in 1981 when the country's professional air traffic controllers went on strike. Traffic surged again after 1981, adding 20 million new passengers a year in the post strike period, reaching a record 466 million passengers in 1990.
In 1989 events began which severely damaged the economic foundations of the industry. The Gulf crisis and economic recession caused the airlines to lose billions of dollars. The industry experienced the first drop in passenger numbers in a decade, and by the end of the three-year period 1989-1992 had lost about US$10 billion - more than had been made since its inception. Great airline names like Pan American and Eastern disappeared, while others, such as TWA and Continental Airlines, sought shelter from bankruptcy by going into Chapter 11.
Today the domestic industry in the US is a low cost, low fare environment. Most of the major airlines have undergone cost restructuring, with United Airlines obtaining employee concessions in exchange for equity ownership. Some airlines sought the protection of Chapter 11 bankruptcy to restructure and reduce costs and then emerged as strong low-cost competitors. The majority have entered into cross-border alliances to improve profitability through synergy benefits.
In 1993 President Clinton appointed the National Commission to ensure a strong competitive industry. Its recommendations seek to establish aviation as an efficient, technologically superior industry with financial strength and access to global markets.
Another key recommendation by the Commission was that foreign airlines should be allowed to invest up to 49 per cent of the equity in US airlines and in return, obtain up to 49 per cent of the voting rights. Current US law allows foreign investment up to 49 per cent of the equity with voting rights of up to 25 per cent. An amendment to existing law requires an Act of Congress.
Autumn 1996 saw the UK and US Governments hold bilateral talks with the intention of negotiating an 'Open Skies' arrangement between the two countries. The result of these talks is eagerly awaited by airlines on both sides of the Atlantic.
The last few years have seen the proliferation of airline alliances as the so called 'global carriers' of the future are created. North American carriers have been very much at the forefront of this activity, and today much of the world aviation market is shared between several large global alliances, including KLM/NorthWest, Atlantic Excellence alliance, STAR, and the British Airways / American Airlines alliance which also includes Canadian Airlines and Qantas. The latter still awaits regulatory approval on both sides of the Atlantic.
Airline Industry Economic considerations
Historically, air travel has survived largely through state support, whether in the form of equity or subsidies. The airline industry as a whole has made a cumulative loss during its 120-year history, once the costs include subsidies for aircraft development and airport construction.
One argument is that positive externalities, such as higher growth due to global mobility, outweigh the microeconomic losses and justify continuing government intervention. A historically high level of government intervention in the airline industry can be seen as part of a wider political consensus on strategic forms of transport, such as highways and railways, both of which receive public funding in most parts of the world. Profitability is likely to improve in the future as privatization continues and more competitive low-cost carriers proliferate.
Although many countries continue to operate state-owned or parastatal airlines, many large airlines today are privately owned and are therefore governed by microeconomic principles in order to maximize shareholder profit.
Ticket revenue
Airlines assign prices to their services in an attempt to maximize profitability. The pricing of airline tickets has become increasingly complicated over the years and is now largely determined by computerized yield management systems.
Because of the complications in scheduling flights and maintaining profitability, airlines have many loopholes that can be used by the knowledgeable traveler. Many of these airfare secrets are becoming more and more known to the general public, so airlines are forced to make constant adjustments.
Most airlines use differentiated pricing, a form of price discrimination, in order to sell air services at varying prices simultaneously to different segments. Factors influencing the price include the days remaining until departure, the booked load factor, the forecast of total demand by price point, competitive pricing in force, and variations by day of week of departure and by time of day. Carriers often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a number of travel classes for pricing purposes.
A complicating factor is that of origin-destination control ("O&D control"). Someone purchasing a ticket from Melbourne to Sydney (as an example) for AU$200 is competing with someone else who wants to fly Melbourne to Los Angeles through Sydney on the same flight, and who is willing to pay AU$1400. Should the airline prefer the $1400 passenger, or the $200 passenger plus a possible Sydney-Los Angeles passenger willing to pay $1300? Airlines have to make hundreds of thousands of similar pricing decisions daily.
The advent of advanced computerized reservations systems in the late 1970s, most notably Sabre, allowed airlines to easily perform cost-benefit analyses on different pricing structures, leading to almost perfect price discrimination in some cases (that is, filling each seat on an aircraft at the highest price that can be charged without driving the consumer elsewhere).
The intense nature of airfare pricing has led to the term "fare war" to describe efforts by airlines to undercut other airlines on competitive routes. Through computers, new airfares can be published quickly and efficiently to the airlines' sales channels. For this purpose the airlines use the Airline Tariff Publishing Company (ATPCO), who distribute latest fares for more than 500 airlines to Computer Reservation Systems across the world.
The extent of these pricing phenomena is strongest in "legacy" carriers. In contrast, low fare carriers usually offer preannounced and simplified price structure, and sometimes quote prices for each leg of a trip separately.
Computers also allow airlines to predict, with some accuracy, how many passengers will actually fly after making a reservation to fly. This allows airlines to overbook their flights enough to fill the aircraft while accounting for "no-shows," but not enough (in most cases) to force paying passengers off the aircraft for lack of seats. Since an average of ⅓ of all seats are flown empty, stimulative pricing for low demand flights coupled with overbooking on high demand flights can help reduce this figure.
Asian Airline Industry
Some of the first countries in Asia to embrace air transport were India, Hong Kong, Indonesia, Malaysia , Pakistan and the Philippines.
One of the first countries in Asia to embrace air transport was the Philippines. Philippine Airlines was founded on February 26, 1941, making it Asia's oldest carrier and the oldest operating under its current name. The airline was started by a group of businessmen led by Andres Soriano, hailed as one of the Philippines' leading industrialists at the time. The airline’s first flight was made on March 15, 1941 with a single Beech Model 18 NPC-54 aircraft, which started its daily services between Manila (from Nielson Field) and Baguio, later to expand with larger aircraft such as the DC-3 and Vickers Viscount. Notably Philippine Airlines leased Japan Airlines their first aircraft, a DC-3 named "Kinsei". On July 31, 1946, a chartered Philippine Airlines DC-4 ferried 40 American servicemen to Oakland,California from Nielson Airport in Makati City with stops in Guam, Wake Island, Johnston Atoll and Honolulu, Hawaii, making PAL the first Asian airline to cross the Pacific Ocean. A regular service between Manila and San Francisco was started in December. It was during this year that the airline was designated as the Philippines flag carrier.
Pakistan International Airlines Boeing 747-300. The Government of Pakistan is the majority stake-holder in Pakistan International Airlines.
Another airline company to begin early operations was Air India, which had its beginning as Tata Airlines in 1932, a division of Tata Sons Ltd. (now Tata Group) by India's leading industrialist JRD Tata. On October 15, 1932, J. R. D. Tata himself flew a single engined De Havilland Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi to Bombay via Ahmedabad. The aircraft continued to Madras via Bellary piloted by Royal Air Force pilot Nevill Vincent.
With the outbreak of World War Two, the airline presence in Asia came to a relative halt, with many new flag carriers donating their aircraft for military aid and other uses.
Following the end of World War II, regular commercial service was restored in India and Tata Airlines became a public limited company on July 29, 1946 under the name Air India. After the Independence of India, 49% of the airline was acquired by the Government of India. In return, the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International.
Neighboring countries also soon embraced air transport, notably with the beginning of a new nation, Pakistan began Orient Airways Ltd (Pakistan International Airlines), Cathay Pacific founded in 1946, Singapore Airlines and Malaysian Airlines in 1947 (as Malayan Airways), Garuda Indonesia in 1949, Japan Airlines in 1951, and Korean Air in 1962.
European Airline Industry
The Imperial Airways Empire Terminal, Victoria, London. Trains ran from here to flying boats in Southampton, and to Croydon Airport.
The first countries in Europe to embrace air transport were Finland, France, Germany, the Netherlands and the United Kingdom.
KLM, the oldest carrier still operating under its original name, was founded in 1919. The first flight (operated on behalf of KLM by Aircraft Transport and Travel) transported two English passengers to Schiphol, Amsterdam from London in 1920. Like other major European airlines of the time (see France and the UK below), KLM's early growth depended heavily on the needs to service links with far-flung colonial possessions (Dutch Indies). It is only after the loss of the Dutch Empire that KLM found itself based at a small country with few potential passengers, depending heavily on transfer traffic, and was one of the first to introduce the hub-system to facilitate easy connections.
France began an air mail service to Morocco in 1919 that was bought out in 1927, renamed Aéropostale, and injected with capital to become a major international carrier. In 1933, Aéropostale went bankrupt, was nationalized and merged with several other airlines into what became Air France.
In Finland, the charter establishing Aero O/Y (now Finnair, one of the oldest still-operating airlines in the world) was signed in the city of Helsinki on September 12, 1923. Junkers F 13 D-335 became the first aircraft of the company, when Aero took delivery of it on March 14, 1924. The first flight was between Helsinki and Tallinn, capital of Estonia, and it took place on March 20, 1924, one week later.
Germany's Lufthansa began in 1926. Lufthansa, unlike most other airlines at the time, became a major investor in airlines outside of Europe, providing capital to Varig and Avianca. German airliners built by Junkers, Dornier, and Fokker were the most advanced in the world at the time. The peak of German air travel came in the mid-1930s, when Nazi propaganda ministers approved the start of commercial zeppelin service: the big airships were a symbol of industrial might, but the fact that they used flammable hydrogen gas raised safety concerns that culminated with the Hindenburg disaster of 1937. The reason they used hydrogen instead of the not-flammable helium gas was a United States military embargo on helium.
The British company Aircraft Transport and Travel commenced a London to Paris service on August 25, 1919, this was the world's first regular international flight. The United Kingdom's flag carrier during this period was Imperial Airways, which became BOAC (British Overseas Airways Co.) in 1939. Imperial Airways used huge Handley-Page biplanes for routes between London, the Middle East, and India: images of Imperial aircraft in the middle of the Rub'al Khali, being maintained by Bedouins, are among the most famous pictures from the heyday of the British Empire.
U.S. Airline Industry
Early Development
Tony Jannus conducted the United States' scheduled commercial airline flight on 1 January 1914 for the Saint Petersburg-routes, Braniff Airways, American Airlines, Delta Air Lines, United Airlines (originally a division of Boeing), Trans World Airlines, Northwest Airlines, and Eastern Air Lines, to name a few.
Passenger service during the early 1920s was sporadic: most airlines at the time were focused on carrying bags of mail. In 1925, however, the Ford Motor Company bought out the Stout Aircraft Company and began construction of the all-metal Ford Trimotor, which became the first successful American airliner. With a 12-passenger capacity, the Trimotor made passenger service potentially profitable. Air service was seen as a supplement to rail service in the American transportation network.
At the same time, Juan Trippe began a crusade to create an air network that would link America to the world, and he achieved this goal through his airline, Pan American World Airways, with a fleet of flying boats that linked Los Angeles to Shanghai and Boston to London. Pan Am and Northwest Airways (which began flights to Canada in the 1920s) were the only U.S. airlines to go international before the 1940s.
With the introduction of the Boeing 247 and Douglas DC-3 in the 1930s, the U.S. airline industry was generally profitable, even during the Great Depression. This trend continued until the beginning of World War II.
Development since 1945
As governments met to set the standards and scope for an emergent civil air industry toward the end of the war, it was no surprise that the U.S. took a position of maximum operating freedom. After all, U.S. airline companies were not as hard-hit as European and the few Asian ones had been. This preference for "open skies" operating regimes continues, within limitations, to this day.
World War II, like World War I, brought new life to the airline industry. Many airlines in the Allied countries were flush from lease contracts to the military, and foresaw a future explosive demand for civil air transport, for both passengers and cargo. They were eager to invest in the newly emerging flagships of air travel such as the Boeing Stratocruiser, Lockheed Constellation, and Douglas DC-6. Most of these new aircraft were based on American bombers such as the B-29, which had spearheaded research into new technologies such as pressurization. Most offered increased efficiency from both added speed and greater payload.
In the 1950s, the De Havilland Comet, Boeing 707, Douglas DC-8, and Sud Aviation Caravelle became the first flagships of the Jet Age in the West, while the Soviet Union bloc had Tupolev Tu-104 and Tupolev Tu-124 in the fleets of state-owned carriers such as Aeroflot and Interflug. The Vickers Viscount and Lockheed L-188 Electra inaugurated turboprop transport.
The next big boost for the airlines would come in the 1970s, when the Boeing 747, McDonnell Douglas DC-10, and Lockheed L-1011 inaugurated widebody ("jumbo jet") service, which is still the standard in international travel. The Tupolev Tu-144 and its Western counterpart, Concorde, made supersonic travel a reality. Concorde first flew in 1969 and operated through 2003. In 1972, Airbus began producing Europe's most commercially successful line of airliners to date. The added efficiencies for these aircraft were often not in speed, but in passenger capacity, payload, and range. Airbus also features modern electronic cockpits that were common across their aircraft to enable pilots to fly multiple models with minimal cross-training.
1978's U.S. airline industry deregulation lowered barriers for new airlines. In this period, new start-ups entered during downturns in the normal 8-10 year business cycle. At that time, they find aircraft and funding, contract hangar and maintenance services, train new employees, and recruit laid off staff from other airlines.
As the business cycle returned to normalcy, major airlines dominated their routes through aggressive pricing and additional capacity offerings, often swamping new startups. Only America West Airlines (which has since merged with US Airways) remained a significant survivor from this new entrant era, as dozens, even hundreds, have gone under.
In many ways, the biggest winner in the deregulated environment was the air passenger. Indeed, the U.S. witnessed an explosive growth in demand for air travel, as many millions who had never or rarely flown before became regular fliers, even joining frequent flyer loyalty programs and receiving free flights and other benefits from their flying. New services and higher frequencies meant that business fliers could fly to another city, do business, and return the same day, for almost any point in the country. Air travel's advantages put intercity bus lines under pressure, and most have withered away.
By the 1980s, almost half of the total flying in the world took place in the U.S., and today the domestic industry operates over 10,000 daily departures nationwide.
Toward the end of the century, a new style of low cost airline emerged, offering a no-frills product at a lower price. Southwest Airlines, JetBlue, AirTran Airways, Skybus Airlines and other low-cost carriers began to represent a serious challenge to the so-called "legacy airlines", as did their low-cost counterparts in many other countries. Their commercial viability represented a serious competitive threat to the legacy carriers. However, of these, ATA and Skybus have since ceased operations.
Thus the last 50 years of the airline industry have varied from reasonably profitable, to devastatingly depressed. As the first major market to deregulate the industry in 1978, U.S. airlines have experienced more turbulence than almost any other country or region. Today, American Airlines is the only U.S. legacy carrier to survive bankruptcy-free.
Airline
An airline provides air transport services for passengers or freight, generally with a recognized operating certificate or license. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit.
Airlines vary from those with a single airplane carrying mail or cargo, through full-service international airlines operating hundreds of airplanes. Airline services can be categorized as being intercontinental, intra continental, domestic, or international and may be operated as scheduled services or charters.
The first airlines
DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft was the world's first airline.It was founded on November 16, 1909 with government assistance, and operated airships manufactured by The Zeppelin Corporation. Its headquarters were in Frankfurt. (Note: Americans, such as Rufus Porter and Frederick Marriott, attempted to start airlines in the mid-19th century, focusing on the New York-California route. Those attempts foundered due to such mishaps as the aircraft catching fire and the aircraft being ripped apart by spectators.) The five oldest non-dirigible airlines that still exist are Australia's Qantas, Netherland's KLM, Colombia's Avianca, Czech Republic's Czech Airlines and Mexico's Mexicana. KLM first flew in May 1920 while Qantas (for the Queensland and Northern Territory Aerial Services Limited) was founded in Queensland, Australia in late 1920.
The Industry Handbook: The Airline Industry
Few inventions have changed how people live and experience the world as much as the invention of the airplane. During both World Wars, government subsidies and demands for new airplanes vastly improved techniques for their design and construction. Following the World War II, the first commercial airplane routes were set up in Europe. Over time, air travel has become so commonplace that it would be hard to imagine life without it. The airline industry, therefore, certainly has progressed. It has also altered the way in which people live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit and conduct business in places once considered remote. (For more on the airline industry, read Is That Airline Ready For Lift-Off?)
The airline industry exists in an intensely competitive market. In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic and international services. In the past, the airline industry was at least partly government owned. This is still true in many countries, but in the U.S. all major airlines have come to be privately held.
The airline industry can be separated into four categories by the U.S. Department of Transportation (DOT):
- International - 130+ seat planes that have the ability to take passengers just about anywhere in the world. Companies in this category typically have annual revenue of $1 billion or more.
- National - Usually these airlines seat 100-150 people and have revenues between $100 million and $1 billion.
- Regional - Companies with revenues less than $100 million that focus on short-haul flights.
- Cargo - These are airlines generally transport goods.
Airport capacity, route structures, technology and costs to lease or buy the physical aircraft are significant in the airline industry. Other large issues are:
- Weather - Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down airports and cancel flights, which costs an airline money.
- Fuel Cost - According to the Air Transportation Association (ATA), fuel is an airline's second largest expense. Fuel makes up a significant portion of an airline's total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.
- Labor - According to the ATA, labor is the an airline's No.1 cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others.
Key Ratios/Terms
Available Seat Mile = (total # of seats available for transporting passengers) X (# of miles flown during period)
Revenue Passenger Mile = (# of revenue-paying passengers) X (# of mile flown during the period)
Revenue Per Available Seat Mile = (Revenue)
(# of seats available)
Air Traffic Liability (ATL): An estimate of the amount of money already received for passenger ticket sales and cargo transportation that is yet to be provided. It is important to find out this figure so you can remove it from quoted revenue figures (unless they specifically state that ATL was excluded).
Load Factor: This indicator, compiled monthly by the Air Transport Association (ATA), measures the percentage of available seating capacity that is filled with passengers. Analysts state that once the airline load factor exceeds its break-even point, then more and more revenue will trickle down to the bottom line. Keep in mind that during holidays and summer vacations load factor can be significantly higher, therefore, it is important to compare the figures against the same period from the previous year.
Analyst Insight
Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and up-selling in flight services. But the largest proportion of revenue is derived from regular and business passengers. For this reason, it is important that you take consumer and business confidence into account on top of the regular factors that one should consider like earnings growth and debt load. (For more about the consumer confidence survey, see Economic Indicators: Consumer Confidence Index.)
Business travelers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the number of leisure travelers to decline.
It is also important to look at the geographic areas that an airline targets. Obviously, more market share is better for a particular market, but it is also important to stay diversified. Try to find out the destination to which the majority of an airline's flights are traveling. For example, an airline that sends a high number of flights to the Caribbean might see a dramatic drop in profits if the outlook for leisure travelers looks poor.
A final key area to keep a close eye on is costs. The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. If you notice a trend of rising fuel costs, you should factor that into your analysis of a company. Fuel prices tend to fluctuate on a monthly basis, so paying close attention to these costs is crucial.
Porter's 5 Forces Analysis
- Threat of New Entrants. At first glance, you might think that the airline industry is pretty tough to break into, but don't be fooled. You'll need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher.
- Power of Suppliers. The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn't a lot of cutthroat competition among suppliers. Also, the likelihood of a supplier integrating vertically isn't very likely. In other words, you probably won't see suppliers starting to offer flight service on top of building airlines.
- Power of Buyers. The bargaining power of buyers in the airline industry is quite low. Obviously, there are high costs involved with switching airplanes, but also take a look at the ability to compete on service. Is the seat in one airline more comfortable than another? Probably not unless you are analyzing a luxury liner like the Concord Jet.
- Availability of Substitutes. What is the likelihood that someone will drive or take a train to his or her destination? For regional airlines, the threat might be a little higher than international carriers. When determining this you should consider time, money, personal preference and convenience in the air travel industry.
- Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.
Key Links
- Federal Aviation Administration - Get the latest regulation news, airport delays, etc.
- AviationNow.com - Information and news on the airline/aerospace industry.
- AirWise.com - Airport and aviation news
Airline Industry
The scale and scope of airline companies are from those with a single airplane carrying mail or cargo, through full-service international airlines operating many hundreds of airplanes in various types. Airline services can be categorized as being intercontinental, intracontinental, regional or domestic and may be operated as scheduled services or charters. These variations in the types of airline companies, their operating scope, and the routes they serve makes analysis of the airline industry somewhat complex. Nevertheless, some patterns have emerged in the last 50 years of experience. The general pattern of ownership has gone from government owned or supported to independent, for-profit public companies. This occurs as regulators permit greater freedom, in steps that are usually decades apart. This pattern has not been completed for all airlines in all regions. The demand for air travel services is derived demand. That is, it depends on other things: business needs for cargo shipments, business passenger demand, leisure passenger demand, all influenced by macroeconomic activity in the markets under study. These patterns are highly seasonal, and often day-of-week, time-of-day, and even directionally variable. Notwithstanding these demand patterns, the overall trend of demand has been consistently increasing. In the 1950's and 1960's, annual growth rates of 15% or more were common. Annual growth of 5-6% persisted through the 1980's and 1990's. Growth rates are not consistent in all regions, but certainly areas where deregulation provided more competition and greater pricing freedom resulted in lower fares and sometimes dramatic spurts in traffic growth. The U.S., Australia, Japan, Brazil, Mexico, and other markets exhibited this trend. The industry is cyclical. Four or five years of poor performance are followed by five or six years of gradually improving good performance. But profitability in the good years is generally low, in the range of 2-3% net profit after interest and tax. It is in this time that airlines begin paying for new generations of airplanes and other service upgrades they ordered to respond to the increased demand. Since 1980, the industry as a whole has not even earned back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically worse. As in many mature industries, consolidation is a trend, as airlines form new business combinations, ranging from loose, limited bilateral partnerships to long-term, multi-faceted alliances of groups of companies, to equity arrangements between companies, to actual mergers or takeovers. Since governments often restrict ownership and merger between companies in different countries, we see most consolidation taking place within a country. In the U.S., over 200 airlines have been merged, taken over, or simply gone out of business since deregulation began in 1978. Many international airline managers are actively lobbying their governments to permit greater consolidation, in order to achieve higher economies of scale and greater efficiencies.
Development of airlines post-1945
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As governments met to set the standards and scope for an emergent civil air industry toward the end of the war, it was no surprise that the U.S. took a position of maximum operating freedom. After all, U.S. airline companies were not devastated by the war, as European companies and the few Asian companies had been. This preference for "open skies" operating regimes continues, within limitations, to this day. World War II, like World War I, brought new life to the airline industry. Many airlines in the Allied countries were flush from lease contracts to the military, and foresaw a future explosive demand for civil air transport, for both passengers and cargo. They were eager to invest in the newly emerging flagships of air travel such as the Boeing Stratocruiser, Lockheed Constellation, and Douglas DC-6. Most of these new aircraft were based on American bombers such as the B-29, which had spearheaded research into new technologies such as pressurization. Most offered increased efficiency from both added speed and greater payload. In the 1950s, the De Havilland Comet, Boeing 707, Douglas DC-8, and Sud Aviation Caravelle became the first flagships of the Jet Age in the West, while the Soviet Union bloc countered with the Tupolev Tu-104 and Tupolev Tu-124 in the fleets of state-owned carriers such as Aeroflot and Interflug. The Vickers Viscount and Lockheed L-188 Electra inaugurated turboprop transport. The next big boost for the airlines would come in the 1970s, when the Boeing 747, McDonnell Douglas DC-10, and Lockheed L-1011 inaugurated widebody ("jumbo jet") service, which is still the standard in international travel. The Tupolev Tu-144 and its Western counterpart, Concorde, made supersonic travel a reality. In 1972, Airbus began producing Europe's most commercially successful line of airliners to date. The added efficiencies for these aircraft were often not in speed, but in passenger capacity, payload, and range. With deregulation in the U.S. beginning in 1978, barriers to entry were lowered for new entrants. Typically, a new wave of start-ups would enter during downturns in the normal 8-10 year business cycle. At that time, they find aircraft, financing, hangar and maintenance services, training all relatively inexpensive, and laid off staff from other companies eager and willing to take a job with the new company. Alas, as the business cycle returned to normalcy, major airlines were able to dominate their routes through aggressive pricing and additional capacity offerings, often swamping the new startup. Only America West Airlines (now known as USAirways) has remained as a significant survivor from this new entrant era, as dozens, even hundreds, have gone under. In many ways, the biggest winner in the deregulated environment was the air passenger. Indeed, the U.S. witnessed an explosive growth in demand for air travel, as many millions who had never or rarely flown before became regular fliers, even joining frequent flyer loyalty programs and receiving free flights and other benefits from their flying. New services and higher frequencies meant that business fliers could fly to another city, do business, and return the same day, for almost any points in the country. Air travel's advantages put intercity bus lines under pressure, and most have withered away. By the 1980's, almost half of the total flying in the world took place in the U.S., and today the domestic industry operates over 10,000 daily departures nationwide. Toward the end of the century, a new style of low cost airline was seen, offering a consistent, often high-quality product, using new aircraft models, at a price that was well-received. JetBlue, AirTran Airways, and other companies represented a serious challenge to legacy carriers, as their counterparts in Europe, Canada, and Asia did to legacy carriers in those regions. Their commercial viability also represented a serious cost threat to employees at legacy airlines, as they set the standard for wage rates in the industry that were a fraction of the prevailing wage. Thus the last 50 years of the airline industry have varied from reasonably profitable, to devastatingly depressed. As the first major market to deregulate the industry in 1978, U.S. airlines have experienced more turbulence than almost any other country or region. Today, airlines representing approximately one-half of total U.S. seat capacity are operating under Chapter 11 bankruptcy provisions.
Estimation of a Model of Entry in the Airline Industry
The URL is S Berry - Econometrica, 1992 - econ.jhu.edu
So i just take some part from the journal.
This paper investigates the importance of airport presence in determining the
profits of operating in a given city pair. The empirical methodology relies on a
model of equilibrium outcomes which allows for an economic interpretation of
estimated coefficients and for a preliminary study of how city pair market
structure would change if city pair entry were made less costly, either by direct
subsidy or by changes in airport regulation.
The paper emphasizes several methodological issues that are of particular
importance in studying airline city pairs. One issue is the simultaneity of profits
and market structure in oligopolistic markets. In this respect the paper bears a
resemblance to the independent work, discussed below, of Bresnahan and Reiss
(1987, 1990, 1991) and Reiss and Spiller (1989) on entry in oligopolistic markets.
A second problem arises from the presence of a large number of heterogeneous
potential entrants, where the "heterogeneity" stems from observed or unobserved
variations in firm costs and demand.
Tuesday, February 3, 2009
eAirlines: strategic and tactical use of ICTs in the airline industry
Mergers and Market Power: Evidence from the Airline Industry
The airline industry provide a unique opportunity to test for market power using product prices. In the airline industry, each route can be considered a separate market. The routes not affected by mergers can serve as a control group to capture industry wide factors such as changes in fuel costs, labor cost, and seasonal variations in demand, as well as economy wide factors that influence airfares. Thus, airfares changes on routes affected by a merger., computed relative to the control group, can be attributed to the merger.
Advancement Opportunities In The Airline Industry
Pilots in every level of the airline and flight industry look to move from the entry level position of first officer to the higher paying and higher pressure job of captain. First officers typically have to work five to ten years to advance to the captain’s seat, putting in long hours for minimal pay in comparison to their colleagues. However, the rewards of advancing to the position of captain are incomparable. Young pilots who stick with airline jobs see their pay multiplied several times over while doing what they love. There is no better goal than being financially secure while living out your dream.
Mechanics, maintenance professionals, and other “behind the scenes" workers in the airline industry can advance in several stages throughout their career. With a few years of exemplary work under their belt, the average mechanic can advance to a team leadership or crew management position. The pay increase and ability to use innovative organization on a daily basis are enough reward for these hard working professionals. From there, managers and crew leaders can advance to facilities management positions. Planes and airliners are kept in hangars that include some of the most sophisticated equipment in the world. Exceptional mechanics can achieve high positions within the industry.
Tower personnel, including traffic controllers, can also use their technical skills and intuition in higher positions. These professionals can move to positions of middle management, where they oversee an entire crew of controllers and monitor efficiency to keep the skies safe for millions of passengers. Management positions can lead to executive positions on two different fronts. A particular airline may be interested in experienced air traffic controllers for positions in airline management or research and development. As well, air traffic controllers and other tower personnel can move onto positions of management within a particular airport. In the end, it is important for every airline professional to aim high in order to succeed in the industry.
Wednesday, January 28, 2009
Barges Industry (eg: Cargo Shipping)
"What is happening to this industry today?"
The one-page recession update discusses industry dynamics since the last update of the industry report and over the next few months. The purpose of this update is to provide additional information for the short term. This chapter includes quarterly forecasts to help identify key turning points.
Key Statistics
"How big is this industry?"
The heart of our industry profile, this chapter provides key market data on industry trends over the past five years, reflecting overall size and health.
The market statistics include industry revenue, industry gross product, industry employment, number of establishments, number of enterprises, export revenue, export share of total industry revenue, import share of domestic demand, total cost of industry wages, industry growth, and a growth trend or decline trend.
The uniform nature of the IBISWorld industry report collection allows for both a basic understanding of industry size, as well as in-depth market analysis of all industries within the US economy.
Segmentation
"What is this industry comprised of?"
The market segmentation chapter of the market report breaks down the makeup of this industry from different angles, including:
* The Products and Service Segmentation section highlights the top products and services by industry share, demonstrating their influence over total industry revenue, as well as providing market share on all the niche businesses that operate within this industry.
* The Major Market Segments section details the industry share of key customer (or downstream industries) and/or groups as well as giving an indication as to which of these are the most important to the industry.
* The Industry Concentration section provides an indicator of market power by showing the industry share of the top four companies. The degree of monopolization or fragmentation of an industry.
* Finally, The Geographic Concentration section is sorted by “region” (South East, Far West, South West, Great Lakes, Mid East, New England, Plains, and Rocky Mountains.), and illustrates where the majority of enterprises are located, while profiling major establishments and concentrations.
Market Characteristics
"What's the market like?"
This chapter of the report explains the behavior and attributes of “The Market”, or customer base for this industry. It provides data trends, market statistics, and industry analysis for:
* Market Size explains the size of the domestic market, as well as the size of the export market.
* Linkages lists the industry's major supplier and major customer industries.
* Demand Determinants are key factors which are likely to cause demand to rise or fall.
* Domestic and International Markets defines the market size for the products and services of the industry. This section provides industry information on the size of the domestic market and the proportion accounted for by imports and exports and trends in the levels of imports and exports.
* Basis of Competition outlines how competitors differentiate themselves within the industry as well as highlighting competition from external substitute products from alternative industries.
* Life Cycle is an analysis of which stage of development the industry is at derived by analyzing by growth trends, innovation, ownership characteristics and rate of change within the industry.
Industry Conditions
"What's happening in this Industry?"
This chapter of the report explains the general operating environment, and includes the following industry research:
* The Barriers to Entry section outlines factors that can prevent a start-up from entering the industry, and also gives an indication of the extent to which this occurs.
* The Taxation section details all kinds of taxation that are specific, or particularly important to this industry, including taxation concessions.
* The Industry Assistance section refers to any government or other measures designed to improve the performance of this industry. The indicator trends of this assistance are noted.
* The Regulation and Deregulation section has industry information regarding regulation and/or deregulation to this industry.
* The Cost Structure section details a table together with analysis of the average major costs for a company operating in this industry as a percentage of total revenue. (eg; rent, materials, depreciation, purchases, wages, utilities, advertising, interest). Industry profits for the average company in the industry are also shown.
* Capital and Labor Intensity section provides a guide to the amount of capital used in production/providing a service compared to the amount of labor in the total mix of inputs.
* The Technology and Systems section acknowledges the latest technology and/or systems available to this industry within the country. Technology refers to machinery and equipment and systems refers to methods of production that enable better and more efficient production.
* The Industry Volatility section refers to the frequency and magnitude of year on year fluctuations which occur in industry output or revenue.
* The Globalization section gives an indication to the extent to which the industry size is global based. Based on factors such as the level of foreign ownership, the proportion of demand accounted for by foreign operators and the volume of production conducted in other countries.
Key Factors
"What's most important?"
This chapter of the report identifies what drives change and ensures success for a business within a dynamic market.
* The Key Sensitivities section identifies the external drivers of change. These are the key factors that are outside the control of an operator in the industry, but are likely to have significant impact on a business.
* The Key Success Factors section details the factors within the control of an industry operator and which should be followed in order to be successful in the industry.
Key Competitors
"Who are the major players?"
This chapter of the report profiles the major players who operate within this industry. Generally the top 5 companies are profiled (including public and private businesses). Market share is included whenever possible, as well as financial data. Competitive analysis of each player provides a solid understanding of strategic position, and market share.
Industry Performance
"How has this industry been performing?"
This chapter of the report features up-to-date, high level industry analysis, based upon the statistics trends present in all previous chapters. It is divided into 2 parts; Historic Performance, and Current Performance.
* The Current Performance section provides research analysis on performance trends over the most recent five years, with key indicators discussed. For example, financial trends, product trends, production volume, external events and internal trends that cause change.
* The Historical Performance section of the market report details previously important events in the development of the industry.
This industry research provides the foundation upon which the forecast trend in the outlook chapter may be viewed, and better understood.
Outlook
"Where is this industry headed?"
Home of our 5 year industry forecast, the final chapter of our industry report contains industry analysis over the next five years. Drawing on supporting evidence introduced throughout the industry report, our industry forecast encompasses market trends for those factors internal and external to the industry, and may forecast trends for the following:
Industry trends, Market trends, Company trends, Product trends, Supply trends, Services trends, Statistics trends, Data trends, Performance trends, Growth trends, Size trends, Financial trends, Cost trends, and any other major industry indicators where appropriate.
Airline Industry
http://www.hannamibia.com/download/HN071105-HANcongress07-AirNamibia.pdf
2. More on data fact collection about airline industry.
http://www.sh-e.com/presentations/David%20Treitel%20-%20Airline%20Restructuring%20&%20Trends%20Speech%2030-Sep-04.pdf
3. Overview of Recent Trends in the Airline Industry
http://dspace.mit.edu/handle/1721.1/35726
http://dspace.mit.edu/bitstream/handle/1721.1/35726/Hansman-Airline.pdf?sequence=1
PS: This is the one i mention before saying that the size is too big to view. I already download it and the content is more on data fact collection of airline industry from 1954(earliest) until 2005(latest).
Transportation & Logistics Industry
Introduction to the Transportation & Logistics Industry
Transportation is one of the world's largest industries. Its sectors range from taxis to trucks to airplanes, trains, ships, barges, pipelines, warehouses and logistics services.
In total, during 2007, the U.S. transportation industry (in both for-hire and not for-hire sectors, including support and repair) was about $1.8 trillion. Transportation, in its many facets and sectors, directly employs about 4.5 million Americans. At a bit more than 10% of America's economic activity, transportation is remarkably efficient, considering the fact that it is a vital service to every other sector of the economy. In fact, thanks to increasing use of advanced information systems and such strategies as the intermodal use of containers (sending freight via containers that are easily transferred from ship to rail car to truck as needed, without repacking), the transportation industry's productivity is excellent.
In the U.S. alone, total freight shipment volumes are expected to increase by 70% between 1998 and 2020, according to a U.S. Department of Transportation estimate. The amount of freight moved through ports of entry (foreign goods into the U.S.) will more than double in the same period.
Globalization has had an extremely positive effect on the transportation and supply chain business. For example, United Parcel Service (UPS) delivered 3.97 billion packages during 2007, an average of 15.8 million per business day. While the firm's U.S. package volume increased only 1.4% during 2007, its international volume was up an impressive 12.2%. Meanwhile, its revenue from supply chain and freight operations grew about 8% to $2.2 billion and profits soared in this sector.
Transportation continues to evolve globally, no matter whether the type of transport involved is on the road, on the sea or in the air. For example, China had only about 200 kilometers of expressways in 1989. By the beginning of 2008, it had more than 50,000 kilometers of expressways, second in terms of length to America's famous Interstate Highway system (roughly 43,000 miles or 69,000 kilometers). China's investment in new infrastructure of all types, including highways and airports, equals 9% of annual GDP according to a study of 2005 budgets.
The information age, with its introduction of sophisticated databases that can track inventory levels and shipments on a global basis via the Internet, has created vast transport and logistics efficiencies. As a result, supply chain technology has been one of the fastest growing segments in the information field.
Next, the rapid adoption of outsourcing has led many companies, when shipping is vital to their businesses, to turn to logistics services providers for all manner of shipping support, including warehousing, scheduling and distribution services. The sectors of transport, supply chain management and logistics services are permanently intertwined; creating efficiencies once undreamed of in the transportation arena.
All nations worldwide face a daunting task in maintaining sufficient airports, seaports, highways and railroads to handle commerce and passenger traffic efficiently. The amount of government funds available for roadway development is never enough to keep up with demand. For example, "The 2005 Urban Mobility Report," a study conducted by researchers at Texas A&M University, analyzed traffic patterns and delays in 85 U.S. major metropolitan areas. The study found that the total annual cost of traffic congestion in these cities was $63 billion, based on 3.7 billion hours of traffic delay and 2.3 billion gallons of fuel consumed by delays.
Globally, big changes in transportation were in the works as 2008 began. Growth in the world's economy was clearly slowing down, and the formerly booming transportation industry will slow along with it. This may provide some much-needed relief to recent shortages and high costs in such areas as shipping and trucking. Airlines were generally starting to see drops in their passenger load factors. Major trucking firms reported shrinking business in late 2007.
In fact, the biggest changes in the works are in the airline sector, where large mergers and cross-border investments are already underway. In the U.S., airline giants Delta and Northwest were attempting to put together a merger as of February 2008. Continental and American were both considering their options and possible merger partners. U.K.-based Virgin had launched its Virgin America affiliate (with a sizeable investment stake in the U.S. operations held by Virgin), and Lufthansa had acquired a minority interest in JetBlue. Overall, U.S. airlines are scrambling to set a positive stage for the future, as they are now faced with growing competition on their prized overseas routes along with higher operating costs, particularly in terms of jet fuel.
Monday, January 12, 2009
(PENDING) Assignment 2 - Transportation Industry
Hi,
As I mention in our class, every group need to identify specific topic of interest in transportation industry. To be honest, transportation industry is huge where it doesn't only cover the vehicles (cars, lorries, boats, airplane, etc), but also it includes all the services (public transportation, automotive design, logistics, delivery, etc).
I've come across several resources which is really interesting: books, magazines, newspaper to start with. There's a huge number of books in the library that covers topics such as logistics, supply chain management system, transportation for tourism, etc.
To start, I will share some journals information that discuss about transportation. Among them:
- International Journal of Physical Distribution & Logistics Management
- International Journal of Logistics Research and Applications
- Journal of Business Logistics
That's it from me. I guess you guys better start work now :)
(COMPLETE) Assignment 1 - Group Formation and Blog Creation
Hi,
As I mention in our previous class (Jan 5, 2009), your first assignment is to form a group (approximately 4 people) and create a blog. This blog will serve as a medium for each of the group to communicate and cooperate among each others. Furthermore it will be the center for each of the group to report on your progress (assignments, projects, thought, comments, etc).
Please be advice that you need to complete this first task by the end of this week.
Good Luck.
SCK3433 Instructor