Category: Airline

Risks and Their Management in the Airline Industry: An Essay

Every organization has number of risks and its crucial to assess and evaluate the risk through risk management system. Risk management system refers to the process of identifying, assessing, and controlling the challenges or threats that face the capital and earnings of an organization. These risks could be natural calamities, data breach related risk or financial uncertainties.

The aircraft industry deals with enormous risks on regular basis, from a swing in the currency exchange rate and the cost of fuel to huge capital expenses, instability in travel demand, and rivalry from carriers operating in a small zone. And many airlines have gone through bankruptcy or been acquired by larger organizations (Gong, 2007). There are many risk management strategies approached by airline industry such as leasing, hedging, capacity management, and revenue management. Market leaders in the industry explore various option for mergers and acquisitions and their less travelled path are subcontracted to regional airlines. At operational level, based on demand frequency of flights and aircraft sizes are varied (Wei and Hansen, 2006). Fuel cost is a primary concern for airline industry, ranking first in operational cost. According to airlines fuel cost account for 10-45% of total expenditures from 2003 to 2013 (Ryerson and Kim, 2014). And relevantly mergers have been a good solution in decreased fuel consumption.

Risks of the Airline Industry

Currency Exchange Rate

Airlines have many operational costs such as pay for labor, fuel and other costs in multiple currencies and are exposed to fluctuation in exchange rates. Sometimes these fluctuations are beneficial for the company when the expenses are in other currency (weaker) and earning are in dollars. In some cases, company’s operational procedures can reduce the risk of exchange fluctuations. Many organizations actively manage currency exposure by swapping between multiple currencies based on weakening of that currency in that week. In 2009, Emirates exchanged between several currencies, paying expenses in euros, Australian dollars, New Zealand dollars, Japanese yen. The airlines reported the AUD receipts were fully hedged and other currencies were hedged at 56%, 29%, 38% respectively (Ren, 2017).

Fuel Costs Fluctuations

Airlines experience huge risks due to fluctuation in cost of crude oil. A sharp increase in crude oil prices leads to great recession. Once prices were increased from $20 barrel to almost $140 before falling to $40 in a short period and again recovered to $110 and fell back to $30 (Sibdari, Mohammadian and Pyke, 2018). In such instances airlines makes a contract policy with the providers. For example, Southwest Airlines Cost per gallon was $50 per barrel, while the market price was $100 (till 2008). These huge differences bring high profitability to the airlines as compared to their competitors. And then there was recession in fuel prices and airlines experienced huge losses due to hedging contract. In 2016, Cathay pacific posted a net loss of $74.01 million due to bad fuel hedges. Singapore airlines were analyzing long term and short-term fuel hedges and their maturity and came up with figures for different quarters these showed up a loss of S$365 million till December 2016 (Park, 2017).

Many airlines stopped hedging in 2014. On the other hand, Alaska Airlines approached different strategy to counter this. Rather than buying future on crude oil, these airlines purchased insurance which would come into picture only when prices rise over a matured cap. With this Alaska saved around $300 million with cheaper fuel prices (Gosai, 2017).

Capital Expenditure

Business expansion for airlines includes expanding flights and routes they operate. As airlines expand, the order for new aircrafts is surging (Kamihsni-Morrow, 2017). The risk arises how the airlines would deal with huge capital costs to serve in new routes. It is very rare that airlines funds for the aircraft at once. Rather they lease aircraft from leasing company (Russell, 2017). Even if they purchase aircrafts, they will sell it to a leasing company and lease it back from them.

Capacity and Revenue Management

As airline industry faces challenges with rise in fuel prices or travel demand and swing in economy, they make decision about capacity of aircrafts and operating routes and frequency of flights. It only takes few months to re-assign flights to a new route while it takes years of time for delivery of a new flight (Cryderman, 2016). Another approach is re-fleeting through which airlines can accommodate passengers on other flights of same time schedule, since airlines pay penalties for re-fleeting unless all tickets are booked this approach is not frequently used. And other method used is ‘upgauging’ where seats are added to existing flights based on demand (Carey & Nicas, 2015). Like some airlines switch to smaller versions from 747’s to 737’s based on travel demand on these routes.

Conclusion

Airline industry manages risk from various sources. The way airlines address them through various strategies, i.e., currency hedging, fuel hedging contracts, leasing contracts, insurance and other revenue management techniques has mixed outcomes some are positive and some are painful.

American Airlines: Case Study

This report was commissioned to identify and explain the services offered by one of the largest global airlines based on revenue, destinations and fleet size, American Airlines (Bhasin, H., 2016). Based on the segmentation principles, information about the company’s target markets will be discussed, as well as how the external factors might affect it. The report draws attention to the fact that American Airlines uses a mix of segmentation principles in order to meet their market targets requirements. Moreover, taking in consideration the PESTLE analysis, the airline’s actual external factors of change consist of social/demographic factors, as well as the environmental factors.

The airline started its operation in 1926 as a mail airline, and later in 1930 became a passenger airline (‘American Airlines’, no date). American Airlines provides a range of domestic and international flights, with 6700 flights per day (Bhasin, H.,2018). The company has a fleet of 940 planes, including Airbus (A319, A320, A321) and Boeing (Boeing 737 MAX, 737-800, 757-200) (American Airlines fleet, no date). The airlines offer 6700 flight/day to 350 destinations.

Product

The product discussed in this report is the airline’s cabin configuration and classes of service. According to American Airlines official site, apart from selling seats (First Class, Business Class, Economy Class, Premium Economy Class), the company provides other services like hotel booking, cars for rent, vacations, activities and cruises.

• Intangible elements. Since the core product of the airline – passengers transportation, is intangible in its nature, the company provides tangible elements, which are much easier to be advertised and promoted.
• Tangible elements. According to Levitt (1980) it is important to differentiate a company with supplementary services, which are meant to give more appeal and value to the core service (Levvit, T., 1980). The airlines envelopes its core product, with supplementary services under the form of pre and post flight care services, as pick-up, lounge services, transfer or stay facilities, which consist of food, cars, rooms (Harsh, V. Verma, 2012). They also have a loyalty program, AAdvantage (American Airlines, no date).
• First/Business Class: a first/business class ticket offers a fast check-in, security and boarding, along with a 5* service through the airport and access to Flagship/Admiral Lounge. In-flight services are composed of wide seats with more legroom, premium dining, free wi-fi and entertainment. Also, the passengers benefit from mileage bonuses, extra bag allowance by using the loyalty program, AAdvantage.
• Premium Economy/ Economy Class: comfortable seat, free snacks (complimentary beer and wine in Premium Economy), free in-flight entertainment.

Target Markets

The importance of dividing the market in segments lays in acquiring a better understanding of what the airline’s customers need and want and provides the ability to exceed their expectations. Based on the segmentation principle (Richard E. Mayer, 2009), the passengers are served depending on demographic, geographic and psychographic variables. The passengers cannot be categorized by one variable only. The airline is using a mix of variables to serve the customers.

Business

In this category, the factors taken in consideration are demographic and psychographic. This segment is focused on convenience, on time departures and arrivals, targeting high quality service.

• Psychographic. According to a case study, the primary target market can be traced to customers flying for business purposes, 72% of which have a Bachelor degree, with an income of $98,000 per year that would pay a big amount of money for comfort, punctuality and frequency (wordpress.com, 2017). For instance, a passenger flying Business Class would rather pay a huge amount of money for a comfortable seat, nice meal, no delays and entertainment on board, especially on a long-haul journey. For these passengers the privacy is an important aspect, which satisfies their working environment without being disturbed by children and so on.
• Demographic. People who fly frequently with the airline are adults between 25-54 years. It was stated by Skift (2017) that young people going on business trips have very different travelling and buying habits than older ones. Statistically speaking, the young generation fly on an average of 7.4 business trips per year while Generation Xers- 6.3. Moreover, in terms of gender, the number of female business travelers is higher than male, even though middle-age males dominated the business market in the past. The campaign ‘The Individual’ featuring Kevin Spacey, which was broadcasted in 2011, manifests the ideal passenger, middle-age (40-50s) male professional, who pretty much lives in the airport (Loulla-Mae Eleftheriou-Smith, 2011).

Leisure

In the leisure segment of demand, the passengers value the low-price tickets. Leisure trips depend on the customer’s income and usually if some individual goes through a difficult financial period, most likely he won’t travel. With the increase of the income, the number of trips taken increases as well. These passengers usually fly in the Economy/Premium Economy Class.

• Psychographic. While the business category will take in consideration the timing and the frequency of a flight, people who fly for leisure are less likely to focus on this aspect. While for the passengers flying business the flyer points are just a job benefit, for the passengers in this category it is an important factor to reduce the cost of the ticket and future journeys.
• Demographic. According to Boston Globe (2016), because of longer life expectancy, women outnumbered men in the leisure travel market (Camilleri, M.A., 2018). The individuals in this division are from all ages, including children. People without a family tend to travel more until late in life.

Promotion

In order to distribute the product, American Airlines opts for various distribution channels as ticket-desks, on-board magazines, its official website but more important, online advertising on social media platforms like Facebook, Twitter or YouTube. Using the AIDA model of selling, the airline’s objective is to build long-term relationships (Stephen Shaw,2015). A research comparing the online engagement on social media between Delta Airlines and American Airlines has shown that American Airlines has more success in promoting the company and engaging with costumers over social media.

In the purpose to advertise the brand, the airline often participates in events and sponsorships programs, being the sponsor of American Airlines Center, opened in 2001 (considered the home of Dallas Mavericks) and American Airlines Arena. Furthermore, the AAdvantage Loyalty Program is also used as an advertising channel, providing the offer to gift miles to friends or family, and entitles the passengers to upgrade and privileges at the airport.

Key River of External Change

Social and Demographic Factors

According to an article posted on Marketrealist.com (2013), the trends in the travel and tourism industry are about to change, with a considerable increase among the millennials. This generation will be at its peak in a couple of years and their spending will grow by 50% comparable with their spending on 2013, which means the baby boomers demand for travel will significantly decrease, approx. by 16% by the year of 2020. This factor will lead a higher interest in upgrades of seats, the passengers are more likely to pay extra for in-flight entertainment and Wi-Fi (in Economy Class). They might not be interested in airline packages, since they tend to make itinerary changes. Moreover, the millennials are more likely to use the AA travel application more than baby boomer’s generation.

Environmental Awareness in the Airline Industry

According to Air Transport Action Group (ATAG), the airline industry processes 12% from the total transport industry emissions. American Airlines is among the airlines considered to be eco-friendly. The airline is currently looking into reducing costs and emissions (paperless cabins, less weight on aircraft). In order to become eco-friendlier, the airline is looking into introducing plastic-free items, such as bamboo toothbrushes, cups, reusable water bottles, cloth napkins, reusable cutlery. Since the environment is a global issue, the passengers will find themselves choosing flying with aircrafts that are more fuel-efficient, such as Boeing 787 Dreamliner, plastic-free and so on. At the same time, flying Economy Class is much better for the environment, since are offered more seats and the aircraft space is used fully. Passenger prefer to pack light resulting in less waste and less weight (‘Alternative Airlines’, no date). ICAO intends to improve the air traffic management and the biofuel production, which can be made from wheat, corn and oil.

Conclusion

To summarize, American Airlines’ targets markets are the customers flying for business and leisure. For these targets to be met the airline is using the segmentation principle to divide the market according to their needs. Also, another point discussed in the report are the two key driver of external change and how it affects the product, the classes of service.

References

1. American Airlines Center, 2019 http://www.americanairlinescenter.com/
2. American Airlines Arena, 2019 https://www.aaarena.com/
3. ‘American Airlines fleet’ AIRFLEETS.NET https://www.airfleets.net/flottecie/American%20Airlines.htm
4. Bhasin, H. (2016), ‘Marketing Strategy of American Airlines – American Airlines Marketing Strategy’. Strategic Marketing Articles. https://www.marketing91.com/marketing-strategy-american-airlines/
5. Camilleri, M.A. (2018). ‘Market Segmentation, Targeting and Positioning’. Travel Marketing, Tourism Economics and the Airline Product. Ch.4, pp.69-83.
6. ‘Eco Friendly Airlines’. Alternative Airlines https://www.alternativeairlines.com/eco-friendly-airlines
7. (2014) ‘External Factors That Influence the Airline Industry’. Market Realist. https://marketrealist.com/2014/09/must-know-environmental-awareness-airline-industry/
8. Harsh, V.V. (2012), Services Marketing, Text and Cases, 2nd ed., p. 71.
9. ‘History of American Airlines’. American Airlines. https://www.aa.com/i18n/customer-service/about-us/history-of-american-airlines.jsp
10. Levitt, T. (1980). ‘Marketing Success Through Differentiation of Anything’. Harvard Business Review, pp. 94-102.
11. Mayer, R. E. (2009). Segmenting Principle. University of California, pp. 175-188.
12. ‘Plan Travel’. American Airlines https://www.americanairlines.co.uk/homePage.do?locale=en_GB https://www.americanairlines.co.uk/i18n/plan-travel/travel-deals-and-offers.jsp?locale=en_GB&anchorEvent=false&from=Nav
13. Smith, L.M.E. (2011). ‘American Airlines Targets Affluent Consumers with Brands Ads’ https://www.campaignlive.co.uk/article/american-airlines-targets-affluent-consumers-brand-ads/1102861
14. Shaw, S. (2015). Airline Marketing Management. 7th ed. pp.289-319.
15. (2017). ‘American Airlines Case Study’. https://dennishighblog.files.wordpress.com/2017/03/american-airlines-case-study.pdf

Dubai’s Emirates Airline: SWOT Analysis

The objective of this paper is to qualitatively analyze the Emirates airline’s business model regarding marketing as well as recommend possible alterations that could be made to enhance their marketing strategy which could optimize performance and ultimately increase the likelihood of producing an increased revenue.

The Emirates airline was first established in 1985 to become the national carrier and to fulfill the needs following the retraction of services offered by Gulf Airlines at that time. The founding CEO was Maurice Flanagan, whose experience included leading British Airways, Gulf Air and BOAC. He was quickly joined by chairman Sheikh Ahmed bin Saeed Al Maktoum. The current CEO is Tim Clark. The airline initial operated two leased aircraft, a Boeing 737 and an Airbus 300 B4. There has been a rapid rise in the global demand for airline travel and Emirates has grown rapidly over the years and its current fleet consists of 110 A380’s and 150 Boeing 777. Emirates currently boasts a total of 155 destinations in 80 countries. This growth has taken just less than 35 years.

This assignment will attempt to describe and analyze the marketing strategies using a SWOT analysis. Further, it will outline marketing strategies, conclusion, and recommendations. In order to critically analyze the airline’s business model, I have used secondary resources in order to qualitatively identify the airline’s marketing strategy which was used in order to promote their product and generate revenue. I have used the SWOT analysis as a tool for determining and gaining a more in-depth understanding of their business environment in which they operate.

Strengths

Geographically, Dubai is placed in a region of the world which provides the airline with a world centered hub. Dubai is also becoming a leading jumping-off point for tourism in the Arabian region. Customer care is perceived as being exceptional. Travelers perceive Emirates as a top-quality airline. London, the home of Arsenal football club is named the ‘Emirates Stadium’. Several other football clubs are recipients, AC Milan, Hamburger SV, New York Cosmos, Olympiacos, Paris Saint-Germain (PSG), Real Madrid C.F., S.L. Benfica and the Asian Football Confederation (AFC). As well as many other sports, including rugby, cricket, motorsports, tennis, and AFL. Advertising is one of the components of the airline which is integral to the awareness of this company. There is a variety of advertising mediums which include: inflight magazine, sponsorship, television, cinema, social media, and printed material.

Emirate’s marketing spreads a ‘lifestyle’ persona which draws in travelers and increases customer loyalty. Emirates has a total of 155 destinations in 80 countries. This comprehensive global coverage is a solid strength for the airline. The fact that Emirates is based in Dubai provides an advantage in the recently increasing tourism demand to and from the location. The location provides good reachability to neighboring destinations. Furthermore, the airline is in a viable position for other carriers to approach them for an alliance which is an opportunity for generating increased revenue through greater incoming traffic by working together with other airlines through partnerships.

Emirates workforce is huge, about 50,000 people, consist of approximately 120 different nationalities. On average you will find 12 different nationalities on a flight.

The recent drop in tourism to Dubai has recovered and is now a positive attribute for the airline. Statistics recently published by Dubai’s Department of Tourism and Commerce Marketing revealed that the number of international overnight visitors to Dubai increased by 3 percent in the first half of 2019. Compared to last year (8.10 million), 2019 witnessed the arrival of around 8.36 million tourists.

Emirate used the slogan ‘So be good to yourself. Fly Emirates’ in its advertising. Thus, promoting an image of luxury and comfort. Emirates has a fleet of high quality, wide-bodied aircraft, which provide the traveler with a quality experience.

Weaknesses

US travel ban’ didn’t survive a court challenge, it led to an instantaneous 35% drop in bookings for Emirates’ routes to the United States. Emirates fleet consists of large aircraft (A380’s and Boeing 777), during the recent downturn in passenger number this meant flying with empty seats, resulting in loss of revenue falling victim to the high perishability which is a common attribute of the airline industry being an intangible service. With smaller aircraft flights could be reduced and passengers redirected to fill seats.

Recent allegation that the airline received subsidies from the Emirati government gave rise to claims of unfair competition, particularly in the US. Emirates has focused on the more affluent traveler.

The budget travel population is a significant market.

Opportunities

Tim Clark (CEO Emirates Airlines), recently reported that several governments, airports, and organizations in Europe have approached the airline requesting Emirates to provide services to and from their region because of growing frustration with their local airlines. There is also an opportunity of catering for the lower to the middle-class traveler, possibly by expanding its fleet to smaller aircraft. Emirates has recognized the potential to expand its operations to the African continent. Travel via Dubai as opposed to a European hub reduces travel times significantly from the African continent. Furthermore, the airline could form an alliance with other airlines such as QANTAS in order to cooperate with as well as share their incoming traffic generating more revenue.

Threats

The Trump administration attempted to restrict travel to the U.S. by citizens of various Muslim-majority countries. While the initial ‘travel ban’ didn’t survive a court challenge, it led to an instantaneous 35% drop in bookings for Emirates’ routes to the United States. US authorities have prohibited passengers flying to the U.S. from several cities (including Emirates’ hub in Dubai) from bringing laptops or tablets as carry-on items. Although this is a security measure, it has an impact on business travelers, who wish to work during their flight. This has resulted in a significant number of business passengers traveling via a European hub instead of Dubai.

Following a growing number of incidents where passengers had various negative experiences with the Airline, the Facebook page titled ‘Emirates Unsatisfied Customers’ has emerged. The bad experiences are mainly related to delay, which then trigger in some circumstance’s immigration control problems with passenger’s visas. This has impacted negatively on the airline’s publicity.

Etihad and Qatar Airways have grown significantly over the past five years and pose a threat to passenger numbers for emirates. Both airlines have developed a reputation for quality and reliability, they are also in competition with emirates in the qualities in terms of the premium culture of emirates. Fluctuation in fuel cost has a significant impact on the airline due to its size.

Marketing Strategy

Emirates being a premium airline/ full cost carrier providing high-quality services with increased comfort and luxury is a key to their marketing strategy especially for business travelers. This can evidently see from their business and first-class designs which are said to be ‘inspired by Mercedes Benz’. The airline’s ‘business to business’ approach provides the airline a way to reach their target demographic being business companies and business travelers, as well as the higher-class society who have secured their financial security by a larger margin. These are people who can afford to pay for comfortable airline services. According to the OAG Analyzer, the number one route by seat capacity between 2018 and 2019 offered by Emirates is Dubai to London Heathrow and London Heathrow to Dubai being 2,219,585. London Heathrow represents one of the European financial centers and is the financial capital of the United Kingdom. The value of an airline service’s subjective to each demographic. For business travelers, if an airline can provide quality and comfortable services which minimize the individual’s fatigue level at the destination, the product/ service would be deemed to be of high value. (e.g., conference meeting) this would increase performance in their job as well as provide convenience for the customer.

Conclusion

The SWOT analysis of Emirates airline highlights the airline has several great strengths as well as a number of weaknesses. There are also opportunities that the airline to might research and turn into strengths. Consideration should also be given to the threats so that their impact might be either eliminated or minimized. Of the strengths, the perception of quality throughout the entire experience is of great value to the organization. This brings a greater customer base which is willing to pay for the product on offer. Along with the geographical global convenience, which comes with being central to the traveling populations of the world. Considering the weaknesses, the fact that the fleet consists of all large, wide-bodied aircraft, could be turned into an opportunity. Developing a group of smaller aircraft could increase the market share of lower to middle-income passengers. Looking at the opportunities, the development of the African continent routes would certainly lead to an increase in passenger numbers. Of the threats the attempted to restrict travel to the USA by citizens of various Muslim-majority countries, is difficult to resolve. The airline has no control over the reaction to such political machinations. Also, the ban on laptops as carrying on luggage to US cities from departure such as Dubai is out of the airline’s control.

Recommendations

• Add smaller aircraft to the fleet and develop the marketing for lower to middle-income earners.
• Develop African continent routes.
• Develop strategies which can deal with a serious customer issue, such as long delays. This will counter the negative publicity engendered by such media outlets as ‘Facebook’.
• Develop modern social media advertising and possible sponsorship via social media.

References

1. Global. (2019). The Emirates A380 fleet | Our fleet | The Emirates Experience | Emirates. [online].
2. Emirates Australia. (2010). History | About us | Emirates Australia. [online]
3. Stephenson, M.L. (2013). Tourism, Development and ‘Destination Dubai’: Cultural Dilemmas and Future Challenges. Current Issues in Tourism, 17(8), pp.723–738.- Peer reviewed.
4. Emirates. (2015). Sponsorships | About us | Emirates. [online].
5. Emirates.com. (2019). Emirates Route Map. [online].
6. Mateusz Maszczynski (2017). What Are the Top 5 Cabin Crew Nationalities at Emirates? [online].
7. Nabbout, M. (2019). Dubai’s Decline in Tourists Was “Short-Lived”, Numbers Back Up Again. [online] StepFeed.
8. Levine-Weinberg, A. (2017). Flight Cuts at Emirates Are a Bad Sign for Airbus. What About Boeing? [online] The Motley Fool.
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15. John F.O’Connell, 2016. A Study into the Hub Performance Emirates, Etihad Airways and Qatar Airways and Their Competitive Position Against the Major European Hubbing Airlines. Peer reviewed.
16. Business Traveller, 2017. Emirates Unveils New Cabins for B777 Fleet, p.17(1). Peer reviewed.
17. Esther Martínez-Garcia, Berta Ferrer-Rosell, Germà Coenders, 2012. Profile of Business and Leisure Travelers on Low-Cost Carriers in Europe, Vol.20, p.12(3). Peer reviewed.
18. Lohmann, Guilherme, 1994. From Hub to a Tourist Destination. An Explorative Study of Singapore and Dubai’s Aviation-Based Transformation. Volume: 1. Peer reviewed
19. OAG Data analyzer, 2019, OAG Data analyzer, Top x report.