Who Benefits From the Airline Industry Consolidation?

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Table of Contents

Introduction
Background of the airline industry
Air travel demand and supply
Market structure and competition policy
References

Introduction

The airline industry has become one of the most flourishing and thriving industries in the world with millions of workers employed in the sector. In addition, large amounts of revenues are generated from daily business operations in the airline industry. Studies indicate that the services offered by the airline industry have been pivotal towards the growth and development of the global economy.

In their publication “The global airline industry”, Belobaba, Odoni and Barnhart (2009, p.45) point out that since its inception, major consolidation processes as well as regulations and deregulations have taken place. These have immensely changed and reshaped its operations. The changes have led to transformation of systems of control in order to keep the companies vibrant and at par with competition in the industry.

As this paper analyses, consolidations in the airline industry greatly affect key players both positively and negatively, causing some airline companies to benefit. It is on this front that the paper seeks to examine the real beneficiaries from the airline industry consolidation.

Background of the airline industry

The successful growth of the airline industry has been attributed to the effective and efficient management strategies and interrupted provision of customers with better and quality services. Dickson (2010, p. 72) indicates that initially, the airline industry was dominated by few major and pioneering airlines which practiced market monopoly policies.

However, from the mid nineteen fifties to the late seventies, many other airline companies came up with competent services in Europe and America to meet the increasing demand for faster international travel and cargo delivery services, and for effective competition in the growing global market. These resulted into intense competition in the global airline industry. According to economic analysts, this has played an important role in shaping the events happening in the airline industry.

Due to the emergence of new airline companies and the introduction of deregulation into the airline market, the initial controls were then forced to review monopolistic ideas of the market to accommodate the new arrivals. Over the years, the demand for growth and dominance in the global airline market has continued to surge, and the air traffic has continued to experience an upward trend consistently with only exceptions of two periods (Dickson 2010, p. 72).

For instance, in 1991, a period well remembered for after-events of the gulf-war, air traffic declined due factors such as declining fuel coupled with a financial crisis of economic recession with a subsequent one experienced as lately as 2001 following a US terror attack. Later statics revealed that there was a decline in American airline traffic following these events as evident from business statistics journals and periodicals (Dickson 2010, p. 72).

An analysis of the airline industry indicates that major airline growth is being experienced in North American regions where airline companies have continued to grow massively with leading market shares, even after the period that followed the terror attacks (Brook 2009, p. 5).

It is estimated that the North American regions are currently gaining more revenues of approximately $1400 billion as measured by parameters rates using the revenue passenger kilometer. The European regions trail with approximately 1200 while Asia and pacific, Latin America and Caribbean, middle east follow with approximately 1700, 130 and while 195 while African airlines remain trailing with only about 50 billion (Brook 2009, p. 5).

With such increased competition in the market, many airline companies have embarked on devising effective and efficient strategies to aid them compete favorably and effectively in the competitive market have employed competition strategy efficiencies. As such, cost efficiency has taken central stage with consideration of quality model in a network.

Dickson (2010, p. 75) argues that back in the year 2004 research revealed an existence of a big cost gap as regards operating costs per seat kilometer. Recently there were steps by major airlines to gain competitive advantage over other airlines but the cost gaps experienced have not consequently reduced.

Since some costs are thought to be helpful in reduction of premiums, efficiency has been emphasized. In the recent past, introduction of cost efficiencies and new airlines has led to achievement of the same. With this, many airlines have learned lessons such as cost gaps only depend on perspectives such as infrastructure, labor and operational costs for instance, The American airlines.

Other airlines such as those in Europe have gained through government and supplies through interception of large costs such as those involved in infrastructure, airport and supplies. With emphasize in quality, comfort and punctuality delivered in regard to differentiation efficiency, competitive advantage is realized.

Air travel demand and supply

Supply and demand within the airline industry are not automatic since there are forces that drive these factors and either keep them at. Since the airline industry is complex in regard to sensitivity of its clientele base, price sensitivity has been identified as one of the drivers of demand and service offering.

With price differences, issues of customer differences also emerge. It is likely that most travelers would prefer airlines with low costs than those specializing in differentiation efficiency. However, business class customers have remained unaffected by highs costs. Thus market elasticity highly depends on pricing that also depends on many other factors.

In addition, changes in pricing have been linked with external and internal changes as expenditure is concerned. For instance, additional government levies, fuel costs, distance of travel and the level of the market all affect prices. Due to these effects in change as concerns pricing of airline industries, many companies find it hard to cope with drastic changes and thus continue operating on a minimum or no profit for the whole duration since it is outside their potent (Brook 2009, p5).

Pearce (2009, p. 12) contends that price elasticity within some airlines has been found to be higher than their counterparts. For instance, elasticity has been considered to relate with efficiency, and airlines such as DEB have used elasticity to demonstrate a high level of elasticity in the range of -2.45 to -1.24.

Other airlines with dependencies in price elasticity have showed lower levels of elasticity of -0.5 to -01.8. Studies indicate that the issues of elasticity are specifically found to affect airlines in the United Kingdom. Other studies of the airline industry reveal that route level elasticity is relatively higher in regions with high numbers of airlines. For instance, regions of North America are observed to experience elasticity in multiples of 1.

In Europe, there is a slight difference in elasticity of slightly more than one. These regions are followed with regions in the Asian regions with 0.95 and followed by Sub-Saharan Africa regions approximately 0.6. South America exhibited low levels of sensitivities as regards price change.

Regions classified such as transatlantic and transpacific showed some of the highest levels of elasticity with the former showing a multiples of more than one point two and pacific airlines with the latter showing a less sensitivity of marginally low values. These were observed to affect the demand for airline services.

With a closer examination of demand of airline services, statistical evidences reveal that customer preferences are altered by change in pricing. However, it has come to the realization that price elasticity was not generously applicable to these regions indiscriminately. To begin with, close examination of customer resistance to price revealed that different customers were affected differently from others.

For instance, Smith (2009) shows that surveys done in the cross section of different customers ranging from business class to regular class revealed that business class customers were resistant to price elasticity and were thus affected less than regular class customers.

Such trends continue to increase the industrial abilities to deliver more services and thus create an opportunity for continual demand and thus supply. This way, the market forces of demand and supply continue to play at equilibrium and thus continue to keep the industry thriving.

Market structure and competition policy

Since the September 11 attack in the United States of America, the airline industry has continued to experience a lot of changes associated with direct effects of the attack such as flight limitations of some airlines to some regions. Studies indicate that after the regulation of the airline industry which commenced in the late seventies, both airlines were controlled by the Civil Aeronautics Board in the dimensions of routes and the prices charged to customers.

Later on, changes were introduced such as deregulation in the open skies. This caused the airline market structure to take a dimension of regulation decentralization to regions and thus involved more stakeholders. For instance, in the United States of America, New York and Washington flights have been expected to acquire slots for landing and taking off by the US government. This is thought at effectively controlling the flights to and fro regions inside America (Gowrisankaran 2002, p.83).

Competition policy

Immediately after the process of deregulation of airline services, many airlines began experiencing immense growth. For instance, the United States airline industry has gained more than twice of it values before deregulation. The effect was not reflected similarly in airlines such as those from Canada, which took time before deregulation since their growth rates have not been as thriving as those of the US.

Gowrisankaran (2002, p.85) depicts that immediately after deregulation, airlines adopted survival strategies such as the hub-and-spoke as employed by the US airline industry. But then, from continued dominance of stronger airlines, many airlines have been forced to close down to unbearable competition from the stronger counterparts. Although the market is self controlling and given that deregulation has liberalized airline industrial activities, the growths experienced have not been consistent.

For instance, the US airline industry experienced losses amounting to more than a half a billion US dollars in the first quarter of 1997 but then gained almost similar margin in the following quarters. With this volatility, airline growths have thus remained divergent over the years and across the industries. For instance, even after the 2001 attack, the Southeast experienced more than eighty million dollars in profit.

This was considered a major step in its growth despite the security threat. Policy of deregulation brought about competition changes that made all players seem equal in decision making, price regulation and efficiency differentiation. This hurt the low ability players of the industry while favoring the gigantic players to a great extent. Thus liberalization of the market was with advantages and disadvantages.

Implications of competition policy

Given the complexity of the airline industry, policy choices usually influence the level of competition. It has been found that policy choice highly determines the mechanisms of infrastructural constructions and amenities. With continual industrial competition, there have been biding processes to make provisions for less advantageous companies in the airline industry by provision of sharing mechanisms (Robert 2008, p.84).

Antitrust policies in the airline industry have continued to dominate the area of government intervention which may also influence markets. Future airfares raises due to such forces as market concentration make it hard for consumers to make suitable and favorable choices and thus affect them directly in a negative way. Decisions such as approving merges for airline industries have been found to affect the industry in a positive way.

Restriction on foreign ownership of heavy commercial airlines and domestic ones may negatively affect direct international and national competition levels (Belobaba & Barnhart 2009, p.45). Although this comes with concern over other issues such as security, major international airlines have made agreements to reduce competition challenges. For instance, the US airline industry in collaboration with the Canadian airline has made agreements concerning handling of security matters as far as the US security is concerned.

With agreements that Canadian airlines take responsibility in picking up passengers from US to Canada and not pick and drop them within the US territory has enabled the two countries to operate collaboratively, reducing competition and enjoying regulation of their services (Clarkson 2005, p.86).

To recap it all, it has been observed the airline industry has undergone great transformations. Before deregulation, all airlines were dominated by a central body that made all decisions regarding pricing, passenger pick and passenger drop. After the introduction of deregulation, many airlines have undergone changes.

The big airlines continued to boom while many other small ones were forced to undergo closure. With changes in the market forces of supply and demand, major airlines have continued to sustain their economies. For instance, pricing elasticity has greatly affected the supply airline services but reductions of elasticity by the business class of passengers have enabled demand to rise and thus keep players in business.

As part of the recent developments, efficiency as well as effectiveness in airline service delivery by cutting down costs has greatly improved both customer satisfaction and profitability of these airlines. As a result, many airlines have gained necessary knowledge and expertise such as cost gaps only heavily rely on factors such as infrastructural development, human resource as well as costs related to operation of the airlines.

A typical example is the American airlines. Some airlines may have experienced unprecedented growth through support obtained from government Industrial competitions based on deregulation have also met with strict policies that hamper autonomous decision making.

Since companies are sometimes restricted by governments in making decisions such merging and ownerships, they have recently experienced negative impacts. In regards to deregulation, major airlines have come to an understanding on handling of security matters such as the one witnessed with United States and Canadian collaborations.

References

Belobaba, P., Odoni, A. & Barnhart, C 2009, “The global airline industry”, Chichester: Wiley and Sons.

Brook, B 2009, “Air travel demand”, New York: IATA.

Clarkson, R 2005 “The US airline industry”, London: McMilan publishers.

Dickson, M 2010, “.Airline cost performance”, New York: Wiley and Sons.

Gowrisankaran, G 2002, “FRBSF economic letter: competition and regulation in the airline industry”, New York: Soybean inks, 2002(1).

Pearce, B 2009, What is driving travel demand? Managing travel’s climate impacts, New York: IATA.

Robert, E 2008, Deregulation of the airline industry, Harvard: Harvard University Press.

Smith, EM 2009, Examining competition policy: The airline industry, New York: Routledge.

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