History of airlines and the business model:World’s first airline was, DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft It was founded on November 16, 1909, with government assistance, and operated airships manufactured by The Zeppelin Corporation. Its headquarters were in Frankfurt. The first fixed wing scheduled air service was started on January 1, 1914, from St. Petersburg, Florida, to Tampa, Florida. The four oldest airlines that still exist are Netherlands’ KLM (1919) Colombia’s Avianca (1919), Australia’s Qantas (1921), and the Czech Republic’s Czech Airlines (1923)Early 20th CenturyAirplanes were around the first few years of the 20th century, but flying was risky, 1925.
In this year, the Air Mail Act assisted the development of the airline industry by allowing the postmaster to contract with private airlines to deliver mail. Later, the Air Commerce Act gave the Secretary of Commerce, power to establish airways, certify aircraft, license pilots, and issue and enforce air traffic regulations. The first commercial airlines included Pan American, Western Air Express and Ford Transport Service.
Within 10 years, many modern-day airlines, such as United and American, came up as major players.Mid-20th CenturyIn 1938, the Civil Aeronautics Act established the Civil Aeronautics Board. This board had various functions, the two most significant being determining airlines’ routes of travel and regulating prices for passenger fares.
The CAB based airfares on average costs, so airlines couldn’t compete based on lower fares, and hence they competed by striving to offer the best quality service. If the CAB found an airline’s service quality was lacking on a certain route, it would allow other carriers to begin operating on that route. In this environment, established airlines enjoyed an advantage over new entrants, as they found it difficult to break into existing network. The Federal Aviation Agency, now known as the Federal Aviation Administration, was created in 1958 to manage safety operations.
DeregulationIn the mid-1970s, Alfred Kahn, an economist and deregulation advocate, was made the chairman of the CAB. Around the same time, a British airline began offering exceptionally inexpensive transatlantic flights, awakening a desire for U.S.-based airlines to lower their fares. These influences made Congress to pass the Airline Deregulation Act of 1978. The CAB disbanded a few years thereafter.Late 20th CenturyPost-deregulation, new carriers rushed into the market, and new routes directly connected cities earlier accessible only via a string of layovers. Fares were reduced as competition and the number of customers increased.
A 1981 air traffic controllers strike brought a temporary setback to the growth, which continued throughout the 1980s. Some of the major carriers who had dominated the skies during the middle portion of the century, such as Pan American and TWA, began to collapse because competition. Such carriers died out completely following the Gulf War and following recession of the early 1990s. Surviving airlines rode out the recession and returned to record profitability by the late 1990s.21st CenturyIn 2001, the industry dealt with the effects of another economic downturn, as business travel decreased substantially while labor and fuel costs increased. The events 9/11 overblew the airlines’ issues, leading to a sharp decrease in customers and significantly higher operating costs. Losses continued for years; the industry didn’t return to profitability until 2006. A comparatively stable period followed, although controversies arose over service quality and passenger treatment in terms of flight delays, particularly those involving planes waiting on the runway.
In 2010 and 2011, the U.S. Department of Transportation issued a series of rules mandating that the airlines provide suitable modifications for passengers in extenuating circumstances.The Evolution Of The Airline Business ModelLow-cost carriers (LCCs) have revolutionised the market, extending the choice of air transport to consumers at the lowest cost.
And they have done so by leveraging their cost efficiency and innovation to remain in a leading position, even in a disconcerting market. However, as the industry dynamics have changed, so have the business strategies of LCCsTo compete for cost-conscious passengers, many traditional full-service carriers created new products, restructured and streamlined their processes, slashed costs and aggressively priced many routes. As a result, LCCs were forced to change or enhance their business models as well. While price remains a key competitive factor, it is no longer the sole driver of low-cost carrier business strategies.
LCCs now emphasis on other areas, such as merchandising, multi-channel strategies and increasing partnerships. They also place more emphasis on: • Maintaining low costs while compensating for rising costs of fuel and aircraft • Integrating new services into the current model and enhancing customer service • Crossing international borders and experimenting with long-haul segments • Expanding market opportunities such as increasing international reach and accessing the corporate segment by participating in a GDS. With carriers veering from the fundamental low-cost strategy, it is no wonder that the low-cost business model has been difficult to define in recent years. The result of this shift is the emergence of the “hybrid” business model.
This model combines the cost-saving methodologies of a pure lowcost airline with the service, flexibility and route structure of a full-service carrier. Market size & trends: Air transport connects people and economies Air transport provides a significant boost to economic development. An ongoing increase in unique city-pair routes has helped to enable the flow of goods, people, capital, technology, and ideas.
The number of unique city-pair connections exceeded 18,400 in 2016, over 700 more than in 2015 and almost double the connectivity by air 20 years ago.The price to users of air transport, meanwhile, continues to fall, after adjusting for inflation. Compared with 20 years ago, real transport costs have more than halved. In addition, enhanced service offerings and nonstop connections have expanded choice for consumer Air transport is crucial to tourism and international tradeAir transport plays a key role in facilitating tourism and its attendant industries and is vital to international trade. IATA estimates that air travelers spent around $650 billion in 2016.
The value of international trade shipped by air, meanwhile, was $5.5 trillion in 2016. Reduced air transport costs and improved connectivity have boosted trade flowsPassenger demand sees another strong year worldwideIndustry-wide revenue passenger kilometers (RPKs) grew 7.1% in 2016 when adjusted for the leap year. Although this marked a slight slowdown from the 7.
4%, oil price–assisted growth seen in 2015, it was still a strong performance and well ahead of the 10-year average growth rate of 5.5%. More than 3.8 billion passenger segments were flown in 2016, an increase of 250 million compared with 2015. Normal return achieved for airline investorsSuch is the intensity of the competition and the challenges of doing business that equity investors in the airline industry have typically seen their capital shrink. For only the second time on record, in 2016 the air transport industry paid its investors a normal reward for risking their capital. That is, the industry’s return on capital exceeded its cost of capitalOperating profits close to matching 2015 recordIt was a year of near-record operating profits in 2016: the operating margin of 8.9% of revenues was up from 8.
6% in the previous year and more than three times that achieved in 2012. After allowing for interest charges, taxes, and write-downs, the $34.8 billion net post-tax profit that airlines generated was slightly down from $35.9 billion in 2015.Improving the industry’s highly leveraged balance sheets, though, will in most cases require a prolonged period of better profits. As a result, only a handful of airlines are rated “investment grade” by ratings agencies.
Aviation’s center of gravity continues to shift eastwardsAsia dominated the ranks of the fastest-growing origin-destination (O-D) passenger markets again in 2016. The industry’s center of gravity continues to shift eastwards. Once again, the domestic China passenger market saw the biggest incremental change in journey numbers, with 37 million more passenger journeys made in 2016 than in the year before. This increase was more than in the next two fastest-growing markets—domestic United States and domestic India—combined. Given its status as the world’s largest air passenger market, the US domestic market saw comparatively modest year-on-year passenger growth, of 3.9% in 2016, equivalent to 19 million additional passenger journeys. To put this in perspective, the domestic Vietnam market surged 33% in 2016, but the absolute number of additional journeys in Vietnam was still only around one-third of those seen in the United States.Accounting for these seasonal fluctuations, fares display a downward trend through the early 2000s, and then appear to head upward again in more recent years.
Naturally, price changes can be caused by demand fluctuations, as well as exogenously determined cost factors, such as fuel prices, but there are also significant shifts in market structure occurring over the time period, and so it is the objective of this paper to attempt to identify how much of these long-term price fluctuations might be determined by market structure. Market structure: The oligopolistic structure Airline industry is oligopolistic in nature where more than two companies compete each other for a limited market. Where capacity comes in bulk and customers in ones and twos. Customers are hypersensitive to price, forcing Airlines to operate close to break even seat factor, about 80% on the average, using flexible pricing.
Most of the seats, therefore, ought to be sold on discount to fill the aircraft because empty seats are perishable. Within an oligopolistic market, it is important to understand that the nature of market entry barriers tend to be considerably high. By barriers to entry, it is understood that there are a lot of obstacles that deter new entrants from the coming into the market to compete with incumbent firms operating in the industry. Therefore, firms in the long run will continue to maintain supernormal profits, which is the above level of profit tied up in assets, related to the firm; consequently reducing potential firms from entering the market. This relates to the airline industry as the five alliances as stated in the above illustration with the largest market share will be able to keep their existing power over the airline business. Barriers to entry in the airline market include high set up costs, legal requirements, brand loyalty and economies of scale.High operating costs are most notably one of the major barriers subject to entering the airline industry as these are necessary costs to a firm to start up an airline.
The cost of aircrafts such as Boeing 747 tend to be a barrier because of the access to capital to fund the investment as they cost no less than £20 million; the costs of research and development can be integrated within aircraft cost; fuel is also an expensive commodity because of its scarcity. Experienced pilots and flight attendants tend to be costly due to the regularly need for them to be trained. Additionally insurance costs are expensive due to taking into account passengers, cost of fleet and also the price of a cost accountant to generate future projected figures which is required for approval of insurance with banks or capital investors.Legal requirements act as a barrier within airline industry because it is vital that they comply with the legal legislations such as having the correct licenses required to manage an airline firm. Both internationally and in the United Kingdom, air operators such as Virgin Atlantic and British Airways must hold a valid operating license which enables them to carry passengers, cargo or mail for payment as stated by Civil Aviation Authority (CAA, 2011).
Brand loyalty is a major restriction to potential entrants in the airline industry for instance, if customers feel loyalty through flier air mile loyalty schemes due to obtaining free upgrades and flights dependant on points earned then they will be less reluctant to go to a substitute airline even though their usual airline is more expensive because of built up loyalty. Additional barriers within the airline market are economies of scale (EOS), this is defined by Gillespie (2010) as ‘The reduction in the long-run average costs as the scale of production increases’ , in relation to airlines they make use of technical EOS by utilising online advanced reservation systems which enables airlines to reduce long-run average costs. Purchasing EOS will lower airline average costs through the bulk buying of aircrafts such as Boeing planes or fuel for the planes. Financial EOS will occur when established airline firms apply for capital from financial institutions to purchase passenger aircrafts, due to them being established they will obtain cost savings when they have borrowed money. Last, managerial EOS will be present in the airline market because they are able to employ managerial specialists within there headquarters due to the size of the firms.It is essential to recognise that a barrier to exit in the air transportation market is sunk costs, these are costs where they are not easily recoverable once a firm leaves a market, due to resources being specialised and not of use to any other sector. In reference, to the airline industry aircrafts subject to specialisation can be regarded as sunk costs because they are not easily transferrable to another use and therefore risk lost of capital investment by firms.
Oligopolistic characteristic which is not uncommon in the airline industry is the application of non price competition; this is where the airline operators use alternative methods to price in order to compete with existing firms. Even though airlines have interdependence and can influence the market over the price they charge, due to the uncertainty associated with competitiveness of pricing they tend to prefer to compete in the form of non-price competition. Non-price competition in the airline market consists of advertising and marketing techniques such as through use of brand websites, the quality of service offered which include offering free meals and alcoholic drinks on flights; these tactics are used to differentiate themselves amongst competitors.The behaviour of oligopolistic firms can be determined through assumptions of price and quantity based on two important models which are the kinked demand curve and game theory. The kinked demand curve is a model that shows assumptions from managers in relation to the way they think rivals will act and how competitors will not follow.Major Players and their characteristics Source: www.
financialexpress.com/industry/air-traffic-soars-15-in-april-indigo-stays-on-top-air-india-marketshare-flat-at-12-9/675661/ Indigo: IndiGo is a well known Indian Low-cost airline company. This enjoys top position in the list with best customer feed back in almost all sections. IndiGo is has top priority for On-time performance.
The airline company headquartered at Gurgaon, India. According to market share, This is the largest airline in India with a share of 35.8%. They offer 633 daily flights connecting to 38 destinations and this includes flights to 5 international destinations. IndiGo works with fleet of 97 aircraft belonging to the Airbus A320 family. The company founded in 2006.
Its primary hub is at Indira Gandhi International Airport (Delhi). Jet airways: Jet Airways founded in 1 April 1992 and they commenced operations from 5 May 1993. Chhatrapati Shivaji International Airport (Mumbai) is the primary hub of this airline. Their focus cities list includes:- Cochin International Airport (Kochi), Sardar Vallabhbhai Patel International Airport (Ahmedabad), Chaudhary Charan Singh International Airport (Lucknow), Rajiv Gandhi International Airport(Hyderabad) and Abu Dhabi International Airport (Abu Dhabi).
JetPrivilege is the name for their frequent flyer program. Jet Lite is the subsidiary of Jet Airways. This major Indian airline based in Mumbai and one of the best in terms of market share and passengers carried. They have 300 flights daily to 74 destinations worldwide. Secondary hubs of Jet Airways located at Delhi, Kolkata, Chennai, Bengaluru. Spice jet:SpiceJet founded in 2005 and Commenced operations from 18 May 2005. This airline company have primary hubs at Chennai International Airport (Chennai), Indira Gandhi International Airport (Delhi) and Rajiv Gandhi International Airport (Hyderabad).The term SpiceJet MAX used for their frequent flyer programme.
SpiceJet works with fleet of 34 aircraft to 41 destinations. Company Slogan is “We Do It With All Our Heart”. This is the country’s forth largest airline by number of passenger carried. The company operates more than 270 daily flights. AirIndiaAir India is a well known flag carrier airline of India owned by Air India Limited (AIL). This is one of the largest airline in India in domestic market share. Company operates a fleet size of 107 aircraft (Airbus and Boeing aircraft) excluding subsidiaries. The company founded on July 1930 as Tata Airlines and commenced operations from 15 October 1932.
Their primary hubs are Indira Gandhi International Airport and Chatrapati Shivaji International Airport. Flying Returns is the name for the flyer program. Air India offers flights to 85 destinations. “Your Palace in the Sky” is the company slogan. Air India was once the largest operator in India. Indifferent financial performance and service, labor trouble Vistara: This is a well known Indian airline located at New Delhi with its primary hub at Delhi-Indira Gandhi International Airport. The company founded on 2013 and commenced operations from 9 January 2015.
Club Vistara is the term for their frequent flyer program. Vistara is a famous joint venture between Tata Sons and Singapore Airlines airline.At present the airline operates 245 weekly scheduled passenger services across 10 domestic destinations within India.
The company equipped with a fleet of 6 Airbus A320-232 aircraft. This is said to be the first airline in India to introduce premium economy seats on domestic routesWays of competitionPricing It’s an exciting time to run an airline. More people want to fly to a wider range of global destinations. And a rise in passenger numbers means greater opportunities for airlines to attract customers. However, winning these passengers over will be far from easy.
Low-cost flights have changed people’s approach to air travel. And this has caused an explosion in competition — with a wider range of airlines working hard to fill the seats on their planes.Technology Competition is one of the greatest challenges many airlines face right now. But the good news is, there’s a way to overcome it.Using new technology — like cloud services, Big Data and the Internet of Things (IoT) — some airlines are already gaining a competitive advantage by making their operations more efficient and improving their passenger experience. And regardless of whether an airline’s already started to capitalise on the tech-savvy passenger, there’s plenty more technology out there to keep airlines flying high. Whether an airline wants to provide customers with additional services, or analyse relevant data to find out what passengers want, there’s technology that can help.
Airlines have a steep climb ahead of them as they attempt to adapt to customer demand. New apps, tools and processes can help them take off ahead of the competition, increasing market share and making sure they’re ready for an even more technological future. Premium economyPremium economy, balancing the trade off between cost and service, is a travel class offered on some airlines. This travel class is between economy class and business class in terms of price, comfort, and amenities. In 1991, EVA Air was the first to introduce Evergreen Class and had since become the first airline to offer this class of service in the world.In some ways Premium Economy has become a standard reflecting what Economy was like 40 years ago (or more); as an example the seat pitch of United Airlines’ Economy Class was 36 inches back in the 1970s, the same seat pitch as most airlines’ Premium Economy these day