Lecture 5 - The Airline Industry PDF

Lecture 5 The Airline Industry Presented by: Kerry-Ann Metcalfe- Green 1  The Airline Industry In 2019 the World Airline Industry carried over 1.5 billion passengers The U.S. Airline Industry (2019)- 929 million (Bureau of Transportation Statistics...

Lecture 5 The Airline Industry Presented by: Kerry-Ann Metcalfe- Green 1  The Airline Industry In 2019 the World Airline Industry carried over 1.5 billion passengers The U.S. Airline Industry (2019)- 929 million (Bureau of Transportation Statistics) In the US the Airline Industry employed 452,668 people (US) Airline Management The process whereby individual (and groups of) airlines seek to organise, direct and harness their resources, personnel and business activities to meet the needs of their organization and customers in an effective and efficient manner Airline management deals with both strategic and operational 2 issues The Airline Industry State ownership of airlines persists in order to ensure the prestige of the national carrier in international relations To maintain a degree of control over tourist arrivals To provide competition with other carriers to prevent a monopoly or 3 duopoly situation The Airline Industry- Nature & Operations Oversee, coordinate an direct the activities of airline operations. They MUST also manage diverse activities that affect the organization’s main business: ❖Ground handling ❖Planning 4 ❖Human resource management ❖Reservations The Airline Industry- Nature & Operations Typically allow different elements to operate as separate business units, with a general manager reporting to a board. This helps to achieve a degree of integration within the organization while delegating responsibility for specialized functions to individual business units Airline Organization Typically allow different elements to operate as separate business units, with a general manager reporting to a board. This helps to achieve a degree of integration within the organization while delegating responsibility for specialized functions to individual business units 5 Management Limitation Airline managers are not free agents Their actions are defined by a host of national and international regulations. Economic and Non-economic !Place severe limitations on airline’s freedom of action 6  Airline in Tourism The role of international airlines in the total tourism business is to provide mass and quick transportation between countries under safe, standardised and economical conditions. Because of quick and efficient transportation, people are spurred to travel for various reasons as destinations have become more accessible. The travel industry requires an efficient infrastructure which put together constitutes the tourism industry 7 which is the world's second largest industry.  Airline in Tourism Together with the recent world inflation and unemployment, travel which came out of disposable income has become a luxury for a few. To meet such fluctuating world trends airlines have modulated their fares and devised novel methods of 8 tariffs to meet the travel need of various segments.  Airline in Tourism They have thus come up with: 1.The First class fares - for exclusive passengers 2.Economy fares - for the common passengers 3.Excursion fares, charter fares - for tourists 9  Airline in Tourism All fares used by the airlines come under two categories 1.IATA fares 2.Government directed fares 10  Airline in Tourism While on a average 35% of the airline carriage was on account of business travel, this segment alone could not be relied on totally to fill additional capacities. Thus, the holiday market had to be tapped and fares reduced to stimulate demand, holidays and student passengers. 11  Nature and Operations of the Airline Industry According to Cook, Yale & Marqua (2010) in the Business of Travel the following is true: Air travel is a 20th century mode of travel: jet travel only in second half of century Cooperative organizations make the industry more efficient ❖ ATA (Air Transport Association): U.S. domestic airline alliance ❖ IATA (International Air Transport Association): International alliance ❖ These associations make it possible for passengers to purchase a single ticket although they may travel on planes owned and operated by several companies in a single trip The Air Transport Action Group (ATAG) is a highly respected not-for-profit association that represents all sectors of the air transport industry. It is the only global industry-wide body to bring together all aviation industry players so that they can speak with one voice – and it works to promote aviation’s sustainable growth for the benefit of our global society Regulation Fully private airlines are subject to a great deal of government regulation for economic, political, and safety concerns. The freedoms of the air to protect passengers 12 Nature and Operations of the Airline Industry According to Cook, Yale & Marqua (2010) further suggests that: Operating in a deregulated environment Airline travel was deregulated in U.S. in 1978 Changes due to deregulation ❖ Competition on price ❖ Increase in number of airlines serving any city ❖ Airlines enter and leave airport service at will ❖ Airlines can package and market tours Hub and Spoke system reduces cost of operation and increases load factors Use of code-share agreements link regional carriers to national lines New smaller, regional jets (RJs) are being tried to increase direct 13 flights Nature and Operations of the Airline Industry Source : Cook, Yale & Marqua (2010) in the Business of Travel 14 The Hub and Spoke System 15 Source : Cook, Yale & Marqua (2010) in the Business of Travel Nature and Operations of the Airline Industry According to Cook, Yale & Marqua (2010) suggests that the airline industry has a language system. Decoding the language of the airline world Each airline has a two-letter identification code Each city with scheduled air service has three-letter code Classes of service have codes Types of flights have special names, e.g., direct, non-stop, etc. Passenger trip type are given special terms, e.g., round-trip, open-jaw 16 2014 statistics- Airport Council International The following is a list of the world's busiest airports by international passenger traffic. (January-December) figures are as follows 1. Dubai International Airport 2. London Heathrow Airport 3. Hong Kong International Airport 4. Paris-Charles de Gaulle Airport 5. Amsterdam Airport Schiphol 6. Singapore Changi Airport 7. Frankfurt Airport 8. Incheon International Airport 9. Atatürk International Airport 17 10. Suvarnabhumi Airport 2013 statistics- Airport Council International The following is a list of the world's busiest airports by international passenger traffic. (January-December) figures are as follows Airport 1. London Heathrow Airport 2. Dubai International Airport 3. Hong Kong International Airport 4. Paris-Charles de Gaulle Airport 5. Singapore Changi Airport 6. Amsterdam Airport Schiphol 7. Frankfurt Airport 8. Suvarnabhumi Airport 9. Incheon International Airport 10. Guarulhos International Airport 18  Marketing for Air Service According to Page (2003) the role of marketing in the management of Airline services can be summarized as a four stage process. They are follows 1. Identify Markets and market segments using research 2. Product Planning – this is using marketing analysis to determine which products to offer. Price is important at this stage and product planning would be related to a. Market research is used to identify market needs b. Current and future product features of competing airlines c. Assessing price costumers will pay for products 3. Develop Marketing Plan to facilitate sale of product 4. Monitor and review airline ability to meet service standards. This can be 19 done by examining customer complaints, sales figures, customer surveys.  Airline Marketing- New Approach Airline Marketing needs to be market oriented versus being dominated by operational bias, in order to satisfy customer’s needs. Airline Marketing Process ❖Identify Markets ❖Product Planning ❖Marketing Plan ❖Monitor and Review 20 Segmenting The Market Geographic segmentation Grouping potential tourism customers based on their location Oldest and simplest basis for market segmentation Group by nation, region, state/province, city, neighborhood Common for tourism suppliers to market to a limited region: Time and money involved in traveling often a factor in travel decision making Demographic segmentation Grouping potential tourism customers based on objective characteristics Most popular basis of segmentation Demographic information routinely collected and widely available 21 Segmenting The Market Psychographic segmentation Grouping potential tourism customers on their lifestyle and personality Lifestyle is the way people live identified by their activities, interests, and opinions (AIOs) Product-related segmentation Most direct form of segmentation, group people based on their product-specific wants Can group based on benefit sought; e.g., need for suite-style hotel room Can group based on amount of use; i.e., light, medium, heavy, non- use 22 Can group based on brand loyalty; e.g., frequent flyer plan member International Ticketing International Ticketing is done by the following: 1. Specific routings 2. round trip 3. one way trip ticketing, 23 International Ticketing The Passenger air tariff, fares selection criteria An airline ticket is a considered to be a document, which is issued by an airline or travel agency. It confirms that an individual has purchased a seat on a flight on an aircraft. 24 CENTRAL RESERVATION SYSTEMS Global distribution systems (GDS)GDS are computerized, centralized services that provide travel-related transactions. They cover everything from airline tickets to car rentals to hotel rooms and more. They were originally usually set up for use by the airlines but were later extended to travel agents. 25  Global Distribution Systems (GDS) The role of GDS is to assist the Travel industry in booking: 1. airline reservations, 2. airline fares & ticketing, 3. car reservations, 4. hotel reservations. Further Reading http://businesstravel.about.com/od/faqs/g/Glossary-GDDS.htm 26 Global distribution systems (GDS) There are several types of GDS some examples are as follows: Apollo SABRE Amadeus Galileo Abacus CRT 27 Global distribution systems (GDS) There are several types of GDS some examples are as follows: Travelport is a considered to be a leading distribution services and e-commerce provider for the global travel industry. The company operates a global distribution system (GDS) business, with three brands: Apollo, Galileo and Worldspan The GDS business provides aggregation, search and transaction processing services to travel providers and travel agencies, allowing travel agencies to search, compare, process and book itinerary and pricing options across multiple travel providers. 28 Global distribution systems (GDS) There are several types of GDS some examples are as follows: SABRE –Sabre Global Distribution System (GDS), owned by Sabre Holdings. It enables companies like travel agents to search, price, book, and ticket travel services provided by airlines, hotels, car rental companies, rail providers and tour operators. 29 Global distribution systems (GDS) GDS provides several benefits for Travel and Tourism products such as: It provides marketing opportunity of tourism and travel facilities It provides greater access to the end users of travel products 30 Scheduled Carriers Versus Charter Operators Scheduled Carrier A scheduled carrier is an airline that run on specific routes at specific times, for hire, and under the rules set forth under Federal Aviation Regulation. Charter Operators: A charter airline, also sometimes referred to as an air taxi, operates aircraft on a charter basis, that is flights that take place outside normal schedules, by a hiring arrangement with a particular customer. These flights are often more expensive, but allow the customer the convenience of flying at a more suitable time. 31 low-cost carrier According to Page Low Cost Carriers (LCC) Innovative use of economics, marketing, geography and management A low-cost carrier or low-cost is an airline that offers generally low fares in exchange for the elimination of traditional passenger services. Some of the characteristic of low cost carriers are as follows: Introduce single one way fares No complimentary in flight service One class cabins Ticketless travel High frequency routes to compete Lower staffing costs Heavy emphasis on advertising Heavy dependence on internet and telephone bookings Three flights a day on low density routes Short turnarounds, often less than half an hour-higher aircraft rotations and less time charged in airports. 32 The use of secondary airports – chance to supply routes where none exist Regulation and Legislation Airline deregulation is the process of removing government- imposed entry and price restrictions on airlines affecting, in particular, the carriers permitted to serve specific routes 33 Regulation and Legislation Post Deregulation the following took place: Airlines moved to the Hub and Spoke system Prices steadily declined Quality of service fell Barriers to entry decreased thereby increasing competition 34 Deregulation In the USA in 2003 there was a growth in the domestic market and source of customer complaints increased to a peak of 40,000 in 1987 but dropped to 6,106 for 1991 then rose again for 1997. The main source of dissatisfaction in 2003 were: Flight problems cancellations and delays Reservations, ticketing and boarding Problems associated with refunds Customer service issues such as unhelpful employees, inadequate meals Overselling Discrimination 35 Deregulation The industry has been transformed from an oligopoly of ten trunk carriers controlling 87% of the market (in 1978) to an unregulated Oligopoly of 8 major carriers controlling 93% of the market in 1995 (Goetz and Sutton 1997): This is interesting given the rationale for deregulation: that it would lead to a situation of perfect competition with no major economies of scale or barriers to entry. Goetz and Sutton synthesis of deregulation observes: Lower air fares (in constant dollars have declines since 1978. Discount pricing and fare wars have also reduced fares. However higher fares have been levelled for short-notice business travel. Under conditions of severe discounting some fares have dropped below cost level. However airlines servicing peripheral routes set airfare 18-27 percent higher than trunk routes 36 Passenger volume have increased since deregulated as a result of discounted fares Deregulation From transports geographer perspective a distinctive spatial structure in air travel emerged in the USA. US airlines develop the hub and spoke structure as spatial and commercial strategy for organizing airline operations in a deregulated environment. O’Kelly 1986 are least cost solutions for airlines and may combine a range of airports in a region, assisting the airline in running a high frequency service along trunk routes. Lee indicated that this led to more passengers having to connect from 87% to 67% having direct flights. It is argued that deregulation has had a negative effect on service quality. Kihl 1998 argues that smaller communities not directly connected to trunk routes faced fare increases and 37 less frequent service Deregulation Debate also was concerned that the hub system would increase the potential for accidents since they is more take of and landing in a specific area. US civil aviation statistics however indicated that between 1975 -90 fatalities dropped from 663 to 424 Airlines also has greater control over their workforce since deregulation in pursuit of continued increases in productivity and greater economies of scale 38 Caribbean Airline CARICOM countries have yet to establish an integrated regional airline system. Caribbean regionally based airline market fragmented between two larger privatized national airlines Smaller Players: One regionally-owned joint public carrier, Leeward Islands Air Transport (LIAT- Now defunct), and a number of small national public flag-carriers and private operators. 39 Airlines Flying Caribbean from U.S. Air Jamaica- Now defunct Caribbean Airlines American Airlines Bahamasair Cayman Airways Continental Delta Air Lines Jet Blue Silver Airways Spirit Airlines.... Southwest Airlines 40 United Airlines Airlines Flying Caribbean from U.S. Frontier Lynx Air Mexicana North American Airlines Northwest Airlines Pan Am 800 United U.S. Airways 41 Challenge of Integration carriers serve different segments of the market. Due to heavy competition there is little effort to integrate segments. Result- most airlines have not been able to make a profit, many smaller airlines are struggling to stay afloat. Issues of Dependency In some cases larger carriers been denied permission to serve US routes by failing to meet US operational standards. Result- The Caribbean is highly dependent on foreign carrier 42 capacity Implication US-based American Airlines, enjoys some 65 percent of the regional market. American has cut service on important routes and has in the past threatened to cut more unless islands agreed to subsidize service. In 1997, Grenada, St. Lucia, and Antigua each agreed to pay US$ 1.5 million a year to retain daily jet service to Miami. Due to the fact that far too much control of our industry is in the hands of external forces with self- interest and ulterior motives a level of exploitation may occur 43 Problem Uncertainty regarding foreign airlines serving the market during difficult times. Caribbean airlines is indebted and under pressure to be profitable, less lucrative island destinations could be under-served to cut cost. 44 Managing the Problem Caribbean Islands can liberalize commercial arrangements and regulations. This will help to ensure that markets meet demand more effectively Air service in the region, as a whole, continues to be operated under specific bilateral agreements that often place restrictions on capacity, routing, pricing and competition. 45 Issues CARICOM countries attempted a multilateral air service agreement in 1995, domestic opponents have blocked its implementation Carib-Express could not acquire landing rights in several countries Competition from other airlines 46 Future Prospects CARICOM members recently agreed to work towards a harmonized regional land, air and marine transportation policy as part of their efforts to establish a single market and economy. Success in this area would bring sizable benefits to the region Several Caribbean airlines have agreed to buy fuel in bulk from a single source. Other collaborative efforts could include joint management of distribution systems and fleet management Use of Satellite ticket printers, smart cards, image communications and teleconferencing 47