An analysis of the global significance

Originally designed to characterize subtle long-term changes in environments that were believed to be stable, the work has revealed some surprising conclusions.

An analysis of the global significance

Airline Industry Overview The international airline industry provides service to virtually every corner of the globe, and has been an integral part of the creation of a global economy.

The airline industry itself is a major economic force, both in terms of its own operations and its impacts on related industries such as aircraft manufacturing and tourism, to name but two. Few other industries generate the amount and intensity of attention given to airlines, not only among its participants but from government policy makers, the media, and almost anyone who has an anecdote about a particular air travel experience.

At the same time, airlines were heavily regulated throughout the world, creating an environment in which technological advances and government policy took precedence over profitability and competition.

It has only been in the period since the economic deregulation of airlines in the United States in that questions of cost efficiency, operating profitability and competitive behavior have become the dominant issues facing airline management. Today, the global airline industry consists of over airlines operating more than 23, aircraft, providing service to over airports.

Historically, the annual growth in air travel has been about twice the annual growth in GDP. The economic impacts of the airline industry range from its direct effects on airline employment, company profitability and net worth to the less direct but very important effects on the aircraft manufacturing industry, airports, and tourism industries, not to mention the economic impact on virtually every other industry that the ability to travel by air An analysis of the global significance.

Commercial aviation contributes 8 percent of the US Gross Domestic Product, according to recent estimates [3].

The economic importance of the airline industry and, in turn, its repercussions for aircraft manufacturers, makes the volatility of airline profits and their dependence on good economic conditions a serious concern for both industries.

As shown in Figure 1, the total net profits of world airlines have shown tremendous volatility over the past 15 years. The US experience with airline deregulation is perceived to be a success by other countries, as the overall benefits to the vast majority of air travelers have been clearly demonstrated.

While US domestic air travel grew at rates significantly greater than prior to deregulation, average real fares declined since deregulation and today remain at less than half of levels [2].

And, despite worries at the time of deregulation that competitive cost pressures might lead to reduced maintenance standards, there is no statistical evidence that airline safety deteriorated.

At the same time, the US deregulation experience had some potentially more negative impacts. The pressure to cut costs, combined with increased profit volatility, mergers and bankruptcies of several airlines led to periodic job losses, reduced wages and airline labor unions with less power than they previously enjoyed.

Furthermore, the benefits of deregulation were not enjoyed equally by all travelers. Residents of small US cities saw changes in the pattern of air service to their communities, as smaller regional airlines replaced previously subsidized jet services. And, despite a substantial decrease in the average real fare paid for air travel in US domestic markets, the disparity between the lowest and highest fares offered by airlines increased, aggravating business travelers forced to pay the higher fares.

The development of large connecting hubs by virtually all US major airlines also raised concerns about the pricing power of dominant airlines at their hub cities.

The management strategies and practices of airlines were fundamentally changed by deregulation, liberalization and, very simply, competition.

Cost management and productivity improvement became a major focus of US airlines for much of the past twenty years, and non-US airlines have more recently been forced by competitive realities to face up to this challenge as well. A by-product of the quest for lower costs and increased productivity has been the pursuit of economies of scale by both US and non-US airlines.

With growing government concerns about industry consolidation, further mergers have become less likely.

An analysis of the global significance

Recent Industry Evolution On a global scale and especially in the United States, the airline industry has been in a financial crisis for much of this new century. The problems that began with the economic downturn at the beginning of reached almost catastrophic proportions after the terror attacks of September 11, At the same time, airline labor costs and fuel prices were increasing yearly.

Reductions in flight schedules alleviated some of the pressure on the aviation infrastructure, resulting in fewer flight delays; faced with massive layoffs and tremendous uncertainty about the financial futures of the airlines, labor unions moved towards a more conciliatory position, and passengers became more willing to lower their service expectations in exchange for improved security.

Yet, despite operating flights that were quite full, the large network airlines were still losing money. The ability of the network airlines to generate adequate revenues to cover their operating costs was severely impacted by major shifts in passenger choice behavior, particularly on the part of business travelers.

The overall volume of business air travel demand decreased in early due to the overall economic downturn. The combination of reduced business travel budgets and substantial cutbacks in airline passenger service quality led more business travelers to look for alternatives to paying premium air fares — teleconferencing and other travel substitutes, alternative travel modes, and especially, low-fare airlines for business travel.

The differences in the cost structures between network airlines and low-fare carriers reflected substantial differences in the productivity of both aircraft and employees. Shorter ground times translate directly into higher aircraft utilization rates.

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An analysis of the global significance

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Global Airline Industry Program