Recent years have seen expansion in the airline business. Due to the nature of the business activities, the industry has been defined by a wide range of dynamics. The airline sector has expanded quickly on a global scale. Unfortunately, steady and substantial profitability is still elusive. According to reports from the International Air Transport Association, revenues increased from 369 US billion in 2004 to 746 US billion in 2014. (www.iata.org). Numerous variables, including low-cost carriers, which have been shown to have 25% of the global market shares, are responsible for the growth. Growth in the airline industry could also be attributed to the fact that the low-cost carriers were able to gain in the developed markets, according to reports by the International Air Transport Association. However, despite the depicted impressive gains, profits continue to hit an all-time low. The focus of the analysis is to assess the implications arising from and the need for global connectivity of the airline industry. Further, an evaluation for growth strategy options that are available for the airlines will be conducted with a conclusion on the analysis of key challenges and potential development directions for sustainable growth in the Airline industry.
Implications Arising from and Need for Global Connectivity of the Airline Industry
Globalization is a process focusing on the transformation of various things or phenome into a global state. It primarily focuses on the unification of individuals living in the world to a single society which functions together. The focus is a combination of the economic, socio-cultural, technological and the political forces. Overall, the definition of the term globalization differs from one individual to the next. Further, the context of globalization would vary from one individual to the other (Hay, 2009). The global connectivity of airlines has a range of implications on the operations of the industry.
The globalization of the airline's industry will result in in an increase in the economic activities conducted across the globe. The effect of greater economic activity will be reflected in the need for people to move from one location to the other. An increase in the individuals engaging in economic activities will increase in demand for air travel. The effect will need to provide air travel services to customers hence the increase in overall revenues earned from such activities. Consequently, it is critical for the airline industry to connect globally and provide services that stand out in a bid to attract many customers into hiring their services. This will be reflected in the attainment of high incomes for the individual airlines due to increased demands arising from enhanced economic activities across the globe.
Global airline connectivity is likely to result in improvement in infrastructural development. It is critical to acknowledge that airports are essential in providing the connectivity and the accessibility necessary for the development of the modern economy thereby enabling the business to take advantage of the overseas opportunities. In a bid to maximize on the same, it is critical to have an elaborate transport infrastructure which is essential in enabling economic growth. It is critical to acknowledge that the need for global connectivity of the airlines arises out of the fact the individual companies will be able to attain the highest profits and maximize their operations.
Historical Perspective
The success of the airlines lies in the ability to connect globally. The forces dictating the airline industry have been instrumental in impelling a majority of the airlines to opt into joining a strategic alliance. The decisions to form the alliances have played a decisive role in ensuring that the airlines work together in addressing the problems that have been witnessed in the industry with regard to aspects national regulatory constraints and the need to build networks. The history of the connectivity is of critical significance since it highlights on how the airlines have been changing with the transformations witnessed in the industry. Europe has since then been identified as a key player in enhancing the connectivity of different airlines across the globe. According to the European Commission, there is importance in connectivity, and this serves as a strong driver for economic growth, trade, and mobility of the European Union. Therefore, the concept of global connectivity draws from the need to have airlines attain the maximum profits out of their operations.
Initially, air transport was strictly regulated because of the possibility of its use for primarily political and economic objectives. For example, the British Airlines, in the 1930s, only carried 50000 passengers to their colonies. However, in the year 1944, the Chicago Convention initiated measures aimed at confronting the existing international potential of civil aviation laying the ground for bilateral agreements on cooperation between the different airlines. The focus was to get countries which could agree on to provide airline services to each other. The fact that most of the international airlines were state-owned laid the framework for the development of possible cooperation between them. Countries have since then adopted ways through which the airlines can coordinate by initiating a series of agreements. The International Civil Aviation Organization was crucial in coming up with accords including the Warsaw Convention dating back to 1929 that would address issues of liabilities in the event of an accident. Such measures were instrumental in supporting the global connectivity of airlines.
Movement of People and Goods
Global connectivity of the airlines will have a profound effect on the movement of individuals and goods from one region to the next. It is likely that there would be ease of movement from one geographical location to the next. The fundamental role of international air transport is to ensure that movement of people and goods from one place to another (Rosillo-Calle et al., 2012). The process of global connectivity will positively impact the movement of people and goods across the globe. The dynamics depicted with regard to globalization in the international arena negates the need to have a reliable means of movement from one geographical location to the next. The global connectivity of the airline industry will be essential in attaining ease of movement both people and goods.
The effect of globalization on airline markets
Globalization continues to play a vital role in enhancing economic activities. Globalization provides avenues for the realization of huge profits to the airline markets. The vast number of people traveling from one geographical location to the next need when conducting business activities provide revenue to the airlines. Specifically, different airline companies offering transportation services to this group of people will earn through the fares charged for such services. Globalization is responsible for economic growth, improved world trade, international investment, and tourism (Schubert, Brida and Risso, 2011). Because of the same, there is a need for those engaged in such activities to move from one country to another. The airline industry has much to benefit from such an arrangement as it provides the critical transport services to the respective industries. The effect of such activity is improved revenues which are essential in boosting the growth of the airline industry. The returns achieved from the provision of such services facilitate the growth of the industry. According to the International Air Transport Association, air travel is expected to grow with the increase in globalization.
Trends
The airline industry has been defined by significant changes in recent times. The first notable trend in the industry regards the concept of increased consumer expectations (Rodriguez del Bosque, San Martin, & Collado, 2006). A significant percentage of customers have grown to become accustomed to seeing an improvement in the nature of services they receive from service providers. Overall, there has been growing concern from customers to access quality services from the air travel service providers. However, there is the challenge of upgrading the primary product which is expensive to most of the airlines. Nevertheless, with the growing technological advancements, airlines have strived to ensure that they provide the best services to the customers.
There is growing pressure to have the airlines reduce the cost of their services while at the same time improving operational efficiency. Airlines have the mandate to ensure that they provide the most affordable services to the customers while improving their operations. The most expensive aspect lies in reducing the cost of fuel since this accounts to over 50% of the operational expenses. Airlines need to address the issue, and this remains to be one of the growing concerns in the industry.
Statistics
The growth of the global connectivity, accompanied by economic growth has seen the aviation industry stand out as one of the fastest transportation sectors. According to statistics, the commercial airlines has since carried over 3.7 billion passengers leading to the generation of a revenue of over 504 billion US dollars in the year 2016 (www.statista.com). The growth in the airline industry can be attributed to increased levels of globalization. Further, the growth of tourism and economic activities across the globe have played a critical role in ensuring that the airline industry witnesses growth. Specifically, statistics show that the international tourist arrivals rose from 1.13 billion US dollars in the year 2014 to 1.19 billion US dollars in the year 2015. More than 50% of the tourists depend on air transport to reach their individual destinations. Statistics regarding fatal airline accidents are equally available with the year 2016 being reported as the safest in the history of aviation.
The growth strategies that are being applied by airlines to remain competitive
A significant percentage of airlines have adopted a range of growth strategies to ensure that they remain competitive in the industry. Airlines have been able to grow by combining both the organic and inorganic growth strategies. The focus is to make sure that the airline maintains a huge customer base.
Organic Growth Strategies
Organic growth strategies entail the expansion of business activities through an increase in output, expansion of the customer base and new product development. The focus of the organic growth strategy is on the use of the airline’s energy and resources to attain its goals and objectives (Pasanen, 2007). Airlines have adopted a range of measures that are aimed at enhancing their growth. An example is a focus on understanding the individual needs of customers and providing services designed to meeting the same. For example, the American Airline identifies the need to meet the customer requirements. Specifically, the airline has taken the initiative to respond to the concerns of customer through the use of social media including Twitter. The ability to engage with customers makes it possible for the airline to grow its clientele base which makes it gain a competitive advantage over other airlines.
The airlines have also been able to use their resources to gain a competitive advantage. An example is a strategy adopted by the Delta Airlines which has invested in their own fuel refinery (www.forbes.com). The ability to own a fuel refinery can be attributed to the fact that the airline has enough resources to set aside and invest in the development of a project. This is an advantage to the airline because unlike other airlines; they do not have to worry about the possible effects of price hikes. The reduction in the operational expenses arising from fuel prices is an advantage to the airline since they can focus on other activities. In the event that the prices rise, Delta is well positioned to respond to the pressure and maintain a competitive price advantage over its competitors.
The adoption of the organic growth strategy may serve as a viable option for the airlines today. The airline industry has witnessed an increase in demand for quality services by the customers. The option of adopting the organic growth strategy will be essential in ensuring that the airlines stand out and gain a competitive edge despite the challenges witnessed in the industry. However, the strategy will only be helpful to airlines that have the resources to drive their growth strategies.
Inorganic Growth
Inorganic growth focuses on the manner in which an organization grows through expansion of their sales by raising their output and acquiring new businesses via mergers, acquisitions, and the take-overs (Öberg, Henneberg and Mouzas, 2007). Airlines have a variety of options to choose from when it comes to the option to apply to ensure growth.
Examples in Industry
Mergers and acquisitions have become the most sort after option among the different airlines in the industry. In the year 2009, Delta Airlines merged with the Northwest Airlines resulting in the creation of a global airline that would provide services to the world’s greatest travel markets (Kumar, 2008). The decision to merge led to the provision of excellent services to the customers. The existence of significant challenges in the airline industry negates the need to come up with appropriate ways of coming up the best strategies. The formation of a merger enabled Delta to successfully adapt to the challenges likely to be faced in the industry. The merger would is essential in ensuring that a particular airline survives in the industry. This was one of the ways through which airlines gained a competitive advantage.
The other example in the airline industry depicting the formation of a merger was that of the US Airways and the America West. This resulted in the survival of the US Airways brand. The merger was instrumental considering that both of the airlines were struggling. The decision to form a merger would probably result in the attraction of investors. This could be seen as a strategic move that is essential in endowing the firms a competitive advantage (Manuela, Rhoades and Curtis, 2016). The formation of a merger would result in a stronger airline that is capable of running affairs in a more efficient manner. Further, through the merger, competition with the low-cost airlines such as the Southwest Airlines Inc and the JetBlue Airways Corp.
Why Airlines have opted to form mergers
The decision by airlines to form a merger could be attributed to various reasons. The first is to enable the airlines to compete favorably with the rest of other companies. The ability to merge would mean that the airlines have enough resources to conduct their activities. The airline industry is one that is defined by the need to invest heavily. Through the formation of a merger, it would be possible to conduct their activities in a more strategic way. Finally, organizational management of the airlines is better off with the merger compared to when it is done by one airline.
How airlines are undertaking development for a more sustainable air transport industry
The aviation industry continues to play a crucial role in the global society because of the fact that it drives the economic, cultural and social development across the world. The International Civil Aviation Organization has been instrumental in coming up with a regulatory framework guiding the entire air travel. The focus of the International Civil Aviation Organization has been on ensuring environmental protection (Lindenthal, 2014). The airline industry has a fundamental role to ensure that they conduct their operations in a sustainable manner to protect the environment. One of the fundamental issues that arise concerns the impact of noise, local quality of air and the aspect of climate change. Measures taken by the airline firms have different impacts on them both financially and environmentally.
Financial Impacts
Airlines have a role in ensuring they uphold the concept of sustainable development. However, the ability to do so has significant financial consequences for the airline industry. Specifically, there is the aspect of the need to ensure that the airlines adopt the best practices aimed at sustainable development. This comes at a financial cost for the airlines. Primarily, there is the issue of ensuring that appropriate technologies are in place to ensure sustainable development. This would mean that huge financial costs would have to be incurred by the individual airlines.
Environmental
The aviation industry has been undertaking significant moves aimed at mitigating against their adverse environmental footprint. The industry through the International Civil Aviation Organization has focused on addressing issues on sustainable energy, transport, poverty eradication and sustainable development goals. There is the issue of ensuring that the airlines’ operations do not have adverse environmental impacts. Particularly, there has been the challenge of excess noise that has adverse impacts on the environment around the airport (Mahashabde et al., 2011). Measures are being taken by the airline's industry to ensure that the problem is addressed. Further, concerns have been raised regarding the greenhouse emissions. The carbon emissions have adverse effects on the environment hence the need to ensure that there are reductions in the same. This has seen the establishment of environmental commitments for purposes of conservation.
Conclusion
Overall, the aviation industry is one defined by unique challenges. Nevertheless, significant measures have been taken by individual airlines to ensure that they stay competitive. Statistics have provided information regarding the aspects of growth and measures that can be taken to make sure that the airlines remain competitive.
References
Hay, C. (2009) ‘Globalization and Public Policy’, in The Oxford Handbook of Public Policy. doi: 10.1093/oxfordhb/9780199548453.003.0029.
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Lindenthal, A. (2014) ‘Aviation and Climate Protection: EU Leadership Within the International Civil Aviation Organization’, Environmental Politics, 23(6), pp. 1064–1081. doi: 10.1080/09644016.2014.913873.
Mahashabde, A., Wolfe, P., Ashok, A., Dorbian, C., He, Q., Fan, A., Lukachko, S., Mozdzanowska, A., Wollersheim, C., Barrett, S. R. H., Locke, M. and Waitz, I. A. (2011) ‘Assessing the environmental impacts of aircraft noise and emissions’, Progress in Aerospace Sciences, 47(1), pp. 15–52. doi: 10.1016/j.paerosci.2010.04.003.
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http://www.iata.org/pressroom/pr/Pages/2015-12-10-01.aspx
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http://www.forbes.com/sites/christopherhelman/2015/01/21/how-cheap-oil-has-delta-air-lines-jet-fooled/
