Airline

Executive Summary

The airline industry has changed greatly over the years. In the greatly competitive industry of today, airlines must constantly innovate and evolve if they wish to stay ahead of the competition, or perhaps even to simply survive. Large established carriers have been around for many years. While the survived the initial onslaught of new entry carriers during the 80's and 90's, over the last decade, their control over the market has been greatly eroded because of the re-emergence of Low Cost Carriers (LCCs). These carriers have tremendous cost advantages. The cost conscious, small size, and no frills approach by LCCs to gain substantial market share. We will look at several factors that have led to the emergence of the low cost carriers and still hinder established airlines even today. We will also look at the advantages of mergers for established airlines and what they must do to fight off the inroads made by low cost airlines. As cost remains an essential factor today, the consolidation of resources by airlines will not be enough unless they can significantly bring down their costs and provide consumers what they want.

Introduction

In today's technologically advanced globalised world, travelling by air across various destinations has become a highly affordable necessity. But things were not always this way. In the US, Government regulation not only prevented the entry of new start-up airlines for many years, but also forced upon airlines limited control over products they could sell and the prices they could charge. The system reduced the efficiency with which resources were used in the aviation industry. Costs were higher and productivity was lower. But all that changed in 1978 when the US Congress passed the Airline Deregulation Act. New entries boomed and prices fell substantially (Borenstein, 1992). Managers were now free to restructure their route networks, compete on price, and set their own fares. Thus, consumers would benefit by paying less for travel and enjoying a wider choice.

The textbook theories generally concluded that actual or potential competition would drive all prices to the marginal costs of the most efficient firms, with less efficient airlines reorganizing or exiting the industry. The actual outcome has been quite a bit different. Lower barriers to entry made the industry more competitive. But in the next few years, many of the new entrants either merged with a major carrier or declared bankruptcy. Entry of new airlines slowed markedly and came to a nearly complete halt by 1983 (Borenstein, 1992). The industry headed towards the imperfect direction of monopolistic competition and oligopoly as the concentration rations rose up again. The airlines that innovated most quickly gained in market share and profitability. Tactics and strategies became essential factors in beating the competition. Indeed, airline deregulation has provided and continues to provide enormous benefits to consumers. Although airline operating expenses have increased 58% since passage of the Airline Deregulation Act in 1978, fares have risen only 48%. But the world today has changed. New Low cost airlines are once again challenging the larger established airlines, forcing some to merger with each other. The hub and spoke system which greatly strengthen established airlines in the US in the 80's, are one of the reasons behind the success of LCCs

The rise of Hub-and- Spoke Systems and their subsequent effects on Airlines

Hub-and-spoke systems provided established carriers with major economies of scope, and at the same time helped deter market entry to LCCs. But its advantages were constrained by the infrastructure limitations of airports. Huge increases in landings and takeoffs at hub airports put enormous stress on the ATC system. Furthermore, congestion, along with a multitude of time-critical connections, led to irregular service. One of the key inherent deficiencies of the hub-and-spoke model, which was later strategically exploited by Low Cost Carriers (LCCs), was that it was built round the needs of the least valuable clients, and depended on the high fares of business class passengers, which subsidised the costly transfer of short-haul low-yield passengers (Graham, Vowles, 2006). Post deregulation in 1978, increased traffic and the formation of hubs increased the strain on many airports. The growing level of congestion at major hub airports during the 1980s created opportunities for alternative services for LCCs, such as low-fare, no-frills, point-to-point service.

External Influences

Various external factors have resulted in large losses for many established airlines and the