Travel and Tourism Support Pack Case Study D: Transportation

Resources 103

Travel and Tourism Support Pack

Case study D: Transportation

The Airline Industry – A Study of Growth and Change Background The world air transport market is very concentrated. Approximately half of the world's fleet is operated by just 17 airlines (from around 650 worldwide) and approximately half of the available seat-kilometres flown by the scheduled airlines are on the top 6% of routes linking no more than 33 airports. The north American market is the world's largest, accounting for 41% of the world's total air traffic. In comparison, travel in Europe accounts for 8.5%. Of all passenger kilometres flown worldwide, approximately 57% are international and 9% are by charter travel. Deregulation Historically, the European airline industry has been highly regulated. The EU has introduced a series of liberalisation measures since 1987 that allows great freedom amongst EU airlines. There has been a significant development in the number of regional low-cost lines and routes, but the European market is distorted, as a number of state-owned or controlled airlines continue to benefit from state subsidies. New competitors are also likely to be hindered by slots and gate constraints at some airports. Large airlines, such as British Airways, have begun to rationalise their loss-making European routes by cutting destinations, using low-cost subsidiaries and franchising. Asia is the most regulated market and is dominated by national flag carriers. Domestic fares are strictly regulated but international fares are less so. The US, by contrast, has been deregulated since 1978 and it is a market-driven industry. Domestic traffic is almost completely deregulated (except for specific issues like safety), but international traffic is governed by constraining bilateral agreements. Alliances Airlines have to have a citizenship to maintain their operating rights, which makes intercontinental mergers impossible. Airlines therefore, have created alliances to capture the revenue benefits of an expanded network. Alliances are highly significant, as they are effective at re-directing traffic and revenue to alliance members. Airlines also achieve cost savings through sharing facilities, such as maintenance and other services and joint purchasing of aircraft also helps reduce costs through purchasing economies. Charter airlines The emergence of European charter airlines can be traced back to the growth of organised tourism in the 1950s. Charter airlines experienced their heyday in the 1970s and 1980s, riding on the fast growth of package holidays in Europe. The association between charter airlines and organised travel providers, particularly evident in the 1990s, was more a consequence than a cause of tourist charter airlines. Far more important to the development of charter airlines were the major imperfections in the regulatory framework. Bilateral agreements between national governments led to arrangements which restricted competition and new entrants to the market. At the same time, the increased demand for seasonal flights, particularly to holiday destinations such as Spain, was unable to be met by traditional national carriers. While national carriers effectively blocked entry on to traditional routes, charter airlines grew at a pace particularly in Germany, the UK, Benelux and Scandinavia. LTU International Airways, which was the major player in the German charter market in the 1970s and 1980s, was able to thrive at the same time as Lufthansa enjoyed a monopoly in the scheduled market. The decline of LTU coincided with the removal of regulatory restrictions in the 1990s. The removal of regulatory barriers restricting entry to the airline industry signalled the beginning of the end for inefficient flag carriers, as well as for the independent charter airline industry.

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Resources

Travel and Tourism Support Pack

The low-cost carriers The new players laid claim to an important part of the market previously dominated by charter airlines, aiming a different product at a similar segment. The low-cost airlines began to erode the customer base of traditional airlines, by offering more flexible flights to the cost-conscious traveller. Ryanair, easyJet, Go and others, formed extensive cooperation agreements with hotel operators, car specialists and the like, to lure customers away from tour operators and charter airlines. The low-cost model has proved to be highly successful. Both Ryanair and easyJet carry more passengers than BA and their growth seems set to continue, apart from recent EU legal moves against Ryanair's receipt of state subsidies for operating through airports such as Charleroi in Belgium. It has not all been good news however.