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Analyze the attractiveness of airlines industry pre 9/11. How attractive was this industry before 9/11?

Was it profitable? Was there growth? Was there strong competition or not? If so, in what sectors? Global Airline Industry before 9/11 Situation before 9/11 In 2001 before 9/11, analysts were predicting that US airlines industry would lose US$2.5bn because of slowing economy combined with large decline in business travel. Airlines costs were rapidly increasing diminishing their marginal profits. Customers were becoming highly price sensitive. On the other hand, Global number of tourist passengers was increasing. Open Markets In 1970s, deregulation of air passenger transport industry globally had brought major structural changes within the industry. The Open Market Policy of US in 1978, where barriers to entry of new entrants were removed. Competition increased as there was freedom to choose routes and set prices in accordance with market demand. Many FSCs had merged in order to gain economies of scale and scope in order to remain competitive. This increase of competition led to lower prices which eroded airline companies profitability. In order to maintain margins due to regular price increases, airlines were forced to reduce on costs. Economically Airlines industry was going through structural changes from many decades. Several factors included globalization, deregulation, consolidation, technological improvements in aircrafts and communication, & high costs of Full Service Carrier (FSC) business model. Demand Demand was increasing continuously. Main factors for increasing demand were: Rise of world GDP, increasing world trade and investment, liberalization of markets, growth in number of retirees. Cost Factor Airlines cost were rising rapidly. Price variations in costs were due to geography, market in terms of length of haul or currency exchange rates. The main costs were: Increasing Fuel Prices, Labor prices rising at a rate above inflation. Net profits of Global Airlines industry increased by 5% and American Airlines Industry only earned 1-2% net profits despite its efficiencies. Returns Even though passenger travel increased by 160% from 1978 to 2000 and margins were maintained through cost cutting, there was a gradual and steady decline in real value of airline yields by 2.5% per annum. Many airlines stopped providing auxiliary services or outsourced their non-core activities and concentrated on their core business.

Full Service Carriers (FSCs) FSCs mainly focused on Networks & Product Quality. Airlines leveraged passengers on willingness to pay premiums for better class, urgent or unexpected travel. Networks: They wanted to provide services to as many cities as possible with high level of frequency and interconnectivity. This was done through variety of aircrafts, support systems and hub and spoke airport network structure. Product Quality: Product was being differentiated by extra service features like in-flight catering, entertainment, leg-room and loyalty programmes. FSCs model had high fixed costs and relied on economies of network size and traffic density to bring costs down. Profits were highly cyclical due to high fixed cost, complex pricing and highly income elastic nature of air travel. Low Cost Carriers (LSCs) LCSs were emerging focusing on value for money fares and providing simple point to point itineraries. LSCs were showing continuous profits gaining significant market share from most efficient FSCs and outperforming them on profitability and market capitalization. Even though the business model was to provide value for money, the LSCs started to serve primary destinations having lower profitability. Alliances Airlines gained economies of scope by forming alliances with other airlines. Strategies used were Code Sharing, Block Spacing & Franchising.

Analyze the attractiveness post 9/11. Global Airline Industry after 9/11 Demand 9/11 had resulted in negative transitory shock as passengers reduced by 30% in 5 months after attack and negative demand shock amounting to 7-8% of pre-September 11 demand. Cost Large FSC focused on cost cutting programmes and staff cost reduction. 2 American Airlines filed for bankruptcy. Unfair competition was created. Cost reduction initiatives by Airlines industry included: scheduling efficiencies, reducing hub peaks, fleet homogenization, streamlined customer interaction, distribution modifications, in-flight product changes, operational changes, and headquarters/ administration efficiencies. Operating costs increased due to different initiatives and stiffened security measures. Passengers had to pay additional costs in the aftermath of the attacks. US introduced security tax levied on tickets and Insurance cost increased to 5-10%. Returns Record losses were posted following 9/11 attacks. US government supported US aviation industry by providing federal loans, credits and subsidies.US airlines lost US$18bn since 9/11 attacks despite US$15bm bailout from government. European Carriers had a collective loss of more than US$3bn for 2001. Full Service Carriers Travel patterns changed after 9/11 and airlines which based most of the profits on long-haul flights, felt the pinch. Corporate market suffered as businesses quickly cut back on travel spending. After 9/11, people wanted to use business class but were not willing to pay price differentials compared with economy class. Low Cost Carriers Within US, there was fall of 44% short-haul air travel segment in June 2012 compared to 2001. This was mainly due to the increase in total travel time due to security procedures. LCC quickly responded after the 9/11 where they launched campaigns and reduced prices. In Europe, some LCCs expanded their markets to capture elements of business travel were lower point to point routes at lower prices led to dramatic LCC passenger growth rate. Alliances

Due to scaling back of routes after the 9/11 attacks by many airlines, alliances were highly affected as they use to share reservations information and revenues, jointly marketed products and services, redeemed one anothers frequent flier miles.

How might airlines better plan for disruptive events such as 9/11.

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