Airline industry

INTRODUCTION AND EXECUTIVE SUMMARY

The global airline industry provides service to virtually every corner of the
globe, and has been an integral part 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, Few other industries generate
intensity of attention given to airlines, not only among its participants but
from government policy makers, the media, and almost anyone who has
an story about a particular air travel experience.

During development, the global airline industry dealt with major

technological innovations such as the introduction of jet airplanes for
commercial use in the 1950s, followed by the development of jumbo
jets in the 1970s. 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 1978 that questions of cost
efficiency, operating profitability and competitive behaviour have become
the dominant issues facing airline management. The US leading the way,
airline deregulation has now spread too much of the industrialized world,
affecting both domestic air travel within each country, perhaps more
importantly, the continuing evolution of a highly competitive international
airline industry.

Today, the global airline industry consists of over 2000 airlines operating
more than 23,000 aircraft, providing service to over 3700 airports. In
2006, the worlds airlines flew almost 28 million scheduled flight
departures and carried over 2 billion passengers. The growth of world air
travel has averaged approximately 5% per year over the past 30 years,
with substantial yearly variations due to changing economic conditions
and differences in economic growth in different regions of the world.
Historically, the annual growth in air travel has been twice more than the
annual growth in GDP. Even with relatively expectations of economic
growth over the next 10-15 years, a continued 4-5% annual growth in
global air travel will lead to a doubling of total air travel during this time.

In the US airline industry, approximately 100 certificated passenger

airlines operate over 11 million flight per year, and carry over one-third of
the worlds total air traffic US airlines 745 million passengers in 2006. US
airlines reported, over $160 billion in total revenues, with approximately
545,000 employees and over 8,000 aircraft operating 31,000 flights per
day. 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,
airports, and tourism industries, not to mention the economic impact on
other industries, Commercial aviation contributes 8 percent of the US
Gross Domestic Product, according to recent estimates .

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 economic good conditions, a serious
concern for both industries. This concern has grown dramatically since
airline deregulation, as stability of profits and/or government assistance,
were the rule rather than the exception for most international airlines,
before 1980s. As shown in Figure 1, the total net profits of world airlines
have shown tremendous volatility over the past 15 years. After the world
airline industry posted 4 consecutive years of losses totalling over $22
billion from 1990 to 1993, as a result of the Gulf War and subsequent
economic recession, it returned to record profitability in the late 1990s,
with total net profits in excess of $25 billion being reported by world
airlines from 1995 to 1999. Even, more dramatic was the industrys into
operating, losses and a financial crisis between 2000 and 2005, with
cumulative net losses of $40 billion.

FIGURE 1: WORLD AIRLINE NET PROFITS 1989-2006:

EMIRATES AIRLINES

Emirates airline has grown by widening its reach and expanding into six
continents to become the fastest growing airline in the world, based on
passengers carried.
Thats an impressive feat, considering Emirates airline was only founded
25 years ago. Now, its the dominant player in the Middle East.
Government owned and based in Dubai, (with backing from Dubais royal
family), it has grown by investing heavily into the business. It doesnt
have the constraints of being a public company.
For example, bought 130 aircraft in 2007 and have doubled in size every
four years. Despite all that spending, Emirates airline has been profitable
for 22 years with growth being at least by 20% each year.
The overall total economic impact of the aviation sector on the Dubai
economy in 2013 can be put at $26.7 billion1, comprising a core impact
of $16.5 billion and benefits from tourism of $10.2 billion. This is
equivalent to 26.7% of Dubais total GDP, and was sufficient to support
416,500 jobs or 21% of Dubais total employment.
The total core impact on employment of 259,400 jobs compares with a
direct impact alone, of 120,300 jobs, meaning that for every 100 jobs,
created in the aviation sector an additional 116 jobs are created
elsewhere in the Dubai economy as a result of the supply chain and
employee, spending effects.

Recent Industry Evolution 2000-2005

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 2001 reached
almost catastrophic proportions after the terror attacks of September 11,
2001. In the United States alone, the airline industry posted cumulative
net losses of over $40 billion from 2001 to 2005, and only in 2006 was it
able to return with a total net profit of just over $3 billion.

The airline industry crisis was most certainly exacerbated, by the events
of 9/11, which resulted in immediate layoffs and cutbacks of almost 20%
in total system capacity, in anticipation of the inevitable decline in
passenger traffic due to concerns about the safety of the airports,
However, the airlines were in serious trouble, well before 9/11 as the start
of an economic downturn already had negatively affected the volume of
business travel and average fares. At the same time, airline labour costs
and fuel prices were increasing yearly. To make matters worse, airlines
were faced with deteriorating labour/management relations. Aviation
infrastructure constraints that led to increasing congestion, flight delays
and dissatisfied customers due to bad service, in general.

Thus, we cannot attribute the recent poor performance of the airline

industry solely to the impacts of 9/11. Actually, the events of 9/11
provided a temporary view of solution from some of the industry's
fundamental problems: Reductions in flight schedules, alleviated some of
the pressure on the aviation infrastructure resulting in fewer flights
delays, the massive layoffs tremendous, uncertainty about the financial
futures of the airlines, labour unions moved towards a more conciliatory
position, and passengers became more willing to lower their service
expectation, in exchange for improved security. In the period after 9/11,
passenger traffic made in a slow recovery, and returned to levels pre-9/11
by mid-2004. With total US domestic airline capacity substantially lower
than before 9/11, average load factors soared to historical record levels.
Yet, despite operating flights that were quite full, the large network
airlines were still losing money.

The ability of the airlines, to generate adequate revenues to cover their

operating costs was severely impacted by major shifts in passenger choice
behaviour, particularly on the part of business travellers. The overall
volume of business airline demand decreased in early 2001 due to the
overall economic downturn. Business airline was affected by the increased
hassle factor and greater uncertainty in passenger processing times,
caused by increased security requirements. The combination of reduced
business travel budget, and substantial cutbacks in airline passenger
service quality, led more business travellers to look for alternatives to
paying airlines teleconferencing and other travel substitutes alternative
travel modes, especially low-fare airlines for business travel. As a result,
total US airline industry, passenger revenues dropped by over 20%
between 2000 and 2002, and were still 10% below 2000 levels in 2004, as
shown in Figure 2.
FIGURE 2: US AIRLINE INDUSTRY PASSENGER REVENUES 1999-2004