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Airline characteristics

An airline sells air transportation service carrying passenger and cargo from origin to destination.
Airlines industries apply oligopolist market structure in which it is on industry that composed of few
firms producing similar products services. What difference between the similar products and same
product? Similar is not same which means the firms has put the branding on the product which make
the product not same anymore but similar. In case in airline industry as apply oligopolist market
structure, there have few airlines in the air transportation industry whether domestically or
internationally as compared to the other industry.

Why it is few firms or company only in the air transport services industry or airlines industry? This is
because of it is difficult to enter this industry due to some barriers.

1. Close Government Regulation

The first barrier is the Close Government Regulation. The airline industry needs to follow the rules
and regulations of the government. For the example, whoever the companies those want to enter the
airline industry must apply for the Airworthiness Operating Certificate (AOC) from the government.
Every company can apply the AOC but only certain are issued by the government to continue the
process for entering airline industry.

2. Very High Investment

Second barrier for entering the airline industry is the Very High Investment. Whichever the company
wants to run the business of airline industry, they need very high investment for the initial
provisioning. Initial Provisioning means that we put the investment not only to the aircraft but to the
all facilities that support the operation of the airline industry business such as the flight crew,
maintenance personal and the facility such as airport electricity.

3. Government Financial Assistance

For the national airline or flag carrier, there is no private sector could provide the financial assistance
except the government itself. The government does not give the direct money to the airline company
but them injecting financial assistance indirectly to airlines such as providing efficient and adequate
infrastructure to the airline.

4. High Technology Turnover

The technology in the aircraft must be always the latest one to support the smooth operation of the
airline. The problem with the aircraft technology is the technology itself is very expensive and the rate
of obsoleting of the technology is very fast. The example of high technology turnover is the
manufacture of Airbus 380 with the very latest technology using this day.

5. Economic of Scale

The airline must have to be able size enough so that the unit price or cost can be lowered. Total cost
cannot be reducing but the unit cost can be reducing. For the example if the company add more the
capacity of the passenger, the company can reduce the unit cost of per aircraft.

6. Growth Through Merger

7. Mutual Dependence.
2. Capacity management

Capacity management is the management that requires the matching of resource inputs to
the demand for the volume and type of output that an airline’s choice of competitive strategy requires
it to produce.

Characteristic of airlines is already in excess capacity. This is because it is the natural of the schedule
airline. In airline industry, excess capacity cannot be zero rises but it can be reduce or minimize. For
an example full capacity is impossible in flight but it is possible on per flight. In the airlines, the
excess capacity is mean of a single flight; the seats in air transportation service provided are not sold
completely. Even though fewer seats sold, the revenue still is the same. It is measured by Available
Tonne Kilometre (ATK) which includes fleet management and network management.

Objective of Capacity Management

Managing capacity is the crucial function in airline because the investor put a very high investment in
the airline business. They expect the return will be higher and fast. The return of investment can be
in dividend, right issue and bonus issue. The higher the excess capacity, the higher the operating
cost. This will impact to the loss of the company and the worst thing can happen is bankrupt.

1. Minimize revenue loss from spillage

To manage capacity effectively, there are 3 things that need to do. First is to minimize the revenue
loss from spillage. Spillage is the situation where the demand is higher than the supply. In the airline
industry, it means that the number of passenger is more than the flight available into the destination
the flight cannot hold on the entire passenger. This gives the chance of the spillage or the excess
passenger to go to the other airline. The airline cannot provide the flight beyond the normal
frequency because it is schedule flight.

2. Minimize excess output and spoilage.

The second one is to minimize the excess output and spoilage. Spoilage means the situation where
the supply is more than demand. It is occurring when there is excess seat unsold at the point of the
aircraft departure. It is cannot be inventorise and it is consider as waste. The airline will be
calculating the operating cost including the unsold seat.

3. Maximize resource productivity

The airline must be able to make sure that the resource productivity use as its maximum so that the
airlines do not suffer the losses. It is including the network and fleet management. The example for
maximizing the resource productivity is to scheduling of the aircraft at right time and also maximizing
the use of the aircraft at the correct destination and demand. It is very critical situation when to
minimize the spillage and spoilage but in the same time to maximize the resource productivity.

6 Challenges Managing Capacity

1. Demand Instability

There are many challenges in managing the capacity in the airline industry. The first challenge is
Demand Instability. Airline cannot control demand because of the air transport service demand is
derived demand. It means that the demands can be fluctuate depends on many reasons such as
seasonal (Holiday), Cyclical (Economic Fluctuations) and irregular (Natural Disaster).
 2. Supply indivisibility

Supply indivisibility means that the supply cannot be divided to cater the unstable demand because of
the supply is fix. If the airline in the spillage situation, the airline cannot cater the aircraft such as
adding more seats into the aircraft to cover the spoilage because of the aircraft cannot be change as
it is according to its manufacturer condition. Balancing the demand and supply are very challenging to
the airline.

3. Product Perishability

Product perishability is means that the air transport service cannot be sold, cannot be inventorise at
the point of the departure. The investors had invested to the air transport service and the service is
been there but it is unsold. Then the airline must face it when the service is unsold. This condition will
be make higher operating cost and lower profit which resultant to greater loss.

4. Liberisation and Deregulation

Liberisation and deregulation is operating by the government. The government open the new entry to
the new airlines which is created more competition between the experienced airline and the newer
airline. The more deregulated the airline become the more challenges the airline need to be facing.
The example in the Malaysia is when the local government open the new entry to Malindo Air that
competes with the experienced airline MAS.

5. Strategic and Tactical Dimension to Capacity

Strategic and Tactical Dimension Capacity is best describes that the strategy of the airline that come
to the new destination as not for the profit but for the power placement. They have calculated the
loss and the risk. For the example is the Emirate Airline that come to Asia region for the power
placing and not for the profit.

6. Cargo Output as By-product of passenger Capacity planning

The aircraft is divided into three types, passenger aircraft, Cargo aircraft and combi aircraft. Airline
that has the passenger aircraft get the profit from bring the passenger only and also for the cargo
aircraft. It is become challenging to the airline to establish cargo market in passenger place. If the
flight has excess capacity of the passenger, the aircraft still can reduce loss by fill in the cargo. The
challenging is when the airline want to choose the destination so that the demand is fill within the
passenger and cargo.

That is why the airlines are very challenging in manage the capacity in the airlines industry.
3. Fleet management

Fleet planning takes care about the aircraft acquisition and it is a compound of fleet
management. Fleet management means managing the aircraft from birth to death which means, take
care the whole process of the aircraft from not having it, maintenance wise, operation and when to
sell if we don’t need it. Fleet management made up of components which are aircraft acquisition and
aircraft selection.

Aircraft acquisition is triggered by 2 factors, the replacement of existing capacity and capacity growth.
Stability of aircraft market is changing – thus the replacement issues triggered the airlines to review
their fleet for acquisition. Replacement is done to find the aircraft that capable to perform effectively
and efficiently. They are high operating cost, unacceptable noise, limited remaining structural life,
inadequate passenger appeal, type rationalisation and ongoing fleet rollover policy.

Replacement of existing Capacity

1. High operating cost

2. Unacceptable noise or emission
3. Limited remaining structural life
4. Inadequate passenger appeal
5. Rationalisation
6. Ongoing fleet rollover policy

1. High Operating Cost

First is the high operating cost. As aircraft flying from time to time, there will be wear and tear to its
component and structure. Thus in order to make the aircraft airworthy it needs to be repair or replace
the damage component. This has caused the airlines to spend a lot of money to maintain the aircraft
especially to the ageing of the aircraft where parts are less manufactured. For example, old aircraft
like Boeing 737 the manufacturer does not produce the parts in a large quantity due to new aircraft
manufactured. So this will cause price of the parts hiking up due to less parts supply.

2. Unacceptable Noise or Emission

Secondly, it is the noise and emission. When aircraft flying. The engine of the aircraft will emit carbon
monoxide to the atmosphere. It does pollute the environment and thinning the ozone layer. To
overcome that, the airlines need to find and replace the engines with high fuel efficiency that emits
less carbon monoxide. In addition to that, the airport has curfew hours in which the aircraft cannot
land or take off at certain time. The regulation is made because the aircraft produce noise pollution to
the residential areas. This is why airlines need to replace the aircraft to find the most effective and
efficient performance.

3. Limited Remaining Structural Life

Next is the limited structural life. For an aircraft to fly, it needs to be airworthy all the time. The
limited structural life of an aircraft triggers the airlines to consider the replacement while it still have
remaining life. This is because all aircraft have certain age operation and beyond that it is considered
to be grounded if not modification is done. If the airlines do not replace the aircraft, they have to pay
for the high cost of maintenance to that old aircraft due to high prices.
 4. Inadequate Passenger Appeal

Fourth is inadequate passenger appeal. This is also one of the factors for an airlines to replace
aircraft. Why? This is because as entertainment technology keeps advancing, the inflight facilities too
need to be upgrade to the most recent one. The inadequate passenger appeal normally occur during
seasonal travel where passenger spent a lot of time in flight and thus they demand for a reasonable
inflight facilities to worth their paid. This can be illustrated in Lufthansa Airline in which they provide
inflight entertainment with sophisticated facilities and device such as seat-bed and LCD screen TV.

5. Type Rationalisation

Fifth is type rationalisation. It means when the type of the aircraft does the airline have. Is it freighter
or passenger and how many aircraft model does the airline acquired for each type? These are the
factors that trigger the airlines to replace the aircraft because the more model of aircraft that airline
acquired, the higher the operating cost. Each aircraft model required its own specific resources such
as crew, pilot, engineers and components. There will be no general resources for an aircraft because
every aircraft have their own specification that differs from others. Thus airline needs to provide the
resources for aircraft according to its model. Unable to provide such resources would cause aircraft
unairworthy. This has cause the airline to spend a lot of money on each aircraft model if the aircraft
is not replaced.

6. Ongoing fleet rollover policy

It is the policy that airlines agreed to the contract of how long they want to keep the aircraft. The
airlines will keep the aircraft up to their vision and objectives and after that they need to return it
back to the authority. During keeping the aircraft with them, they need to ensure the aircraft is
airworthy until to the part of returning it back.

Those are 6 factors of replacement of existing capacity.

Capacity Growth

Capacity Growth is the second factor of acquiring aircraft. The growth in capacity means the airlines
want to increase their production due to demand for air transport services. However, to increase
capacity they need to reduce and replace ageing aircraft due to high operating cost and technology
advancement. Capacity growth is achieved for 2 purposes, growth within existing network and new
missions. Airlines need to increase capacity to satisfy new mission requirements that is beyond the
capability of existing fleet while growth within existing network is due to growing in demand. Growing
in demand can be cater by using larger aircraft at maintaining frequencies, operating the same
aircraft at higher frequency or combination of both. It also can be met by raising the utilisation,
increasing seating densities or accepting higher load factors in respect of existing fleet.

In conclusion, those are the 2 fundamentals reasons for aircraft acquisition.