European Airlines Essay

The European Airline industry is facing one of the most challenging environments in its history. A global economic recession coupled with the terrorist attacks of September 11, 2001 have led to a decrease in passenger traffic, reduction in revenue per mile flown, and rising labor costs. In addition to that, disintegration in pricing power and a shift in the buying behavior of business travelers, coupled with fierce competition from low cost airlines, are forcing major airlines to restructure their operations or face the prospect of going out of business. The airline industry has responded to this difficult environment by taking measures to reduce their costs. Airlines announced layoffs of employees immediately in order to reduce the cost incurred by the airlines. To make matters worse for the industry, it has been predicted that only a gradual recovery in passenger traffic during the coming years would be seen. The European airline industry went through a deregulation process in the late 20th century. Prior to deregulation, almost one third of all passengers did not have a choice of selecting an airline. The growth in the number of passengers flying can be attributed to increased competition, innovations in marketing & operations resulting in lower cost of flying, introduction of new services and improvements in service quality. Macro-economic Analysis The industry became a perfect competition marketplace in that no single firm can influence the price of the product, consumers (for the most part) view the products of all firms as perfect substitutes and consumers will purchase a product from the firm with the lowest price. In late 1990s, during the technology bubble and the increased globalization of business, the airline industry grew at a rapid pace. However, the industry has suffered quite a few setbacks after experiencing that boom. Pummeled by poor profits and scarred from terrorist attacks against the West, the airline industry finds itself on an uncertain course. In an industry which is already taken over by tough competitions, airlines have tried to breakeven at least to survive the threat of close down. Many state administered airlines still operate based on the pacts and treaties signed by other states to decide the schedule of flights for the respective airline. The European countries, started to sign open air treaties as part of the deregulation mechanism being introduced. To get around national laws and regulatory problems, airlines have formed global alliances such as Star (United Airlines and Lufthansa), Oneworld (American Airlines, British Airways, etc. ), and SkyTeam (Delta Air Lines, Air France, and AeroMexico). Through such alliances, airlines benefit from each other’s resources, which include additional routes and marketing strategies as well as code-sharing agreements, without incurring the high costs of expansion. The costs involved with increased security precautions and route changes will force the airlines to examine their agreements and consider expansions of the same. For customers, airline alliances offer broader frequent flier programs, streamlined travel, and simplified systems for purchasing tickets, but those benefits may do little to allay passenger concerns regarding safety. Advances in communication technology have also played a role in the airline industry’s recent troubles. Advances such as video conferencing, internet chat and internet telephones allow firms to conduct business without having their executives get on the plane and visit their customer’s site. Further, coast to coast business class period has become history. Businesses are currently focusing on cutting costs and reducing overheads. While the volume of passengers getting on the planes is slowly increasing, there is no significant increase in people traveling business class or first class, which is a key component in any airline’s profit margins. According to a survey business travel volume in the EU fell by nearly 6% in 2008. More and more passengers continue to look at offers from airlines in form of packages and cheap fares. Nearly 80% of business travelers are stating that their company has implemented travel policies that, among other things, place restrictions on the class of air service. The results have left airlines struggling to come up with ways of attracting more premium passengers. Due to the rise in terrorist attacks and exacerbation in an existing trend of decreased demand and reduced industry revenues. The impact of the global war against terrorism was so huge on the industry that the governments had to intervene in order to support the industry to stabilize it. Although passenger volumes have shown signs of improvement, they remain low and as a result, several airlines are facing severe economic difficulties. Reacting to a drop in the number of passengers and rising costs for security, airlines have laid off staff and trimmed services in effort to keep flying.