Eco ppt
- 2. Introduction to Airline industry Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. Travel for both business and leisure purposes grew strongly worldwide
- 3. Introduction to Airline industryIntroduction to Airline industry o In domestic and international competitive market, aviation economic should be well managed with the existence of LCC airline companies. o To compete with the LCCs, aviation fraternity should understand the concept of aviation economics characteristics and strategies.
- 4. OverviewOverview Economists usually describe the certificated airline industry as an oligopolistic economic structure That is, this industry composed of few firms (can be 5/ 10/ 100) producing either similar or differentiated products. Apart of few sellers and typically characterized by high barriers to entry Airline business also has its own distinguish feature
- 5. However, other economicHowever, other economic acteristic :acteristic : The Airlines as an Oligopolists?The Airlines as an Oligopolists? Apparently the airline industry also share some of the oligopolistic features: 1. Few number of firms contributing to majority of the market share 2. Products are differentiated in terms of service quality and offerings 3. MR=MC 4. p>MC 5. Entry Barriers 6. Firm is a price-setter 7. Long run profit >= 0 8. Strategy dependent on individual rival firm’s behaviour
- 6. Market Equilibrium through the Cournot Model
- 7. Number of carriers and market share Recently there has been increment in airline firms with the addition of small certificated airlines and demise of some larger airlines. But, they either liquidated, merged or never operated or decertified. So, the largest airline own and retain the power in market share
- 8. Number of carriers and market share
- 9. High Barriers of EntryHigh Barriers of Entry In recent years, it is difficult to get access to many markets due to : Difficulty to obtain terminal space at many hub airports The financial outlays risk (i.e., advertising, personnel and aircraft operation cost) Airport terminal capacity
- 10. So, it is difficult to enter the airline industry and it is even harder during the start-up stage as the major airlines dominated the power to buy in the market. This phenomenon match with the second criterion of oligopolistic firms. High Barriers of EntryHigh Barriers of Entry
- 11. Growth through MergerGrowth through Merger Airlines in particular growth through merger. Merger can : 1. Increase market share. 2. Increase market power (greater ability to control the market for and the price of its service than does a smaller, more competitive producer) 3. Eliminating bankruptcy and competition.
- 12. Mutual DependenceMutual Dependence Airlines industry involves rivalry among a number of airlines. An action taken by a particular airline would yield counter-reactions of their rivals or opponents. It is a fact that rivalry in airlines industry counter react with one another for profit gain.
- 13. Price Rigidity and Nonprice CompetitionPrice Rigidity and Nonprice Competition Oligopolistic pricing has become the norms in airline industry Airliners are much comfortable maintaining constant price rather than rocking the boat, so to speak… Why? 1. Mutual Dependence 2. Fear of Price War
- 14. The Airlines Special Economic Characteristics: Government Financial Assistance High Technological Turnover High Labor and Fuel Expenses Sensitivity to Economic Fluctuations Close Government Regulation
- 15. High Technological TurnoverHigh Technological Turnover Technological advances in flight equipment over the short span of 30 years have come at an extremely rapid pace. Airlines spend lots of money on flight re-equipment cycle. Plus, capital spending in hiring and training personnel, and in modifying facilities to accommodate the new aircraft and associated equipment.
- 16. High Labor & Fuel Expenses These are two biggest expenses (Typically 60%) Labor: Airline employees are men and women with highly developed skills and with correspondingly high incomes. Fuel: No other industry has been subjected to the severel increases of fuel prices that the airlines have experienced over the past 15 years.
- 17. Fuel price Costs Ticket Price = Less Passenger, Less Profit… At times, purchasing fuel-efficient aircraft (that burn less fuel than others) also can be very costly than do less-efficient aircraft. High Labor & Fuel Expenses
- 18. Fuel Price Till 2011
- 19. Sensitivity to Economic Fluctuations (Recession) Unlike other durable good like automobile industries, whenever recession takes place, it is much slower for the airline industry to recover. Why ? Because of the apparent impacts of recession on air travel People postpone long-distance travel. Companies cut back business trip. Fewer people travel first class.
- 20. Unlike other industries, airlines still have to continue make payments to creditors and outstanding debtors even during recession. Further, although airline can furlough certain volume related employees, it’d involve extensive retraining costs when personnel are brought back or new personnel are hired. Sensitivity to Economic Fluctuations (Recession)
- 21. Attributes of Low-cost Carriers Narrower seating (higher capacity: 148 vs. 126) Higher plane utilization (10.7h vs. 8.4h) due to shorter turnaround times Lower staff costs due to greater productivity, generally lower wages and smaller staff (no service) Lower airport fees at secondary airports and smaller cities No sales commissions due to web sales Low station costs due to simpler handling and more efficient processes ·High number of passengers per employee - 7250 for RyanAir vs 1290 for Lufthansa (2002 data)
- 22. The Demand of Airline Services Demand is defined as the various amounts of a product or service that consumers are willing and able to purchase at various prices at a particular period of time. Determining the demand would help the airlines in setting the price, estimating and managing their costs and calculating how they can gain profits.
- 23. While formulating the national strategy one must remember a few aspects of Indian Passenger Aviation Market – a.Potentially, India is a very large corporate and luxury travel market. b. Potentially, it is also a very large low-fare market. c. India also has largely blocked but significant markets in the north in China. d. India, unlike other major travel hubs in the region, is an original market both for originating and turnaround traffic. e. India is also a potential transit hub in more than one direction. Consumer Demand in the industry
- 24. Airline Route Planning/ FeasibilityAirline Route Planning/ Feasibility This where airlines deal with the application of forecasting method in determining the costs of a route of one flight from one destination to another either Domestic International In terms of … Flight personnel Fuel consumption Facilities and Airport cost Passenger Movement and Air Cargo
- 25. Fleet Planning; Aircraft leaseFleet Planning; Aircraft lease and Purchaseand Purchase Aircraft leases are a number of types of leases used by Airlines and other aircraft operators. Airlines lease aircraft from other airlines or leasing companies for two main reasons; 1. to operate aircraft without the financial burden of buying them, 2. to provide temporary increase in capacity. When purchasing aircraft, it allows an airline to purchase additional aircraft in the future at an agreed price and date.
- 26. Recommendation • Codesharing • Cabotage • Eliminate the fuel tax/ Get smart on fuel • Improve quality of access to airports and hangars • From bailouts to government partnership • Offer more transparent pricing • Simplify flight operations