Chaos in the skies - the airline industry pre and post 9/11

Case Study Chaos in the skies- the airline industry pre and post 9/11

1. Introduction The terrorist attack on the New York World Trade Center and the Pentagon on September 11, 2001, when civilian planes were turned into guided missiles flown by suicide bombers driven by religious fundamentalism and hatred for the United States not only seared themselves into the consciousness of the American people, but into the economic and business fabric of the country, and as a result, of the world. While the United States economy was slowing in the months before this tragic event, the aftermath of the bombings led the economy into a depression. The airline and travel industry were the worst hit of all industries. This is a review of the situation before and after 9/11 on industry of these attacks and an overview of responses both by government and on industry to the event.

2. Situation before 9/11 STEP 2.1 Social Factors increasing world trade and investment liberalization of markets. Between 1990 and 2000 airlines benefited from an increasing number of tourist passengers from 450 million up to 700 million. The main reasons for people to fly were leisure and business trips. Travelling by plane was also a symbol of wealth and success.

2.2 Technological Factors There has been made huge steps in airline technology, with the invention of more efficient engines the demand for long-distance flight could be satisfied. The internet opened a whole new and cheaper distribution channel for airlines. Furthermore airlines could improve their non-core services to get competitive advantages towards other airlines for example TV screens in the seats or faster boarding with new boarding systems. 2.3 Economical Factors There was an increasing of US passengers travelling with planes of 160% between 1978 and 2000 (almost 660 million passengers) Through the year 2000 the operating costs for airlines went up constantly caused by higher fuel prices and rising labour costs furthermore the widening of the non-core services of airlines caused immense costs. Airlines reacted on that with reducing labour and cutting costs. Furthermore many airlines started outsourcing their non-core services and activities in order to get back to the coreservice and to save costs. 2.3.1 Competitive situation A basic impact on the competitive situation in the airline industry was 1978 US open markets policy which enabled competitors to enter the industry. In the further development of the industry several airlines merged in order to benefit from economies of scale. In 1984, 15 airlines had 90% of the US market in 1990 there were 8 airlines with a market share of 90%. The increasing competition among the airlines lowered the flight prices and airlines had to reduce costs. By the introduction of Hub and Spoke systems fix costs for airlines could be reduced and efficiency could be increased, also customers benefited from these networks. The development of the airline industry basically brought up two different models, the so called Low Cost Carriers who try to offer very low prices to their customers by eg. reducing on ground services and only offering point to point services. On the other hand there are the traditional Full Service Carriers providing the customer a broader range of

services and opportunities. The Low Cost Carriers could win market share because of increasing customer price sensitivity, also business travel declined in 2001 41%. There was a trend of business travellers buying cheaper tickets -and to renounce full services.

2.4 Political factors Basically the industry was fragmented from the constraints of national and international regulations, politics and public ownership. These small impacts were in the form of landing rights and competitive restraints.

3. Situation after 9/11 STEP 3.1 Social Factors The attacks of 9/11 led to a declining of bookings of 74% of US domestic flights and 19% worldwide in the first four days. People were afraid of using air travel. Furthermore the longer check in times because of higher safety standards increased the doorto-door travelling time and customers were looking for alternatives such as video conferencing, using the car or the train. Furthermore customers were not willing to pay the prices they paid before 9/11. 3.2 Technological Factors Airlines invested huge amounts of money into new security systems and safer cockpit doors the changeover of the aircrafts caused enormous costs. 3.3 Economical Factors After 9/11 the economy was facing a recession. Stock market was completely closed for a week, sectors like insurance airlines decimated. Many airlines

were facing bankruptcy. Furthermore insurances raised their premiums up to 500% which increased operating costs for airlines. 3.3.1 Competitive situation Full Service Carriers suffered from the customers fear people avoided longdistance flights, also business flights decreased. To counteract the decreasing bookings and the demand for cheaper prices the Full Service Carriers introduced a dramatic cost-cutting program, including reducing employees. The Low Cost Carriers acted different from the Full Service Carriers, they started campaigns to rebuild the customers trust into flying and offered attractive and very cheap bundles to customers. As a result Low Cost Carriers could strengthen their market position and win new customers. 3.4 Political Factors 4. Conclusion / Recommendations The events of 9/11 accelerated and aggravated negative financial trends which already evident in the airline industry. In order to return to profitability, several steps must be taken to increase consumer demand for air travel, especially business travel, control costs, and address certain pricing issues. The Congress has enacted and the President has signed into law several measures aimed at helping the airline industry to recover and respond to terrorist attacks. However over the long term, the outlook for the U.S. airline industry is more uncertain. The industry faces persistent structural problems that have to be addressed to avoid another wave of bankruptcies in the next economic downtown, and if the industry is to take full advantage of the very substantial progress made in lowering unit costs. If the Federal Reserve increases the interest rate, investments in airline industry will become costlier. Similarly, if government follows contractionary fiscal polices by increasing the tax rates, the profits of the airline industry will be affected. Thus, economic polices and changes in the structure of the economy highly influence the structure of the airline industry as the industry is highly sensitive and dynamic to the policy changes.

Chaos in the skies - Airlines Pre and Post 9/11 Week 5 Q1. Analyse the business environment pre 9/11 and post 9/11 - how have the opportunities and threats changed? Analysis of business environment pre 9/11 Opportunities * Ageing population (retirees). Capture the ageing market * Technology (bigger jet engines and aircraft allowed for more long haul flights and more passengers) * As a result of deregulation the Open Markets policy (removed barriers to entry, freedom of routes and airlines could set prices inline with market demand. FSC carriers merged to remain competitive) * A rise in GDP (more disposable income) * Leisure (55% of air travel was for leisure) * Differentiation (restrictive ticket conditions i.e. time of travel, limited travel times and limiting travel agents) * Hub-and-spoke networks (a hub with lots of spokes could offer a one-stop service. These could be serviced with fewer planes, fewer staff and more frequent flights) * Airlines forged alliances (used strategies such as code sharing, block spacing and franchising) Threats * Technology (as bigger engines and air crafts increased airlines were forced to compete on cost) * A rise in GDP (labour cost rose) * Deregulation (decline in real value of airline yields in US as measured by average revenue per passenger kilometre RPKs. Increases in competition had eroded the bottom line profitability. This forced airlines to cut costs to maintain margins)

* Economies of scale and ability to attract a higher share of business travel (forced FSCs that lacked capital out of most routes) * FSCs (new entrants Low cost carriers LCCs) * Fragmentation (constraint of national and international regulations and public ownership restricted landing rights) * Hub-and-spoke (led to domination by US Airways/United Airlines causing a monopoly) Analysis of airlines post 9/11 Opportunities * United Airlines and US Airways (filled...