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The World Airline Industry : A European Perspective

Political
Drawing on the political factors in PESTEL performed

on airline industry. There are three major components that have bought change to this industry. Those are
Deregulation War and Terrorists.

Deregulation
The US airline Deregulation Act 1978 and Air

transportation Deregulation in Europe 1978- 1997 In the aftermath of deregulation, the development of airline industry rises dramatically. Especially for the low cost airline, there are hundred of them were found in the US. One of the winners was Southwest Airline- today American s most profitable airline. In Europe, low cost airline carriers such as Ryanair and EasyJet are expanding very rapidly.

War
After few years of deregulation in the US the world

airline industry recovered. However, Gulf war strongly hit the airline industry. From 1990 to 1993 the air carriers suffered four years of losses totalling over US$ 22 billions (The World Airline Industry Case Study). People were afraid of flying, which led to a decline in passenger traffic.

Terrorists
The world airline industry was severely shaken by the

terrorist events of 11th September 2001 After that, the security level was increased at all the airport, that result in high cost put into airline industry, due to more personnel and further expensive security applications. More security leads to increase waiting times, makes air transportation less attractive.

Economical
Economical can be another major factor for the airline

industry.
Due to the rate of war and terrorist event, the growth

rate of economy dramatic slowdown, capacity in Europe outstrips demand, which gains the low yield to the airline industry.
Moreover, oil prices increase also affect their profits

Social
The social sector, which are strongly from employment

perspective and safety.


After September 11th 2001, not only American airlines

struggled but also most European airlines laid off thousands of people during the past year.

Technological
Technology in airline industry is fast moving, however

its very costly.


Alliance gives the opportunity to the major airline to

offer customers a global route coverage.


Shared check- in system and online ticket book also

give the airline industry significant support.

Ecological
Ecological factor consist of recycling, the level of

pollution and attitudes to the environment.


For the airline industry, pollution tends to be very

important.
In the early of this year, London Heathrow Airport

announced, third runway and the sixth terminal will be built up and they will be operated by 2020.

Legal
Legislation for the airline consist of employment laws,

company law, tax law and their regulation.


Redundancy, Landing right, health and safety, that are

all the airlines should be considered as legal factor

Future Development on Airline Industry


Gulf war, world trade centre disaster, Iraq war, have

major impact over the airline industry.


Economical and political factor has always been and

continues to be the two major external environmental drivers influencing the airline industry.
From 2004 until present, airline industry recovered

and it become more attractive for investor.

The future development for a major airline will pay

more attention on alliances with other companies.


Secondly, price differentiation, which to access

different target group of customer.


Moreover, the major airline should have direct link

with business area, which low cost airlines do not have. This is can be an advantage for the major airline.

Low cost airline is growing too fast leads to the loss of

their competitive advantage.


Security and cost cuts might cost their customers.

Therefore they should improve their image

concerning security, services, quality and alliances with other companies, in order to attract more customers.

Business Model of Low Cost Airline


Low cost airline has distinct business model, which is

different from major airlines.


It will offer the minimum standards of service and very

low price for the shot distance flight.


This model perfectly fits into Porters theory, which

states that a company offering a low price product to a small and specialized group of buyers or the company, seeks a cost advantage.

The unique business model of low cost carrier contents:


A single passenger class Single aircraft (airbus A320or boeing737) Unreserved seating Secondary Airport No-frills service Point to point and short-haul flight and more frequency Online ticket booking Fast turnaround time

That is the business model for cost airline to achieve

cost advantage.
The low cost airline structure can be defined by three

key components, which are


simple product, position and low operating cost.

Simple product

No Frills extra payment for food and drink on board.

All the service are kept as simple as possible.

Position
For low cost airline they are positioned on non-

business class.
Short-haul and point to point traffic with high

frequencies.
Using secondary airport

Low cost operating


Low wages.
Low landing fee. Low costs for maintenance to ensure the cost

advantage.

Cost item

Cost per seat reduction (a discount from the operating cost per seat of a conventional scheduled carrier)

Product design Use cheaper secondary airports Minimal station costs and out-sourced handling No free in-flight catering Higher seating density Process design Higher aircraft utilization No agents commissions -3% -8% -6% -10% -6% -16%

Reduced sales/reservation costs


Smaller administration costs

-3%
-2%

Total cost reduction

-59%

Competitive Strategy
Porter (1980) has described three general types of

strategy that are often used by businesses. These three strategies are defined along with two dimensions
Strategic scope Strategic strength

In particular he identified two competencies that he

felt were most important: product cost and product differentiation

Cost Leadership
Low cost airline has a distinct business model, which

maintain their low cost advantage over the major airline.


They cost even less than 50% compare with full-service

carriers

To achieve the low operating costs per passenger, low

cost airlines need to have as many seats on board as possible, to fill capacity as much as possible, and to fly the aircraft as often as possible.
Further more, some of the low cost airline such as

Ryanair run the unique ticket less phone and internet booking system to reduce the agencies cost. It saves cost for both company and passengers.

Future Prospects for European Airline Industry


Low cost airline as part of airline industry has

significant leading position in price and cost which the major airline can not compete with.
In Europe, most successful low cost airlines have

operated primarily in domestic, it currently hold one third of the airline industry market share.

Secondly, there are around 50 low cost airlines in

Europe and still new players enter in low cost competition, it will result in the supply over the demand, therefore some of the player will be out of the competition.
It is very hard for them to expand by adding long-haul

flight and increase the quality of the service.

To sum up, low cost airlines should maintain the

existing business model and take the cost advantage to compete with major airlines.
However by increasing the size, low cost airline will

lose their cost advantage, therefore low cost airline will have to fight hard to persist in the future

Conclusion
The outlook for the airline industry is one of aggressive

growing sector. External environment could directly affect its profitability and operation. PEST analysis through Macro-Environment identify the major external environment drivers, which influence the air line industry. Technology in airline industry is fast moving, it will bring the changes in the future

The future for airline industry is bright and it also

holds many challenges. The emergence and growth of no frills, low cost airline have radically altered the nature of competition within the industry. For low cost airline should continue maintain the existing business model by reduce the cost to improve their product.

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