The airline industry
Inevitably growth was much faster in the 1950s and 1960s when aviation was a new industry than it is today when it is reaching maturity. But growth rates are still impressive. In the 1950s and 1960s the world's air traffic grew on average at around 14-15 per cent each year. For the last fifty years it has been characterized by continued and rapid growth in demand for its services. Yet it has remained only marginally profitable. Inevitably growth was much faster in the 1950s and 1960s when aviation was a new industry than it is today when it is reaching maturity. But growth rates are still impressive. In the 1950s and 1960s the world's air traffic grew on average at around 14-15 per cent each year (Doganis 2002). In the decade 1970-79 the annual growth was close to 10 per cent. This still meant that air traffic, and the airlines with it, doubled in size every seven years or so. In the following ten years to 1989 growth declined to around 6 per cent annually and in the decade up to 1999 growth was down slightly at 5.2 per cent. In absolute terms, because of the much higher base, a 5 per cent jump in recent years represents a much greater surge in demand than a 10 per cent annual growth thirty years ago (Doganis 2002).
The airline industry appears to be cyclical and this inevitably impacts on growth rates. Nevertheless the underlying trend has been one of declining but consistently good growth in demand. Most businesses faced with continued and high growth of demand for their products or services would be basking in substantial profits. Not so the airlines. This is the paradox. The financial performance of the world's airlines taken as a whole has been very marginal, even in the years when the industry was highly regulated and largely protected from internal competition. The traditional measure of profitability cannot be applied to the airline industry as a whole (O'Connor 1995). This is because of the difficulty of estimating real asset values for airlines with varied depreciation policies, using varying proportions of leased equipment and often receiving direct or indirect government subsidy in a variety of forms (O'Connor 1995).
A measure of profitability commonly used among airlines is the operating ratio, which is the annual operating or net profit or loss expressed as a percentage of the total annual revenue. The cyclical nature of the airline industry is clearly evident. Four to five years of poor or bad performance are generally followed by an upturn and five or six years of improving results (Doganis 2001). However, even in the good years profit margins are low. The net profits after interest and tax rarely achieve even 2 per cent of revenues. Airlines can be low-cost and very unprofitable or high-cost and financially sound. Unit costs or unit revenues are not critical in themselves (Doganis 2001). The airline industry as a whole has made a cumulative loss during its history. The airline industry's capacity to gain profitability is likely to improve in the future as privatization continues and more competitive low-cost carriers proliferate. Although many countries continue to operate state-owned airlines, many large airlines are privately owned and are therefore governed by microeconomic principles in order to maximize shareholder profit
Industry life cycle
Corporations and industries usually progress through various categories pertaining to birth until death. This trek is the industry life cycle. The first stage of the industry life cycle is the venture capital. As the industry life cycle treks forward through the venture capital stage, the relatively few successes become obvious. The image of an industry and market served is more focused, if not completely defined. Their common stock may be sold to the public, if not already offered. The venture capital stage is left behind. These corporations enter the rapid growth stage. The second stage of the industry life cycle typically witnesses the venture capital firm progressing into a period of rapid growth. The product or service has been developed and marketed to the point of consumer acceptance. The untapped market envisioned by the entrepreneur begins to be tapped. The third stage is the mature stage. Companies in the mature stage of the industry life cycle are entrenched in the economic mainstream (Bolten 2000). Their products, brands, distribution channels, and other aspects of their operations are established (Bolten 2000).
Mature firms must depend on reaching the more marginal customers at competitively low prices, replacing and updating sales to prior customers, and most importantly, sustained general economic growth. The fourth stage is the shakeout stage. The end of the rapid growth stage is typically marked by the shakeout. The flood of new competitors, the accompanying product or service price deterioration, the introduction of superior technology and distribution, and/or any other circumstances that lower entry barriers eliminate the superior profitability and diminish earnings growth prospects (Balmer & Greyser 2003). Companies in the stable/declining stage of their industry life cycle exhibit steady to declining expected earnings. Investors emphasize expected dividends in their valuation (Balmer & Greyser 2003).
An industry is considered to have its own life. An industry after it was invented rises and provides various products and services to people; it then matures and provides better product and service. The life cycle of the airline industry begins in the introductory/venture capital stage where the purpose of the industry and its goals are made known. This is the stage where the industry initialized its planned actions and adjust to the different players and factors in the environment. The second stage of the life cycle of the airline industry is the rapid growth stage. In this stage some of the goals have been achieved and the industry has achieved a smooth entry into the market. In the second stage the industry has shown to the public the products and services they can provide to the clients. The third stage is the mature stage where the products and services are known in the market and they already have a unique identity. In this stage the relationship between the airline industry and their clients have already blossomed. The last stage is the shakeout stage wherein the industry experiences more problems and the stability and longevity of the industry is questioned. This stage focuses on changing strategies whenever a problem that cannot be easily solved comes out.
PEST
Political
The airline industry will not get any good reputation, trust and success if it will not be aware of what is happening in the political sector of the country. The airline industry and companies within it have made sure that they were aware of the political situation of every country they have operated in and the industry has its position with regards to political issues. . The airline industry and companies within it is continuously prepared for any problems concerning the political sector. The airline industry and companies within it makes sure that it follows the different laws of a country they engage transaction in. The airline industry and companies within it also makes sure that the different local and international transportation laws are followed in any trips made by an airline company. The airline industry and companies within it doesn’t want to risk their client’s welfare by breaking local and international transportation laws. The airline industry and companies within it follows the international air travel laws that provide regulations for different things like the route allowed for every flight
Economic
. The airline industry and companies within it can be said to be economically stable for the past years. Its economic stature is doing fairly well that’s why they try to improve their products to give the best to their clients. It is not only the internal economic situation of the airline industry that should be taken note of but also the economy of the country, the industry checks first the economic status of the country they are operating in before making decisions because making decisions during a difficult time on the economy of another country may cause catastrophe for the industry. The economy of a country can help boost the sale of the products and services of the airline sector. Because of the good economy of the country they are operating in, people can have the financial resources to buy the airline industries’ products and services.
Social
The airline industry and companies within it makes sure that the service they offer and the technology they use to tender their services will be accepted by the public. The airline industry and companies within it does not authorize the delivery of some services they know will cause outbursts or complains from different group in the society. The entertainment provided in flights will not contain anything that will cause problems with the passengers. The airline industry and companies within it also engages in social activities that tend to develop a better relationship between them and the clients. These activities can be in the form of outreach programs and free tickets to special people.
Technological
The airline industry and companies within it offered new innovations in its technological aspect and introduced new concepts with regards to its industry. Since technology rapidly changes. The airline industry and companies within it makes sure they are updated to what is happening and they can adjust to these changes. The airline industry and companies within it makes sure that the services they offer are updated with regards to what technology is used to tender their services. If other companies use new technologies to provide services, the airlines company has the technology capable of competing with such technologies.
Porter’s five forces
Potential Entrants
The airline industry has been around for a quite some time and the industry is not greatly affected by the new entrants. The influence of potential entrants to the sector is weak. But to ensure that no other problem arise the industry and the ticketing and booking system used by Airline companies maintains low cost for the different expenses they make, this helps in making sure that the new entrant will not have advantage over them and it makes sure that the airline industry and companies within it cannot be outrun by any new competitor.
Competitive rivalry
Competitive rivalry highly influences the airline industry and companies within it. Different things are done by the airline industry and companies within it particularly on the ticketing and booking system used by the Airline companies. This ensures that they have advantage over their competitors. One thing done by the airline companies is the use of a strategy wherein they give the best kind of service to clients. This kind of strategy gives the company a better relationship with the clients. The airline industry and companies within it also offer unique flying experience to the clients thus giving the rival industries additional worries and concern for each of their future.
Substitutes
Substitutes exist when a certain market has a situation of high prices. In this industry clients look for a company that can offer lower prices for their products or services. Substitutes can also be in the form of alternative services that a client deems appropriate for his/her need and capabilities. Substitutes give high influence to the airline industry and companies within it since substitutes can make the airline company lose the clients it has. The airline industry and companies within it make sure that the substitutes won’t give them much problem. They do this by proving that the service they offer and the technologies they use to provide the service are the best quality and are better than substitutes.
Bargaining power of buyers
The bargaining power of buyers is a standard of how the client can put the business in a tight spot wherein the client dictates the price of a product. The bargaining power of buyers highly influences the airline industry and companies within it. It shows how the industry tries to create good relationships with clients. As much as possible the airline industry and companies within it maintains reasonable prices for their fares, they also have promos and discounts that intend to make the clients have second thoughts on purchasing tickets from other companies. When the clients try to dictate lower prices the company tries to know whether it is reasonable and it isn’t it has no choice but let the client go.
Bargaining power of sellers
The bargaining power of sellers is a measure of how suppliers can dictate the price of materials needed by the company. The bargaining power of sellers highly influences the company. The company makes sure that their suppliers have high bargaining power through helping them show their importance in the industry. The company makes sure that the price being asked for a material has the same value as the same materials’ quality and durability. This will ensure that budgets will not be wasted.
Strategic analysis
A key challenge for any organization in the twenty-first century is to seek to maintain and improve its performance in an increasingly complex and competitive global operating environment, where change pressures appear to offer the only certainty. Despite the pursuit, over the last two decades, of Total Quality Management (TQM), Business Process Reengineering (BPR) and more recently Enterprise Resource Planning (ERP), to name only three of the more popular management holy grails, there remains, nonetheless, a prevailing sense of failure in fully realizing hoped-for levels of improvement. In this context then, it is not surprising that there should be some sense of cynicism when it is argued that, by focusing upon identifying, valuing and managing information and knowledge (IKM) assets, there are significant opportunities to achieve more effective organizations and to improve their efficiency by reducing the amount of wasted time, effort and lost opportunity through better and more integrated use of both tangible and intangible organizational resources (Beckford 2002). The challenge presented here is to move to define such assets, particularly in relation to a public sector context, and through an investigation of the benefits which can accrue from the successful management of information and knowledge, to dispel much of the disquiet and cynicism surrounding this potentially important area of organizational improvement (Beckford 2002).
Companies cannot survive without an effective competitive strategy; an effective competitive strategy gives a company an easier chance of attaining its goal with lesser focus on the problems they have. A company that is wiling to use a competitive strategy must create changes in its internal environment. In doing this every aspect of the business can be checked before the strategies can be used for success in the firm. The service strategies will depend on the situation in an environment and the different barriers that may hinder the delivery of an effective strategy. The service strategy may go into waste if there are still certain barriers and environmental condition left unsolved since the effect of the strategy may not be felt by clients. The airline industry makes use of the best service strategies that intends to make an identity separate from the competitors. It concentrates on providing excellent service to clients. Companies in the airline industry have a code of service that the company and its employees use whenever they are having conversations with their clients. This code makes sure that any transaction done between the client and the company will be in good taste and it will make the relationship between the company and the client stronger.
The situation in the airline industry is different from the situation in the manufacturing industry, fast food industry, retailing industry or other kinds of industry. The airline industry needs to make sure that the best service can be given to the clients. It also has to make sure that the best technologies will be used to serve the clients. To avail the services of airline companies, clients have to pay more. The payment of the clients should be replaced with the equivalent service. Therefore the strategies of Airline companies should aim to provide the same worth as the prices of accommodating their services. Airline companies are forced to make sure that their services and the technologies they use will be in the same level as the payments made by the clients. Their strategy on their service and the technologies they use will then be improved further to meet clients’ expectations. The airline industry has a responsibility to make sure that the welfare of the clients is being taken care of thus airline companies need to make sure that they have strategies that pertain to the responsibility of the industry to take care of its clients. Whenever there are untoward incidents or situations while the service is being rendered, Airline businesses need to make use of a different set of strategies that will make sure that nothing will happen to the clients under an unexpected situation. Businesses can succeed in a certain industry that for them looks unpromising. With proper strategies they can survive in an industry that no one wants to engage business in and no one wants to be a part of. Building market share should not be priority of business rather the company should have a strong competitive advantage before they can have market shares. Resources should not be always a concern for the company since success can be achieved if there are limited resources
Conclusion
The airline industry is has its own share of problems over the years, this does not mean that companies in this industry should be affected by such situation. The key forces at work for the industry include its ability to make proper use of technologies and service strategies to provide proper delivery of service to clients. The use of proper technologies and strategies can give the industry a better chance to improve its economic stature. The underlying forces in the airline industry is the external environment, once there is radical change in the external environment it would prove to be catastrophic for the industry. This would be prevented through constant monitoring of the external industry and through creating back up plans to counter a sudden change. Another underlying force for the airline industry is its economic status. If the economic status drops then the industry will have to find alternative means to provide service to their own set of clients.
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