The airline industry is a large and growing industry which is, because of the great everchanging environment it operates in, forced to constantly adapt and enhance business models in order to survive, compete and to generate profits. In this context this report will investigate the developments and trends and their importance in the airline industry that influence its future the most. In accordance with this aim the Problem Statement reads as followed:
Which trends and developments in the airline industry will have the most impact on its future?
To clarify the context of the widespread and complex airline industry and to provide an overview, firstly the most relevant characteristics of the airline industry will be discussed, so it will be clarified in what environment it operates in and what factors it is influenced by. Moreover, due to the fact that the whole airline industry is in constant and often protracted development, also the past of the industry has to be considered. Therefore past trends and developments and how they influence the industry will be examined. Under consideration of past developments and trends that shaped the current situation of the airline industry, present trends and developments will be discussed. This facilitates an outlook on the future, which will be given on the basis and resulting from the current trends and developments discussed.
To clarify these matters of concern the research questions have been formulated as follows:
1. What are the characteristics of the global airline industry? 2. Which were the most important trends and developments in the airline industries’ past shaping the current situation?
3. Which trends and developments can be identified in the current airline industry that will shape its future?
Finally the problem statement will be answered on the basis of each research questions’ outcome.
This report solely comprises secondary research. The most relevant information will selectively be drawn from Rigas Dogains’ “The Airline Business”, the airline news resource as well as from topic related articles.
2 What are the characteristics of the airline industry?
What are the characteristics of the airline industry?
In order to understand the complexity and the contradictory as well as widespread nature of the airline industry and therefore its trends and developments, this section will give an insight into the most relevant features that characterize this industry, with a short outline of influencing and most significant factors will be given.
Dynamic growth industry – Due to the constant development towards a globalized world, the innovation and the fast progress with new technologies as well as the increased income and greater leisure time of people, the travel demand increased especially vast in the post 1945 (IATA, 2014a). Still the further development of the industry’s environment facilitates growth in demand. Even though the demand for air traffic seems to follow the development of the gross domestic product (GDP), fluctuations which can be associated with factors such as an economic crisis are the exception on the overall rising demand and therefore growth of the airline industry (Doganis, 2006). Closely linked to economy – The airline industry can be described as highly cyclical since it has a high sensitivity to the economic cycle (Doganis, 2006). The profit margins of the airline industry are rising and falling in accordance with the World’s economic growth which again is impacted by unforeseen factors like a crisis (see appendix I). So demand for air traffic decreases during times of economic distress or simply when the growth slows down. This causes overcapacity and therefore lower fares and yields. The effects of the change in the industry, however, might show lagged in time. Also the factor causing the industry’s downturn can intensify or lengthen it (Doganis, 2006).
High fixed costs and marginal profitability – Also characterizing features of the airline industry are the generally low profit margins and high fixed costs. The fixed costs manly results from personnel and fuel. The low profit margins arise from the circumstance that there is no significant variation between the expenses of an aircraft flight and the number of carried passengers. Therefore already a small change in passenger numbers can negatively impact the financial result (Doganis, 2006).
Dependence on oil prices – As already mentioned the fuel prices are one of the two greatest fixed costs in the airline industry. As the aviation fuel price is closely linked to the oil price, the airline industry is highly dependent on it. An increase of oil prices would mean almost immediate price increase on fuel, what again could negatively impact the financial results of the industry. As fuel is crucial to the aviation business and the oil price is outside of direct control, this dependence on an uncertain factor creates a major challenge for the industry (Doganis, 2006).
Restricted by regulations – Besides technical and safety regulations with are enforced by different instances, like for example the Federal Aviation Administration (FAA) that restricts the industry’s operations, also the economic benefit is reduced by poorly designed regulations and high taxations that hinder the airlines to connect. Also governmental policies discourage crossborder consolidation (IATA, 2013a). Due to the fact that the airline industry is the most international industry in terms of operations, but quite national in terms of control and ownership, makes it a paradox (Doganis, 2006).
Highly competitive – As stated by Doganis (2006) the airline industry is highly competitive and influenced by several factors. Besides the necessity to adapt pricing and keeping track of competitions actions, airlines also must consider the customers demand, the routes that are flown and the brand awareness and brand identity to remain competitive. Moreover airlines might become part of alliances to gain advantages, also in terms of bypassing regulation (mentioned above) that inhibit competitiveness (Doganis, 2006).
Summing up it becomes clear that the airline industry is a growing industry that is characterized by high fixed costs and marginal profitability as well as a financial outcome closely linked to the economic cycle. Those features combined with the dependence on oil prices, make the airline industry instable and constantly threatened by uncertainty. High competitiveness demands constant adaption and development in accordance with competitions operations and the changing environment within the highly regulated mostly nationally controlled industry framework.
In order to be able to understand the current situation of the airline industry and to further gain insight into future trends and developments it needs to be understood, that the whole airline industry is in constant and often protracted development. Therefore this section will deal with those developments and trends, which were the most important in the past years. Deregulation & Liberalisation – As already mentioned the airline industry is a paradox since even though it is the most international industry in operational terms, it is quite national in terms of ownership and control. However, it can be stated that the growing realisation that politically controlled economy did not longer served public interest was triggering deregulation. It describes the process of removing the governmental restrictions on market entry, exit as well as pricing of airline services, mergers and customer issues (Smith Jr. & Cox, n.d.). The deregulation being a part of the bigger global liberalization trend started 1978 in the US with the Airline Deregulation Act granting foreign states airline traffic rights. The aim was to provide highest customer benefits by preserving and extending competition amongst airlines in a fair market (Doganis, 2006).
The global liberalisation trend was shaped by the call for more liberal rules and regulations of international air transport (Doganis, 2006). In order to facilitate an effective liberalized airline industry Air Transport Agreements had to be made between two or more nations (bilateral or multilateral agreements). The first breakthrough in this matter was the open sky agreement between the Netherlands and the US, granting greater freedom in air traffic. For example now the Netherlands were allowed to carry revenue traffic between the US and third countries if the service was starting and ending in their home country.
Also Europe took liberalisation measured with the Third package approaching differently than the US. Instead of focussing on bilateral agreements the EU allowed open route access to foreign counties without price controls or restrictions when determining fares and cargo tariffs for a whole region. Also cross-border ownership was allowed, which for example enabled KLM to take over and operate a British airline (Doganis, 2006). Over the years the open sky agreements evolved further in terms of freedom from many traditional forms of economic re ulations and quantity (Smith Jr. & Cox, n.d.). According to the U.S. Department of State (2013) the US achieved Open Skies with over 100 partners, amongst which since 2007 also the EU numbers (IATA, 2014b). Up to this day deregulation and liberalisation in combination with intense competition caused a change in management strategies and therefore a change in the airline industry. Market exit, diversification into new products, expanding into new markets or specialising in niche markets were the reactions to this new development (IATA, 2007). Due to the fact that the industry became safer, more accessible and more efficient than before and the circumstance that other industries also already demonstrate the benefits of liberalisation (such as lower prices, increased output and choice, improved quality of customer service, greater commercial freedom, that allows to increase productivity and efficiency for providers etc.), the IATA (2007) argues that further and full liberalisation is required in order to maximise the potential benefits.
Privatisation of state owned airlines and airports – Because the liberalisation and deregulation forced the airlines to adapt new market practices in order to become more competitive and customer-oriented the trend towards privatisation of state-owned airlines emerged. Stateowned airlines were suffering from the so called Distress State Airline Syndrome, which is characterised by financial difficulties and therefore substantial losses, bureaucratic, indecisive management and over-politicisation slowing down the reaction for example to the crisis in 2000 – 2004. Moreover decision influencing strong unions, over-staffing and low labour costs resulting from unrealistic or uncompetitive terms and conditions or inefficient HR management are negative influences. Also poor service quality and organisational culture, poor marketing and distribution, outdated processes, made the state-owned airlines an obstacle regarding economic growth, through increased productivity and efficiency. The solution privatisation however, has financial reconstruction, cost reduction and network and fleet rationalisation as precondition (Doganis, 2006). Since a whole recovery strategy and its implementation needs time, the process of privatisation is a protracted development, there are still many state-owned airlines today (Dogains, 2006). Because even though there also was a program to privatize airports since 1997, in which no one participated, the airport sector has not structurally transformed as the airline sector (IATA, 2013b).
Therefore only few airports are privatised today. In the EU for example the number of privatized airports amounts only 9%. However the IATA (2013b) argues that airports can benefit from privatisation the same way the airline industry does, since more competition and customer orientation can be facilitated. Approach of alliances – In times of the crisis alliances were forged most actively, since they were driven by worsening financial performances (Dogains, 2006). Alliances are a logical response to uncertainty focussing on the key driver being to generate more revenue. Also they proved their worth, as simply buying in second-tier carriers have shown to be difficult due to incompatibility of cultures or management style or just the dominance of one carrier. There are two types of alliances – the commercial alliance, in which airlines operate with independent assets and the strategic alliance, which is characterized by greater integration and co-mingling of assets (see appendix II). In the beginning most alliances were of bilateral nature that made agreements to serve specific needs mainly for marketing, so commercially motivated benefits.
However, since British Airlines and American Airlines joined in the oneworld alliance in 1998 this kind of alliances approached until they became global. By 2004 it was normal to abandon bilateral alliances for global ones, which became most important, because of the interlinked networks of more airlines operation in different countries or even continents (Dogains, 2006). Today the tree biggest global alliances are Star Alliance, oneworld and Styteam
(Travel Industry Wire, 2013a) and they generated about 56% of the world’s passenger-kms in 2003 (Doganis, 2006). Besides the boost of revenue, benefits for the members include expanded networks and frequencies, which customers appreciate and greater value and service for the same or lower prices. With this approach of alliances also competition amongst airlines turned into competition amongst alliances. Also the strategic importance of alliances emerged since growing airlines like those from the East can become a valuable asset for them (oneworld, 2013). Approach of Low-cost airlines – While in 1994 less than 3 million passengers travelled with low-cost airlines, the passenger numbers in 1999 already amounted about 17.5 million and even 100 million in 2004. This example illustrates the success of the low-cost carriers and therefore their importance for changes and developments in the industry. The most remarkable fact was that even during the crisis the low-cost carries not only grew but also were they profitable. No frills low-cost airlines like for ex.
Ryanair have changed the nature of competition to a great extent in the short haul flight. High frequencies and punctuality as well as low fares, facilitated by cost cuttings and savings where it is possible, make low-cost carriers attractive to customers. Costs are saved for example by flying to secondary airports with lower fares, operation of only one type of fleet to lower maintenance costs, cheap direct booking by skipping travel agents, shorter average sector length, easier cost management because of point-to point flights only, or less seating space facilitating more seats per flight. Due to this intense competition of low-cost carriers legacy carriers flying the same short-haul routes were forced to respond or fail. Overcapacity in 2004 resulting from legacy carriers switching to low-cost or new entries in the low-cost market posed a new challenge as well as the maturing of the low-cost industry (Doganis, 2006). The gap between low-cost and legacy carriers is due to the premium service. However, the legacy carriers were working towards more cost efficiency as well to remain competitive with the low-cost carriers on short haul routes (IATA, 2006). Rise of Middle East / Asian Pacific airlines – While most of the airline industry was busy with responding to changed environments with consolidations, alliances, reductions of capacity etc., the three big airlines of gulf aviation (Emirates, Etihad Airways and Qatar Airways) started a new course. In a remarkably short period passengers, aircrafts and destinations were added pursuing a new vision for air transportation.
This was supported by the friendlier regulatory environment, the states’ spending in increasing infrastructure (f. ex. expansion or building of new airports) as well as bigger reliable long-haul aircrafts and integrated strategies between airports, airlines, the financial community and some government agencies. In September 2012 Qatar Airways announced to join oneworld while Saudi and Middle East Airlines were joining SkyTeam and Emirates and Quantas announced global partnership. Other agreements for code sharing were made as well, for example between Etihad and the Maldives, Bangladesh, Australia the Seychelles and Pakistan (Airline leader, n.d.a). Besides the factors mentioned above excellent services and highly competitive pricing for non-stop long-haul flights provide a positive branding and increase demand (Skytrax, 2013a). According to IATA the Middle East are currently still “growing market share with particularly strong traffic growth on routes to Europe and Asia” (IATA, 2009). Also the Asian Pacific airlines have shown market growth despite of political, economic, natural or other uncertainties. With airlines offering low fares and additional services (hybrid model) leading the way, the airline market of this region was the fastest growing in the world in 2012 (Travel Industry Wire, 2012a). The greatest contribution to this comes from China and India. The increase in traveller numbers mostly derives from the countries’ growing middle class that travels domestically as well as internationally. Since the region has become a large market it has become crucial for airlines to be part of this growth (abacus, 2012). Importance of controlling costs – During the crisis of 1990 – 1993 when the airline industry was impacted by the negative changes, the airlines realised that controlling labour costs, being a large single cost category, is the key to cost control. Moreover it is a critical factor since it is also the main differentiator between airlines. A direct way of controlling labour costs is simply to reduce staff numbers.
New terms and conditions can help to adopt new practices to increase flexibility and productivity to compensate stuff cut backs. Another option is to launch low-cost subsidiaries like for ex. Delta Airlines did in response to the greater competition of low-cost carriers. Also outsourcing is commonly used practice. Besides cost cuttings mentioned above a second strategy, namely reconstructing the whole labour costs to a lower base could ensure long term cost reduction by operating with performance-related bonuses like a lot of low-cost airlines do (Doganis, 2006).
Apart from the labour costs, savings or reductions can also be facilitated in other categories like for instance maintenance. Here costs can be saved by operating one aircraft type only, like Southwest Airlines who operate Boeing 747 (Doganis, 2006). Also hedging fuel is a common practice to avoid having higher costs when oil prices rise (Airline Leader, n.d.b). Moreover higher efficiency can facilitate cost savings. For ex. Ryanair increased the seating density in their aircrafts by reducing space between seats (Doganis, 2006). Technology also plays an important role as it could facilitate cost savings in the industry. An example for cost saving possibilities with technology is booking without printed tickets. Since 2008 the industry completely moved to electronic ticketing (IATA, 2008).
The trend of cost control that is caused by intensive competition still is and will be a major influence the airline industry and needed to achieve high yields, the airlines profitability and competitiveness in the ever-changing environment (Doganis, 2006). Integration of technology – Since IT is underpinning every operation in the airline industry it can serve as powerful management tool that helps to efficiently integrate functions, reduce costs and increases revenue generation (Doganis, 2006). The introduction of IP to the industry enabled many new applications like online reservation systems (ITPRO, 2006). Therefore and because of the need to cut distribution costs, e-commerce also gained importance with the progressing of technology. E-commerce is not only about ticketing but it also fundamentally changes the whole airlines operations, the relationship amongst airlines as well as to their suppliers and customers (Doganis, 2006). 2005 for example the Star alliances asked Amadeus, an airline IT system provider to build a common IT platform for the members of the alliance, which provides customer management solutions, so offers full reservations, departure and inventory control capabilities. Moreover it facilitates faster and enhanced integration with alliance partners (Amadeus, 2014).
Besides the benefits of interactive communication and distribution e-commerce also allowed more dynamic pricing (making it easier to respond to changing market conditions) as well as to bypass travel agents, who are decreasingly able to influence the customers’ choice, due the shift in culture approaching with technology and the cheaper availability of computers and internet. The market power of the customers is constantly growing because of all the information they can access. Therefore enhanced customer service is of great importance. This is why today most of the airlines’ booking pages also offer other products and services besides flights, like hotel booking or car rental, so do cross selling for ancillary revenues and customer loyalty (Doganis, 2006). Also the practice of frequent flyer programs is used by many airlines, like for example United Airlines, to retain customer loyalty (United, 2014).
Considering all the above mentioned trends and developments it can be concluded that today’s airline industry worldwide is shaped by increased competition and greater importance of customer orientation in a more liberal industry with greater freedom in air traffic, what challenges old business models. Considering the high uncertainty and vulnerability of the industry to global or local shocks, cost control, increasing efficiency and constant integration of ecommerce and technology in general have a major part in this. To achieve profitability and efficient operation airlines worldwide need to constantly rethink and enhance their business model. Carriers are forced to adapt to the changed conditions coming up with innovative business plans or vanish from the industry. New types of carriers with more flexible business plans have advantage over the carriers with operations based on legacy. Enhanced infrastructure and increasing demand in a friendlier regulatory environment facilitate the continuous increase of market share of the Middle East and Asia Pacific airlines. The offering of high value for relatively low fares with extending networks on domestic as well as international flights influences the industry as it starts to excel simple low-cost carriers operation that revolutionised the industry before and could essentially impact alliances stability.
Which trends and developments can be identified in the current airline industry that will shape its future?
Having an understanding of the past trends and developments shaping the current situation of the airline industry, this section will now deal with the current developments and trends in the industry. This will facilitate an outlook on the future of the airline industry, its operations and what it could look like. The outlook will be given on the basis and resulting from the current trends and developments discussed.
Cost control / efficiency – Since the price of airlines’ offers remains a key competitive factor which is majorly determined by non-controllable factors like the fuel price, slow economic growth or labour costs – not only for low-cost carriers but for every airline controlling costs is a major driver that needs to be further integrated in the business strategy. The focus on cost reduction and savings in order to facilitate profitability is also still pushing more efficient operations. Especially for Europe with its stuttering economy and the US struggling for traction risk reductions in terms of higher efficiency and cost control has a high priority (CAPA, 2013a). Fuel hedging to avoiding uncertainty on short-term or reducing capacity on even marginal profitable routes and higher load factors commonly in combination with higher yields are able to make operations profitable. However, these measures taken seem to have almost reached their peak, as it is not able to compensate another rise in fuel (CAPA, 2013a). To nevertheless control costs as far as possible now one focus lies on increasing fuel efficiency. An example here is Alaska Airlines that used new technologies to increase their fuel performance with the acquisition of the most fuel efficient aircrafts Boeing 737 and Bombadier Q4000. Even though it is an investment, it will benefit the company on the long run (Travel Industry Wire, 2013b).
As the first airline United Airlines just recently invested into fuel-efficient split-scimitar winglets (Travel Wire Industry, 2014a). A private Indian airline called go air even plans to only hire female stews because they weigh less it will reduce the flight weight, and as a consequence lower fuel costs on the long haul (Hotel News Resource, 2013). How strange this action might appear, it derives from the condition that in proportion the fuel costs are so high for airlines that it is barely worth the effort to focus on not fuel related cost cutting measures (CAPA, 2013a). Due to these developments and since single fuel efficiency measures are not enough to maintain or improve profitability, airlines have to draw on additional sources to boost revenue such as raised fares and ancillary services (Travel Industry Wire, 2013c). Importance of Customer Relationship Management (CRM) / technology changing travel experience – As the ever-approaching technology changed the game of the airline industry by creating a customer who is socially savvy, the focus on the customer is of growing importance. Search engines, travel websites or also online travel agents make it easy for the price-sensitive customer to find the best flight, which endangers customer loyalty and therewith the airlines revenues (Travel Industry Wire, 2013d). Moreover studies have shown that the travellers’ choice is not only driven by prices but also by attributes of the product, schedule, individualisation and customer service. Also are customers that made an unsatisfying experience less likely to choose again for the same airline. Therefore Customer Relationship Management (CRM) aims on creating and/or increasing customer satisfaction and customer loyalty (Sabre, 2009).
As already mentioned the frequent flyer program, awarding customers for using a certain airlines and collecting their data, is a commonly used approach to gain customer information. However since it has shown that these frequent fliers might not even be the most valuable one, airlines now rather focus on travellers paying higher fares, or those who are willing to pay more for ancillary services (Sabre, 2009). Data that is needed for such information can for example be gained from bookings costumers made or social media analytics. Southwest airlines recently took the acquisitions about customer information a step further. They collect real-time data directly from the customer personnel conversations by using speech analytics to extract potentially meaningful information (BigData Startups, 2013). The gathered customer information together with general operations of for example single flights like reports from pilots etc. are analysed in unified digital warehouses. Resulting costumer profiles can provide the airlines with useful information. American and British Airways for instance use information about costumers in flight. The cabin crew can access seat maps and detailed information (like for ex. who is a vegetarian) via smartphone or tablet.
Not only do these information provide the opportunity of personalized interaction, but also can they serve as source of information for increasing convenient services that again increases value for the costumer. For example bookings are faster since the system already knows customers’ preferences (Wall Street Journal, 2013). Also marketing and e-commerce in the airline industry are influenced by increasing significance of CRM and the approach of technology (Travel Industry Wire, 2013d). The age of simple advertisement is dead, since Social Media has become progressively important and gadgets like smartphones make it possible to always be connected. An example for the usage of Social Media is the online initiative run by Ryanair that offered refunds on tickets through an online game. Also Vueling is getting involved with Social Media letting potential costumers win free flights if costumers post a picture of one of the Vueling destinations on Instagram and Cebu Pacific promised free flights for the first 100 customers that like their Facebook page. The usage of Social Media for marketing is approaching further and unpredictable. It offers a lot of room for ingenuity facilitating for ex. new media campaigns for certain areas only. Triggering positive emotions towards and happy associations with the brand, like for instance kulala is doing with the catchy phrase “most South African flight ever”, holds completely new capabilities towards brand building.
Taking Social Media further towards increased convenience for costumers, KLM is the first airline that lets passengers pay via Facebook or Twitter (airlinetrends, 2014). Besides that Social Networks also facilitate faster and more personalized communication to the customer, which are valuable in terms of CRM (Travel Industry Wire, 2013d). Besides sales force automation (see e-commerce) also the automation of costumer services is increasingly part of the CRM’s operational segment. Therefore now also technology is progressively used, for ex. to provide costumer with information about their flight status. Apps like the Flight Status Application provide access to boarding times, delays of flights and so on, increase the convenience for the customer and therefore contribute to CRM (FlightStats, 2014). KLM makes feedback for their customers easy with the introduction of an app which enables to assess specific areas such as check-in, lounge, boarding and arrival in real time (airlinetrends, 2013a). In general Apps are progressively important as they can provide the customer with almost everything he needs for travelling besides the passport. They provide a platform for storing boarding passes and coupons and the App “to Satisfly” even gives the customer the possibility to choose their seatmates in flight
on the basis of their Social Network profiles. It is stated that Apps will become essential to travel having the mobile revolution transform the experience by 2015. It is likely that in the near future Apps encompass everything from aggregates of endto-end services for airports, ground transports to airlines as well as hotels (Future Travel Experience, 2013a). Overall however, it has to be recognised that the CRM airlines do reaches beyond the traditional sales, marketing, services and loyalty. Instead it includes the whole travel experience with all its touch points from booking over inflight to after the flight. Bonds between the customer and the airline are made in every part of the whole experience. For example in flight a crew that is well groomed and courteous create a social bond (IBM, 2002). The effect of CRM does also reflect in increased revenue as it reduces churn, acquires more of the travellers spending and attracts new customers.
Depending on the size of an airline the potential improvement in operating profit ranges from 15 US$ to 250 US$. Also with a CRM program revenues can rise up to 2.35% which does more than it needs to compensate the 0.1% to 0.8% caused by the implementation and growth in marginal flight costs (Sabre, 2009). Importance of airports – Because greater customer orientation and the customers travel experience as a whole gains centre stage, it is becoming more important that also airports need to adapt this focus, since they are a great part of this experience. Therefore, picking up on CRM, the automation of customer service is a major discussion matter. The Incheon airport for example is pioneering the overall self-service experience. Passengers sever themselves at a selfcheck-in kiosk allowing it to check in with 8 major airlines. Moreover it saves time, as this procedure is with only 3 minutes in average four times faster than regular check-in. For the future the manager of the airport intends to further invest in atomising, like biometric systems that recognize customers and give them information they might need (Future Travel Experience, 2013b). Also the airport Cangi intends to open the new Terminal 4 in 2017 which will include total self-services, automatic bag drop, check-in and immigration and boarding process (Future Travel Experience, 2013c). Moreover the airport provides a feedback system that allows customer to rate services with Smilies. The feedback will immediately alter the staff in order to give an instantaneous reaction (Future Travel Experience, 2013b). The Copenhagen airport is trying to improve the customers experience with a 360-degrgee tool to find the way within the airport. This can be done from the computer at home or on site with an app (Future Travel Experience, 2013a).
Considering the new trends it can be stated that especially Asian airports hugely invest in technology to make the traveller experience more seamless (Future Travel Experience, 2013b). The reason for this can be found in the fact that the airports in Asia are mainly operated by governmental instances which have money to invest due to the currently emerging economy. Not only in Asia but in general airports are still mainly (at least partly) owned by the government (IATA, 2013b). However not all governments have enough money to fund new technologies or expansion in necessary infrastructure. Moreover since airlines looked for ways to pass along the squeezed revenues they had because of increasing global competition, cost pressure is also challenging airports (Wyman, 2012). Therefore also the trend towards privatisation of airports is like the trend of privatisation in the whole industry still emerging (IATA, 2013b). To still make profit under pressure of competition and to be able to invest in infrastructure and technology a new trend approaching the airports is the shift of focus onto developing commercial activities, that are not related to aviation. In fact this can represent the key differentiator for the airport business, not only in financial terms but also in CRM terms, as increased service offerings can increase customer satisfaction (Wyman, 2012). However, more services do not only mean new stores or cafes within the airport, but rather a whole special experience for the customer, what also shaped the term Aertropolis. Again the Incheon Airport in South Korea, being voted the best airport in the world, is one of the leading implementers of this trend putting the customer first. The amenities on site include besides whole shopping and retrial district and a V.I.P Lounge for example exhibition and sculpture areas, gardens with waterfalls, an aircraft observation deck, ponds with kois, a transfer hotel as well a retail lifestyle centres with pick-up of duty-free purchases. Moreover a new terminal is planned, which will reflect the Korean culture and art, flora and fauna (Travel Industry Wire, 2013e).
Hybrid business model / Differentiation – Even though the price is still the main competitive factor in the industry’s operation enhancing customer services for more loyalty is becoming a major focus. Since the low fares alone are not a unique selling point anymore and do no longer sufficiently serve the growing expectation of the customer, the model of the low-cost carriers evolved towards the “hybrid” business model (Sabre, 2012). This business model still works with low fares, however, customers can choose to buy additional service so basically bundle their own packages. Also ancillary revenue and CRM need to be considered for success (Prologis, 2014).
Throughout the airline industry the high standards of customers have pushed all airlines towards upgrading their interior (airlinetrends, 2009-2014). For example Lufthansa just recently introduced a new “premium economy” class offering more comfort (Maushagen, 2014). Especially across the Chinese Airlines quality levels are high (Skytrax, 2013b). Also carriers providing low fare flights are going along with this trend raising the bar in terms of in-flight standard. The Japanese airline Skymark announced to introduce a “premium economy” class on the ordered seven A330-300 aircrafts (airlinetrends, 2013b) and JetBlue introduced their new potential premium product, which includes several amenities. They have invested in business and economy showing of a section that offers large TV screens with touch-screen technology and greater leg room. Also food is offered tapas-style with dessert as well as cappuccino or espresso. Moreover they provide a “monthly discovery service” giving out cosmetic samples to customers (airlinetrends, 2013c). Based on the idea of increasing customer loyalty differentiation of the product airline becomes more important.
The customer needs to value the services so much they become the key differentiator driving the travellers’ choice to be loyal. Of course also the financial aspect to generate higher revenues, play an important role as well. For these reasons hybrid airlines, offering low fare and additional services for extra charge, are successful these days. Of course Ryanair has practiced this before by charging extra for example for snacks but the pressure to increase customer satisfaction raises the bar. So AirAsia for instance is now hoping to launch a trial this year for in-flight connectivity and entertainment. (Future Travel Experience, 2014). To increase on board ancillary revenue airlines also start to adopt a retailing mind-set building on connectivity and data. Virgin America for example give passengers the possibility to order merchandise, food and beverage via IFEC system integrated in the seat. Recently there was even a tab function added facilitating passengers to make purchases by only swiping their credit card once. Delta Airlines also has approached increasing on board ancillary revenues by giving travellers free access to Amazon during a flight. Again Asian airlines change the mindset by taking additional sales in-flight further. Korean Air offers a “Sky Shop”, a store on the airlines A380s in which passengers can shop duty-free during the flight. The airline believes that the generated profit of the on board shop can outweigh the loss on revenues of 13 seats (Future Travel Experience, 2013d). Another trend that comes with the approach of the hybrid business model is the consideration of extending the network event towards long haul flights. WestJet for example is currently starting to explore of long-haul flights with wide-body aircrafts (CAPA, 2013b). Airlines offering full service suffer from the similar approach the hybrid business model operates. This forces a response of restraining capacity and pull back on routes (CAPA, 2013a). Growth of passenger numbers mostly derive from new carriers, especially in the Middle East and Asia, while the growth for legacy carriers stagnate (see Appendix III). The exception here again is
Asia, where legacy carriers commonly respond with establishing a low-los subsidy (CAPA, 2013a).
Changing traffic flows / Alliances – Besides the strengthened financial situation of the airline industry also the passenger demand is increasing (in international markets with 5.4% a bit faster that in domestic travel which increased 4.9%). In fact it is overall predicted to rise approximately 31% by 2017. Already from the growth rates of 2013 it becomes very apparent that the Asian Pacific market on short haul increased more than any other, while the airlines from the Middle East had the strongest growth in international passenger demand (IATA, 2014c). Encouraged by the hastening liberalisation, the investments in infrastructure (building and expanding airports) and the efforts towards more costumer-orientation make this possible. Also they ordered aircrafts in unprecedented quantities (CAPA, 2013a). The three big Gulf airlines (Emirates, Qatar Airways and Etihad) for example ordered widebody aircrafts in the order of $160 billion. The Middle East will be armed with ha huge fleet that excels the US and Europe in terms of efficiency, luxury and comfort. Moreover Boeing event estimates the Middle Eastern airlines to need approximately 2610 over the next 20 years, which would make about $550 billion. A third of the new carriers will replace old ones while the rest is used to expand reach globally. Their wide-body fleet is already bigger than those of all US carriers together.
This is threatening the international air traffic of US and Europe possessing the biggest market share in the air transport. Especially the US carriers are concerned, since they could lose a big part of their international market with more passengers moving through the gulf (CNN Money, 2013). Also have the Middle Eastern carriers begun to joint alliances for advantages like increased connectivity, which will enforce their strength further (USA Today, 2012). Moreover IATA expects the Middle East carriers to have the highest growth rate of 6.3% in international passengers by 2017, followed by Asia Pacific with 5.7% and Africa and Latin America (Aviation Today, 2013). The growth of Asian-Pacific is mainly driven by the Chinese domestic market, Asia’s biggest aviation market. The traffic Asia Pacific is forecasted to represent 31.7% of the global passengers in 2017. Also, there is awareness that fundamental change are happening in the global aviation industry, so that efforts towards international traffic are made as well and can be expected to also have major influence on the international air traffic (IATA 2014c). Consolidation – Mergers and joint ventures have become common practice over the years (Business Travel News, 2013). IATA states that they are and efficient tool to gain efficiencies and deliver value for shareholders was well as for passengers (Travel Industry Wire, 2012b).
Joint ventures are bringing synergy effects on the contracting companies can benefit the brand building customer satisfaction and therefore loyalty. It can help to improve brand image and support differentiation. For example the joint venture created between Delta Airlines and Virgin Atlantic allowed both to become more efficient competitors by expanding the travel options on routes between North America and the U.K. in quality and quantity (Travel Industry Wire, 2013f). By merging companies completely combine their operations becoming one. This year American Airlines and US Airways merged to benefit customer, investors, creditors, communities and employees by creating a premium carrier operating under the name of American Airlines. Having a robust financial foundation and a strong global network shall secure their position in the industry (Travel Industry Wire, 2014b). However the possibility for merging is not just given. Old airlines for example are often heavily restricted by legacy unions or government, which makes innovation of flexibility needed to survive in this turbulent environment of the industry almost impossible (CAPA, 2013a). Overall the IATA values consolidation, since it can bring choice to the costumer as well as lower fares resulting from lower unit costs. Also the process of mergers would over time cause inefficient airlines to disappear from the industry. However there also is a big concern coming up, namely that too much concentration would form entities having dominant position (IATA, 2010). In the US for ex. with the merger of American Airlines and US Airways 80% of the countries air traffic is now dominated by only 4 carriers (Daily Mail, 2013). But if the suppliers become less the risk of high fares rise. If this scenario occurs, remains to be seen. Anyway the further concentration of airlines is predicted (Business Travel News, 2013).
Summing up the gathered information above it can be stated that the future of the airline industry will be elementary transformed, shaped by the turmoil it is undergoing as the old norms are challenged and the shift of aviation’s axis towards the East that threaten alliances stability. Because uncertainty is dominating the industry and cost reduction is still a major issue for the airlines in terms of competitiveness carriers are pulling the levers to cover risks of slow economy, competition, low fares, decreasing revenues or downward pressure on yields with actions like hoarding cash, tight control of capacities, increasing load actors increasing load factors, strengthening partnerships and alliances as well as exploiting ancillary services. Besides these focus on short term risk reduction growing focus on CRM is emerging, which shows in general upgrading of aircrafts’ interior, as well as the rise of the new hybrid business model, combining low fares with extra services and packages that can be bundled individually, to better meet the costumers higher expectations. Technology-use now is a main feature of the airline industry also in terms of CRM, facilitating the better serving of customer needs and therewith increasing their loyalty. Customer data provides airlines with individual profiles, while e-commerce and new possibilities in marketing facilitate new ways of creating a positive branding and a more differentiated product. Technology is also vastly changing the automation of customer service, of which a lot of this is happening especially at airports.
Therefore, and because of the raised importance of airports as a major part of the travellers’ experience influencing their satisfaction to a great extent, airports have become more important, which drives them towards more commercialised activities. Since the Middle East and Asia Pacific have most of the capabilities to invest in their aviation industry, airlines as well as airports are growing, flourishing in these areas. It is invested in high standards in technological equipment and CRM to facilitate the special costumer experience while operating highly efficient. Outlook on the future – Since the new ways of competition emerged facilitated by the changing regulatory system it can be foreseen that older airlines that are restricted by legacy, regulations and/or ancient business models will continuously have difficulties on the future market, because the old market responses (like adding seats or cutting costs) to reduce risks on losses are near exhaustion and therefore do not provide long lasting solutions.
While these actions and the adaption to changing markets as far as possible may have prepared legacy carriers reasonably well for the short term, the long term will look different. Due to the fact that those airlines pulled most of the levers there is not much room left to adjust policies much further, which can hinder their advantageous development in the future. While carriers that cannot adapt to changes and competition appropriately or fast enough will continue to draw back and steadily decline in market share, newer airlines with high standards and efficiency as well as airlines offering low fares on short and medium-haul flights will emerge further. Since alliances as well as consolidation provide an appreciated tool to gain efficiency and increase value, by becoming easier to implement with the continuous loosening of regulatory controls, they will be continued to be forged. They will be used by long established airlines to secure their position in the industry, as well as by other airlines to simply have more advantages on the market. It has to be emphasized that in the future the experience of the customer will be the focus of the aviation industry which means that the airline industry will be determined by those carriers which can offer services the customer value most.
Also the (more commercialised) airports providing the best experience will influence the industry since customer will value extra services. Considering these features it is apparent that new aviation countries (led by those from the areas of the Middle East and Asia Pacific) will play a big role in the future industry since they expand exponentially faster that the mature markets (like the US or the EU). Even though the mature markets react to changes by upgrading and developing business models further, they will have it hard to keep up with the new markets if they do not find ways to invest more. This becomes clear looking at the Middle East and Asia Pacific have the capabilities for investment in aviation, which facilitates more efficiency and better customer services (at airports as well as in flight), as well as the business models, which are more flexible and more applicable for the current industry developments. They massively invest in new aircrafts that bear advantage over old fleets in terms of efficiency, luxury and comfort, as well as in infrastructure, further facilitating a smoother experience for customers. Also the joining to alliances combined with the countries awareness of the importance to participate to the change of the industry are reasons for the Middle East and Asia Pacific airlines being forecasted to be the most flourishing in the future. Especially China having growing numbers of travellers due to the growing middle class while intensively operating the hybrid business model are forecasted major growth and therefore eventually more influence in the whole industry.
For the answer to the Problem Statement of which trends and developments in the airline industry will have the most impact on its future it can be stated that all the discussed features of the report are important for the future development. Since they influence each other and are moreover often interlinked determining a certain trend or development that particularly impacts the future becomes more complicated. Also the fact that trends emerge slowly and developments in the airline industry are often protracted, so do not start or end to a certain time, further complicates this distinction.
However, it is apparent that the trends and developments important for the future start out and are based on the past. Firstly, there was the realisation that higher customer orientation is vital for the industry leading to the approach of liberalisation and deregulation which enabled the airlines to operate in an increasingly liberal industry with greater air traffic. With the resulting higher competition airlines became pressured to privatize state-owned airlines, as those often hindered competitiveness. This development is still approaching today further liberalising the industry and therefore impacting the future.
When old business models were challenged by more competition and less regulations the trend of low-cost carriers revolutionising the industry with more flexible business plans and customer oriented pricing emerged. Since today customers have, enabled by increasing technology availability and use, greater information, choice and influence on the aviation industry low prices alone do not mean competitive advantage anymore. This facilitates the growth of carriers with new a business model of more individual packages, serving the customer better. Older airlines, restricted by legacy that cannot adapt to changes as well, react with pulling all their levers for risk reduction in order to compete further.
Because costs can provide the competitive advantage controlling costs has already been important in the past, and still is today. However due to the fact that cost cutting is already greatly exploited and low costs alone do not guarantee travellers loyalty a shift towards more customer orientation noticeable. Also the alliances, which have been formed in the past in reaction to uncertainties providing benefits that could constitute competitive advantage, are still important today since the advantages of greater networks etc. raise the value for the customer. With the development of increasing use of technology in every part of the industry’s operations today also the CRM is to a great extend enhanced by it. Besides greater possibilities for using customer information also new effective ways for positive branding and product differentiation arise. Technology has also shaped the development towards automation of customer service, happening at airports, which contributes to satisfy the more demanding customer. Since the whole travel experience has become of vital importance also airports gain importance.
In the friendlier regulatory environment supported by investments the Middle East and Asia Pacific gained market share in the past changing aviation industry. Due to the capabilities to invest in this market today the business of the Middle East and Asia Pacific is flourishing. On the basis of the past and current developments and trends that facilitate an outlook on the future it can be stated, that new airlines offering high standards to lower fares will emerge further while older airlines being restricted by legacy will have difficulties in the market. Even though the actions taken for risk reduction have prepared them well for the short term, on long term it will make policy adjustment increasingly difficult so that eventually a lot of those airlines will draw back while newer airlines profit. Alliances and consolidation will continue to be forged since they increase competitive benefit and are more easily implemented with progressing loosening regulations.
Also, as the customer experience will be of major concern for the aviation industry, carriers that provide the most value for the customer will have great advantage. In concrete terms this means that the new aviation countries (led by those from the areas of the Middle East and Asia Pacific) expanding further that mature markets (like the US or the EU), will become more important. Because the Middle East and Asia Pacific having great capabilities and willingness to spend on improving their operations in accordance to the newest trends and developments facilitating more efficiency, luxury and comfort and overall a smoother and pleasing experience and better service (at airports and in flight) for the customer, they will outdo the mature markets eventually. Moreover these arias airlines joining alliances to benefit and their awareness of the importance to shape the industry will benefit their operations. Especially China will have great impact since they will grow exponentially fast having growing traveller numbers while intensively operating the hybrid model. In conclusion, despite the fact that all developments and trends are important influences overall and not considering the uncertainty of unpredictable scenarios but only the outlook on the future it could be stated that the developments and trends that currently have most impact on the future of the aviation industry are the shift towards the newer markets and the importance of customer focus.
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