Get 10% with discount code
save10 now.

Stuck with your academic or business paper?

We are here to Help

Aviation Industry Essay

In the last decade, the aviation industry has undergone many changes from changes in structure to increased costs especially of fuel to effects of economic recession like closure of some airlines and mergers and acquisitions. From the collapse of many airlines like American airways, Pan AM, compass airlines and others in the late 1990’s to the industry structure change experienced in the early millennium.

The Aviation Industry consisted of three types of structures i.e. the full service network carriers (FSNC) which cost more and gave quality service. The low cost carriers (LCC’s) that cost less and gave less or no service and the hybrid that was a combination of the two. With the introduction of LCC’s, major airlines went into partnership with them leading to mergers and acquisitions as airlines tried to remain profitable and reduce costs. Mergers include Air France and KLM, British airways and Iberia Airways among others. The price of jet fuel has been on the rise and in 2008, it formed 35% of the total operating costs of airlines thus pushing ticket prices up (shaw, 2004). Another issue to affect the aviation industry has been the economic recession of 2008-2009 that reduced demand for air travel. This is because people cut down on what they term as luxury goods of which air travel is one as disposal income reduces. This recession greatly affected Europe where the major airlines exist and saw many countries being bailed out after near collapse like Greece.

The German aviation market is dominated by 2 airlines i.e. Lufthansa Group and Air Berlin. Lufthansa consists of a group of airlines like Lufthansa Cityline, Lufthansa Italia, Eurowings, Swiss, Brussels Airlines among others. It controls 52.4% of the domestic market and 34.7% of the international market. It was the world’s largest airline group in 2010 in terms of revenue. LCCs control 43.9% of the domestic market. Germany is the largest aviation industry in Europe and the fifth largest economy in the world (data monitor, 2011).

In terms of market value, it was 20.7 billion in 2010 despite an industry shrink of 11.2%. The compound Annual Growth Rate (CAGR) was 5.8% for the period 2006-2010.  Market volume was 95.2 million passengers in 2010 a growth of 4.7% while CAGR was 1.9% for the period 2006-2010. In terms of market segmentation, international sales took the bigger share at 74.6% of the total volume while domestic volume was 25.4%.  In Europe, Germany accounts for 12.5% of the industry value coming in second after UK with 12.9% (data monitor, 2011).

China has three major airlines i.e. Air china, China Eastern and China Southern which are government owned. Next comes Hainan Airlines, a privately owned airline that is the fourth largest in China. The big three account for 80% of the total market (CAAC Report). Mergers have existed e.g. between Air China and China Southwest in 2001 and China Eastern merged with Shanghai Airlines in 2009. In terms of market size, China’s aviation industry is the second largest market in the world after the US. There were 180 airports in 2010(data monitr,2011).

The market value of the chinese airlines industry was 12.1% in 2010, a value of $26.9 billion and the CAGR for the period 2006–10 was 10.8%. The market volume was of 247.4 million passengers, a growth of 7.3% in 2010. The CAGR for the period 2006–10 was 11.6%. As for market segmentation, domestic sales were more accounting for 93% of the total volume while international sales were a mere 7% for the period 2010. In the asia-pacific region, China is the leading country in the aviation industry accounting for 30.2% of the sales value with Japan coming next with 26.2% of sales value for the period 2010.

China & Germany airlines industry volume: million passengers, 2007–10

China Germany
Year Million passengers % Growth Million Passengers % Growth
2007 185.8 16.3% 94.0 6.3%
2008 192.5 3.6% 95.2 1.3%
2009 230.5 19.7% 90.9 (4.5%)
2010 247.4 7.3% 95.2 4.7%
CAGR: 2006–10 11.6% 1.9%

Source: Data monitor.com, 2011

China & Germany airlines industry value: $ bilion , 2007–10

China Germany
Year $ billion % Growth $ billion % Growth
2007 22.4 25.5% 18.3 10.8%
2008 25.1 12.1% 22.4 22.2%
2009 24.0 (4.5%) 23.4 4.3%
2010 26.9 12.1% 20.7 (11.2%)
CAGR: 2006–10 10.8% 5.8%

Source: Data monitor.com, 2011

Using Porters five forces model, the market can be analysed as follows. The players are airline firms, the buyers are passengers and the suppliers are aircraft manufacturers, employees and fuel suppliers. Forces driving competition in the airlines industry in Germany in 2010 include degree of rivalry, buyer and supplier power, new entrants and substitutes. Rivalry is a prominent factor as there are many competitors especially in the bigger sector of passenger travel. This has resulted in both industries forming mergers and alliances with other airlines at home and abroad so as to reduce costs, widen network coverage and increase efficiencies. For example, Air China has strategic alliances with SAS airlines and United Airlines (Zhang, 2009). Buyer power is high as the product price is highly sensitive and product differentiation minimal. Porter highlighted that “ the power of consumers will be a crucial determinant of profitability in firms in any industry” (P248). Supplier power is also great as there are few plane manufacturers and jet fuel prices keep changing affecting profit margins. For example, according to International Air Transport Association (IATA), fuel accounted for 33% of total costs in 2008 while it was below18% before 2005. And 29% of costs in 2011, up from 26% in 2010. It is difficult and expensive for new entrants into the market as the capital costs are quite high. Substitutes include road and rail transport. There are domestic bus companies that operate in major cities and the railway network is one of the most advanced in Europe. The treat these two substitutes pose is more of price at the expense of time saving and convenience of air travel. New entrants into the industry is pretty restricted and difficult due to the high capital costs of entering into the industry and the time it takes to acquire route rights and strategic alliances (Mason, 2005).

The aviation industry in china experienced remarkable growth with key drivers being positive economic factors like high GDP, higher disposable incomes increase in both foreign and domestic tourists, government backing of industry including financial backing & bailing out among others. Economic factors that plagued the industry did not affect China aviation as much. For example, the economic slump in 2008-2009 in Europe caused a shrink in Germany aviation passenger travel but did not affect china aviation numbers which instead increased. This is because the purchasing power of most people in Europe went down making airlines have to deal with over capacity while china was not affected as most of their passengers are domestic. The annual growth rate of passenger volume in the period 2006 -2010 was 11.6% in china and only 1.9% in German aviation (Data monitor, 2006).

The use of technology has seen a big change in the way airlines conduct business. It has led to reduction in the operating costs of airlines. Technologies embraced by this industry include Electronic ticketing (e-Ticketing) which has resulted in reduced paperwork thus reduced costs. It has also resulted in less staff being employed by airlines and convenience to the customer due to 24 hour presence.  Another technological change is the online boarding pass. This has reduced airline costs associated with check-in processes and also increased customer service and convenience. There is also the common self service kiosks found in airports. This ensures that customers can use any booth to check-in and not necessarily the one of their airline thus has reduced staffing costs. The Electronic freight (e-freight) has revolutionized the cargo industry by eliminating paperwork and agents so the client can send a parcel at his convenience and be able to track progress. Also the use of online customer service through FAQ’s or chat tools has seen the staff numbers go down and costly call centers minimized or done away with hence savings taking place. It  also means the client is dealt with immediately and it increases user ratings of the airline & customer experience. Another technology factor is that today, planes manufactured use less fuel and fly more miles on less fuel (Lu, 2009).

In conclusion, china aviation industry is experiencing growth as it’s more of an emerging market and many people are keen in visiting the place. It is predicted to reach almost 500 billion dollar mark in 2015 with the compound annual growth rate (CAGR) expected to be 11.1% while that of Germany is expected to be 8% (Data Monitor, 2011). The Chinese government is upgrading airports and is pumping money into the industry as part of its strategic plans.

References

Data monitor (2011) Airlines in China, Reference Code: 0099-0756. Retrieved from www.datamonitor.com

Fahy, J. & Jobber, D. (2003).Foundations of Marketing. McGraw Hill, New York.

Porter M. (2002). Competitive Stategy. Free Press,US

Shaw S. (2004). Air Transport. A marketing Perspective Pitman Pub. Melbourne

Manson K. (2005).Observation of fundamental changes in the demand for aviation services. Journal of Air Transport Management 11:19-25

Zhang, Quirong.(2009). China: General Aviation Industry Outlook 2009. Rep. Shanghai: U.S. Commercial Service.

Lu, C. (2009). The implications of environmental costs on air passenger demand for different airline business models. Journal of Air Transport Management,15(4), 158-165.