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Researching of Airline Industry Crises

Table of Contents

Introduction
Financial crisis
Low-Cost Airlines
COVID-19 Pandemic
Government Bailouts
Conclusion
Works Cited

Introduction

In recent years, international airlines have implemented measures that support an aggressive expansion strategy into new travel routes and markets. This phenomenon has been made possible through the creation of alliances, such as Star OneWorld, and SkyTeam. Belonging to such partnerships provides numerous benefits to the respective airline passengers, for instance, code sharing on flights and accumulating trip rewards, especially for frequent fliers. The global airline industry has, on a large scale, facilitating tourism, trade, and economic growth across multiple countries. Hence, this industry can be considered one of the major contributors to globalization. However, it is very volatile and highly susceptible to changes in the political, social, and economic spheres. The main argument in this paper is that apart from the global financial crises, the introduction of low-cost flight options and the advent of COVID-19 constitute new challenges for the airline industry.

Financial crisis

Following the economic recession of 2008, the airline industry faced an unprecedented occurrence. According to analysts, the industry suffered a total loss of nine billion dollars during that year, with an estimated 4.7 billion losses in 2009 (Sehl). Thus, the economic crisis affected commercial flight frequency and number due to reduced disposable incomes. Moreover, critics point out that the airline sector had not experienced a financial crisis of such magnitude since the September 11, 2001 terror attacks in the United States of America (Sehl). Continuous analysis by experts highlights the epicenter of this crisis as the collapse in the flight demand by passengers. As a result, most airline companies were forced to reduce their capacity and flying frequency and make significant financial adjustments.

Amidst this crisis, the industry experienced some relief following a drop in fuel prices in 2009. Experts in the tourism industry attributed the survival of the airlines through a recession to lower petroleum prices (Khan et al. 7). However, as airlines adjusted their frequency of flying, the oil prices shifted; hence, the industry needs to develop new strategies on how to deal with the unpredictable trends in petroleum cost (Sehl). Oil crises or shortages can affect flight operations, impacting the profitability of major carriers.

The financial crisis whose effects on airlines are significant is also attributed to the rapid globalization of the industry. Maneenop and Kotcharin argue that the creation of the open skies conglomerate empowers some airlines during the recession while leading to the creation of low-cost flight options to cater to the demand and market prices (6). On the issue of fuel prices, the environmental impact of continued petroleum use is considered unsustainable in the long term. Maneenop and Kotcharin suggest the introduction of technological advancements that lightens airline equipment and in turn reduces harmful fuel emissions (9). In this case, the cost implications for the passengers might be high, but the benefits for society will be significant.

The impact of crises on the airlines differs between regions. The International Air Transport Association reported that carriers of the Asian, African, European and North American markets suffered the most from the financial crisis. The most affected countries were those in Asia and Europe. In 2009, the transport association reported that Asia-Pacific companies endured the greatest losses since Japan, the largest market in the region was also undergoing a recession (Sehl). The European airlines also lost billions of dollars due to canceled flights. This loss was attributed to the lack of demand for their premium services across their major markets. Comparatively, airlines in the African market experienced the least amount of losses.

Low-Cost Airlines

The aviation industry represents a dynamic market confirmed by the fast development of new entrants and carriers. Due to strong competition, a large number of airline companies try to recreate the business models suited to their target market and profitability. The global economic crisis greatly affected the market, especially charter flights, which saw a decrease in demand due to their high prices. Because of the economic recession, low-cost airlines began to emerge in the budget-friendly flight segment (Khan et al. 3). The airline industry uses the term low-cost flights to describe services offered by transport carriers that include a limited array of amenities at a reduced price. For instance, a low-cost airline is characterized by operating on short-haul flights and lacks in-flight passenger services.

The low-cost carriers present a challenge to operators in the premium and luxury travel segments. According to Khan et al., such airlines have been instrumental in promoting tourism, especially for budget travelers (6). However, business people have quickly adopted these tourist routes, as a means of cheap travel, further hurting the performance of established players. In this case, low-cost airlines are slowly stealing customers from major flight companies, especially following their continuous route expansion (Khan et al. 5). Faced with the challenge of trying to retain their customer base, larger airline companies are forced to reduce their flight tickets in order to compete with these budget carriers. For instance, British Airways is one of the companies that launched a series of cheap, budget-friendly flights.

Consequently, the deregulation of airlines has been a contributing factor to the emergence of low-cost carriers. Before the act was passed in 1983, there were only 43 certified carriers but that number has greatly increased in recent years (Abate et al. 4). The availability of carrier options and cheaper flights promoted air travel as a favorable, fast, and efficient means of transportation. To create customer loyalty that was based on service satisfaction, deregulation saw the innovation of the frequent flyer program whereby passengers earn travel points depending on their carrier of choice. This particular program allows passengers to purchase subsequent flight tickets via their accumulated reward points. Hence, creating fierce competition for customers between airlines.

COVID-19 Pandemic

The latest global pandemic that has disrupted business across all industries is the coronavirus or COVID-19. Unfortunately, the airline industry was among the first affected by this pandemic because the virus is easily transmitted. To curb the effects and spread of the virus, governments across the world instituted quarantine measures, which involved a prohibition of cross-country travel, while in some nations, moving from one state to another has been limited to essential reasons only (Maneenop and Kotcharin 8). In the recent past, similar pandemics have had a major impact on the global airline industry, contributing to airline crises. However, with an estimated 117 million reported infections and a death toll of more than 2 million, COVID-19 remains one of the major, impactful crises in modern history (Amankwah-Amoah 1). When the infection rates started to rise early last year, people were advised to stay home and practice social distancing. Anyone who had to travel was encouraged to participate in a self-imposed quarantine for a minimum of two weeks in a bid to limit the transition rate of the virus. The effect of the implementation of bans and lockdowns was reduced flights and revenue for airlines across the globe.

In order to survive the pandemic, stringent measures were later on instituted adversely affecting the movement and interaction of people. Some of these measures included a ban on all international travels, closure of borders, physical distancing in social places, temporary shutting down of non-essential businesses, and the introduction of working from home policies (Abate et al. 2). Two particular measures that affected the airline industry are border closures and limited international flights. The initial impacts of these restrictions were highlighted by the drastic drop in flight capacity in flight routes that operated in and out of China. Similarly, in Hong Kong, airlines reported a 92.35% drop in flight capacity, which was mainly influenced by the protests prior to the announcement of the outbreak (Abate et al. 5). The containment measures contributed significantly to a crisis in the airline industry, regionally and globally.

Although the demand for commercial flights has decreased tremendously during the pandemic, airlines are diversifying by converting most of their grounded passenger planes into cargo airplanes. Korean Air has successfully made this transition by taking advantage of the reduced fuel prices and the increasing demand for supplies, such as medical, fresh seafood, and fruits (Maneenop and Kotcharin 7). It is anticipated that other airlines are likely to follow the Korean path for them to maintain profitability amidst the economic crisis. While the world has adjusted the way it does business, the future of commercial travel and tourism is uncertain. According to Abate et al., prospective travelers should expect an increase in ticket prices as airlines try to shield the economic burden by passing it to their customers (11). Moreover, to institute social distancing policies while traveling, the traditional class system of seat arrangements might be strapped to make room for increased carrier capacity.

The impact of the crisis is also felt in other value chains linked to the airline industry. An empirical study by Maneenop and Kotcharin concluded that the initial impact of the pandemic was greatly underestimated by global traders (12). The effect was felt gradually in major cities, culminating in a crisis. Eventually, after the virus spread in Italy and parts of Europe, the airline stock rates began to fall, culminating in a negative return of 7.8% during the initial first five days after the announcement of the outbreak (Maneenop and Kotcharin 6). The airline stock market continued to plummet following the official announcements by the World Health Organization and Americas cancelation of international flights into the country. The adverse effects suffered by the industry were attributed to it being the first respondent to the pandemic.

Government Bailouts

Apart from the obvious impact of COVID-19 on health and mortality rate, the pandemic has had far-reaching effects on society, especially economic implications. The containment measures instituted were a major contributor to the disruption of the economy, which is estimated to take a long time to recover. Reports indicate that the aviation industry experienced a 50% decline in the number of global flights between April and May of 2020 (Abate et al. 4). The high cost of operation of airports and airlines has raised questions about the survival of several aviation actors. Following a continuous decrease in travel demands, the financial crisis faced by airlines is likely to proceed for a long time. In a bid to improve and shield aviators from these negative consequences, some governments are offering financial support to their national carriers (Abate et al. 4). This financial aid is mainly aimed at ensuring essential operations are maintained throughout the pandemic and economic crisis while protecting the jobs provided by the industry.

While these bailouts and resources are useful for a turnaround, they present a long-term risk that may create a crisis. According to Abate et al., the growing involvement of governments in the aviation industry has had at least three implications (7). First, the continued support has seen an increase in government share allocation, making most airlines state-owned. There is an intense debate on whether publicly owned aviation would impact the efficiency and effectiveness of airline operations (Abate et al. 8). Secondly, there is a growing concern about whether or not government involvement will result in a retreat into stringent regulation policies, risking all the significant progress that has been achieved after the deregulation act was passed. Thirdly, the industry should discuss whether governments will facilitate the decline or accelerate the environmental sustainability that aviation has strived to uphold and maintain.

Conclusion

In an attempt to expand into new market access, the aviation industry has had to diversify and package its services to attract more customers. Some of the measures include the introduction of a frequent flier reward program whereby clients can accumulate points that can be redeemed for subsequent flights. However, these programs and the diverse travel routes provided by airlines have not shielded the industry from the effects of the cyclical changes in the political, social, and economic environment. A number of factors have contributed to the recurring crisis facing the industry. The first one is the 2008 recession that introduced a threat of new substitutes from low-cost travel options. These budget flights resulted in a reduction in passenger capacity for the big airlines. The ongoing pandemic has resulted in a significant drop in travel bookings. Lastly, the issue of government bailouts is creating major contention among industry actors due to the risk of over-involvement.

Works Cited

Abate, Megersa, Panayotis Christidis, and Alloysius Joko Purwanto. Government support to airlines in the aftermath of the COVID-19 pandemic. Journal of Air Transport, vol. 89, no. 101931, pp. 1-12.

Amankwah-Amoah, Joseph. Stepping up and Stepping out of COVID-19: New Challenges for Environmental Sustainability Policies in The Global Airline Industry. Journal of Cleaner Production, vol. 271, pp. 1-10.

Khan, Nokhaiz, et al. Evolving Competition Between Low-Cost Carriers And Full-Service Carriers: The Case Of South Korea. Journal of Transport Geography, vol. 74, 2019, pp. 1-9.

Maneenop, Sakkakom, and Suntichai Kotcharin. The impacts of COVID-19 on the global airline industry: An event study approach. Journal of air transport management, vol. 89, no. 101920, pp. 1-14.

Sehl, Katie. How the Airline Industry Survived SARS, 9/11, the Global Recession and More. The Airline Passenger Experience Association.

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