Cebu Pacific

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CHAPTER 2
EXTERNAL ANALYSIS

A. Economic Forces

Generating billions in revenues and creating hundreds of thousands of jobs. In recent years, the global aviation industry has been through many ups and downs. From skyrocketing fuel prices to pandemics to recent financial crisis, aviation industry has confronted a very rough weather in last ten years or so. Consolidation in mature markets, higher ticket prices, modernization of airports, policies to reduce emissions and tremendous growth prospects in emerging economies have been some of the trends during the decade. According to recent industry reports, the global aviation industry is on the path of recovery and future looks optimistic and would present ample opportunities for the stakeholders.   

The airline industry is inextricably tied to the overall economy – even minor recessions result in reduced demand and increased sensitivity to prices for leisure as well as business travellers. Changes in the economy have a big affect on the airline industry. The elasticity of demand, externalities, wage inequality, and monetary, fiscal, and federal policies all have an impact on this industry. The airline industry is constantly changing due to today’s market and today we will be looking at the reasons behind it.

By successfully managing opportunity cost, and adapting to an ever changing economic environment, airline industries can have economic success.However, the well-being of the nation’s economy will have a direct impact on the level of success experienced in the airline industry. During economic shortfalls in the nation’s economy, travellers will have fewer resources available to travel for pleasure. Contributing to the negative economic influences in the airline industry, future and existing policies targeting the airline industry will continue to hinder the industry’s ability to recover losses in periods of economic hardships.  

The launch of low cost airlines in Philippines has provided a boost for the industry. Airlines that have been part of this trend are Asian Spirit and Southeast Asian Air, offering affordable fares to local and even international destinations. The public seems to have embraced this, as the rate of flying passengers has increased. This increased not only accounts for new fliers but also regular flying passengers who were on a budget and now have a choice to choosing budget over luxury.                         

      There are quite a few negative externalities in the airline industry. Another thing that the economy is affecting the airline industry is the competing airlines. The bigger airlines can afford lower fares which make it hard for the smaller airlines to compete. Different airlines have plans to expand but will not be able to until the cost of fuel is under control. For the low fare carriers who allow advanced booking, they will need to work on a plan to avoid bankruptcy. This will make the airline industry continue to boost prices due to the fact that oil prices are expected to continue rising due to the supply.

B. Political Forces

In 1973, from the Letters of Instruction (151 and 151A) the airline industry in the Philippines was monopolized by Philippine Airlines (PAL). The monopoly lasted for more than twenty years until the Executive Order 19 in 1995 which liberalized the airline industry establishing the domestic and international civil aviation liberalization policy in the country. The E.O 219 stipulates the removal of restrictions on routes and flight frequencies, as well as government control on fares and charges. Following the liberalization, the industry attracted new entrants such as Cebu Pacific, Air Philippines, Grand Air, and Mindanao Express. Unfortunately, Grand Air and Mindanao Express were unsuccessful, and then SEAir and Asian Spirit come to birth.  

Today, airline industry in the Philippines is under the regulations of Department of Transportation and Communication (DOTC) under the civil aviation...
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