Airline Industry

Topics: Airline, Southwest Airlines, Low-cost carrier Pages: 44 (13041 words) Published: June 23, 2013
Chapter 2

Characteristics of the Airline Industry

The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones. John Maynard Keynes

2.1 Introduction
In recent years, the European airline industry has exhibited impressively dynamics. The sector has gone through a drastic change on both the supply and the demand side. Unlikely in other industries, the driving forces governing the recent changes do not depend mainly on technological factors, but on developments in the legal, institutional, and cultural domains. Legal and institutional aspects have clearly affected the structure of the market, while cultural forces have influenced spatial mobility and its characteristics. On the supply side, we observe that only a few industries have faced changes as dramatic as those that have occurred in the European airline industry in the past 20 years. Over this time period, the industry has evolved from a system of longestablished state-owned carriers operating in a regulated market to a dynamic, freemarket industry. Before the deregulation, only one or two flag carriers operated the European routes, with airfares being regulated by state bilateral agreements. The process of deregulation and the subsequent process of privatization have induced important changes in the structure of the airline market. This chapter presents a concise analysis of the main characteristics and changes in the aviation sector, mainly from the supply side, which has followed the deregulation.1 The aim is to draw a new profile of the airline industry in terms of new airline business models and compare their characteristics in a way which has rarely been presented in the literature to date. Section 2.2 describes the deregulation of 1

This chapter mainly attempts to describe the European market but draws parallels with other markets. Thus, some elements of the description can easily be generalizable to other markets. A. Cento, The Airline Industry: Challenges in the 21st Century, c Springer-Verlag Berlin Heidelberg 2009 13

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2 Characteristics of the Airline Industry

the EU aviation market and part of the relevant literature. The discussion mainly concerns its effects on the airlines’ strategies and how they have consequently reorganized their models. In Sect. 2.3 these new models are described, with particular emphasis on network, pricing, and alliances. These three elements are discussed more in-depth in Sects. 2.4, 2.5 and 2.6, respectively. Section 2.7 concludes this analysis and introduces Parts II and III of this study.

2.2 Market Deregulation
At the Chicago Convention in 1944, 52 state members2 discussed some forms of agreements in order to regulate: (1) capacity and frequency; (2) airfares; (3) freight levels; and (4) the application of the traffic rights or ‘air traffic freedoms’.3 The Convention also established the International Aviation Organization (ICAO), i.e. an inter-governmental agency responsible for the coordination of worldwide technical and operational standards. The four regulatory elements together were able to effectively reduce the entry of new carriers, the pricing freedom, and the production levels, and therefore they limited any form of price or network competition. International carriers such as KLM or Lufthansa defined their international strategy depending on a set of bilateral service agreements (known as ‘bilaterals’) between the government of their country of aircraft registration and the destination country. The bilateral agreements specified the traffic rights for each operating carrier, the number of airports in which they operate, the number of carriers, and the frequencies of flights between the fixed airports. Those airlines were, in practice, the national flag carriers of each country (state-owned). Since 1947 the International Air Transport Association (IATA) has had the authority to set the ticket prices charged by international airlines at the worldwide...
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