The purpose of this report is to understand and evaluate who benefits more from the airline industry consolidation. It will do so by examining the general environment, history and recent background of the airline industry and it will continue by analysing the market’s demand and supply distinguishing between leisure and business. Afterwards it will examine the market structure of the airline industry and how the past regulations and deregulations affected the industry and whether those had a positive or a negative effect. It will then conclude by stating whether the consolidation is beneficial to consumers or not and how.
General Environment and Background
Beginning in 1903 with the Wright brothers' first successful flight and over the past century the airline industry has grown from an exploratory type of transportation to a significant part of the world's transportation system which services more than 1.6 billion passengers annually. In the beginning most consumers did not see airplane travel as an option due to the lack of safety. World War I contributed a lot in the familiarization of the public with the aircraft but it was not until the first transatlantic flight that the commercial possibilities of this type of transportation were recognized.
The deregulation of the airline industry by the U.S. government in 1978 and Europe’s deregulation in 1997 allowed airline companies to fly in other markets that used to be off-limits. That deregulation aroused a fierce competition between airline companies which resulted in many mergers and failures of large carriers but in the growth of other small carriers as well.
The economic boom of the 1980s signaled many difficulties for some airlines during the 1990s due to excess orders of airplanes which exceeded the demand of international passengers. Increasing losses were calculated roughly at more than 20 billion dollars from 1990 to 1994. There was also a substantial increase in the number of passengers, including first time passengers, because prices were cut and more cities would become available to airline companies.
The events of the attack at the World Trade Centre in the US had a major economic impact on the airline industry; decreasing passenger demand and increasing costs. The deregulation of the market had a positive effect on dealing with those problems.
Up until the 2008 recession, it is estimated that air travel had been growing by about 7 percent annually over ten years with a maximum of a 1.6 billion passengers taken to the air in one of the last years.
Today most airlines have merged, others have entered alliances in order to share the financial difficulties of operating costs. Low-cost operators such as EasyJet, RyanAir and Aer Lingus have made significant progress into the market. Low cost carriers ignited strong competition in the airline industry also for the traditional airlines . Those, though, can survive since they did not lose that many clients due to the fact that low cost passengers were won over by other industries that would otherwise have traveled by car or train. Low cost carriers also led to an increased amount of civil airports but the number of passengers at the traditional airports did not decrease.
There is a debate between some economists in whether the low cost services have a negative or a positive impact. It is considered positive that in many airports around the world thousands of new jobs were created but, on the other hand, those jobs must have been cut from other transport sectors like railway stations for example.
Air Travel Demand
Air travel demand appears to have become more price sensitive during the last years mainly due to fare transparency and the greater choice open to consumers in terms of destinations, service providers and frequency. On the other hand, though, the importance of fares in stimulating overall demand for air travel seems to be less important as commonly thought. In...
References: and Bibliography
Demand for Outbound Leisure Air Travel and its Key Drivers, CIVIL AVIATION AUTHORITY, December 2005 (http://www.caa.co.uk/docs/5/ERG_Elasticity_Study.pdf) (last accessed 14-03-12)
Star Alliance: http://www.staralliance.com (last accessed 14-03-12)
Strauss, Michael (2010): Value Creation in Travel Distribution
Please join StudyMode to read the full document