Introduction of Low Cost Carriers (LCC)

• As the airlines began to Recover from 9/11 and

Rethink their business plans, they began to consider
ways to reduce overhead.
• Those efforts resulted in “no frills” operations that had
significantly reduced initial prices, but many hidden
add-on options.
• Airlines also began to branch out their income
streams into related travel and leisure activities.
 Past, present and future trends
• In the past, negative scenarios resulted
in operational barriers:
– Outbreak of SARS in 2003
– Wars, for example the Iraq, Afghan, Ukraine Wars
• At present, airlines need to be prepared for additional
scenarios whether they occur or not
• In the future, airlines need to be ready for new
challenges such as fuel and pilot shortages and
limitations due to noise and pollution
 Current airline challenges
• What are some topics recently in the
media that caused concerns for the
airlines, airports or air traffic services?
 Sources of airline frustrations
• Limitations on airline investors due to citizenship
• Changes in fuel and labor costs
• Environmental limitations of hours of operation
• Staffing levels and outsourcing of services
• Safety oversight and regulatory compliance
• User fees for air navigation services
• Media scrutiny of officials and business dealings
 Question
What might give a competitive edge for one region’s airline over
another?

What are the major costs for an airline?

 Top three Costs for airlines
• Fuel, labor and
maintenance costs
are the top three costs
for most airlines.
• Why might actual costs
vary from one company
to another?
 Regional analysis
• Airlines often consider regional economies and
opportunities in the management of their global
understanding and investment in industry
• At the end of 2009, the global financial crisis
negatively impacted the aviation industry
• By the end of 2012, the global economy started
to recover, but airlines continued to struggle due
to extremely high oil prices
 Financial challenges
• At the height of fuel shortages the airlines lost about $11
billion annually.
• At that time fuel oil cost about $140/barrel, now it is about
$35/barrel and forecasts are uncertain.
• Airlines have a history of over-expansion during good times
(without banking a reserve) and then under-investment during
the recessions and even selling off assets to make payroll.
• This has results in an overall average return on investment of
about 2 percent with large variations in profit and loss.
 Regional regulatory trends

Are these trends still accurate? (Wensveen, 2015, p8)

 North America
• Canada has experienced the privatization of
airlines, airports, Air Traffic Control (ATC), and
the rise of the low-cost carriers (LLC)
• The United States has experienced the rise of
LLCs, privatization of primary and secondary
airports, major airline debt, bankruptcies,
mergers, stagnant domestic passenger growth,
and increased international growth
 North America continued
• LCC de-hubbing and de-peaking are
opportunities to reduce pricing. Also reducing
the number of flights and reducing the number of
empty seats is good for the balance sheet, bad if
you miss a flight
• Mexico has experienced government control of
the industry and bankruptcies in addition to the
emergence of LLCs
 Europe
• Within Europe, airlines operate in a fully liberalized
environment
• The European Aviation Safety Agency is harmonizing
regulations and simplifying industry practices to facilitate
the exchange of safety information, acceptance of
training and licensing practices
• European airlines are mostly privatized and the region
has experienced the growth of LCC and airline and
airport alliances
 Europe continued
• Competition between different modes of
transportation has impacted the airline industry,
especially the use of high-speed rail
• National pride continues to be an issue for the
industry and many challenges will continue to be
faced as the EU geographic boundaries expand
• Recent terrorist and mass immigration put
boundaries in question
 Asia-Pacific
• The Asia-Pacific region has experienced managed
liberalization and change are accelerating as compared
to North America and Europe
• The region has felt the positive rewards of strong growth
since late 2001 especially in China and India
• Megacarriers and small international carriers co-exist
with interline agreements making this the largest share
of the world economy
 Asia-Pacific continued
• There has been increased growth in the
development of airline alliances resulting in
increased airport and airspace congestion
• Legacy airlines such as Qantas are challenged
by LLCs for both market share and access to
international investment options
• There is a dire need for advanced navigational
equipment to improve efficiency and enhance
safety measures
 Middle East
• The Middle East is strategically positioned and the use of
efficient hub airports has resulted in a stronger presence
in the long-haul markets
• Safety and security continue to be issues
• The Middle East is home to a small number of global
megacarriers (Etihad, Qatar & Emirates for example)
dominating passenger flows between Europe and Asia
• There are also the development of some tourism
destinations
 Africa
• Although growing at a higher rate than most other regions,
Africa is only about 5 percent of global air traffic
• Increased stability in the region may increase the
importance of aviation on the African continent
• African airlines often purchase older aircraft from other
parts of the world as those airlines modernize
• Predatory hiring practices and lack of funding have reduced
the pool of skilled personnel for African airlines
• With a few exceptions, civil aviation authorities lack
institutional strength or “political will” for major changes
 Latin America and Caribbean
• Latin America and the Caribbean are shifting from regulation
toward liberalization
• There is a strong need for training at the management levels
as well as a need for research and development
• Safety performance continues to be an issue in Latin America
and the Caribbean
• To overcome historic challenges, there are some centers of
infrastructure growth such as Brazil, Argentina and elsewhere
in order to meet regional and international demands.
 The Industry: challenges and strategies
• Physical, economic, political
and/or legal, socio/cultural,
demographic, labor and
technological forces impact the
aviation industry
• Airline management must be
aware of these factors
 Challenges continued
• Increases in capacity must consider
airports and airways along with linkage to
population and production areas
• Investment in next generation
“NextGen” Air Traffic Control (ATC) and
communication infrastructure is needed
to overcome surface navigation and
capacity issues
 (Wensveen, 2015, p12)
What are the most pressing issues for Australia and the region?
 (Wensveen, 2015, p12)
Have you seen any of these topics in the news lately?
 (Wensveen, 2015, p12)

If you were CEO of an airline, where would you focus your efforts?
 The New Breed of Airlines
• The global aviation industry is constantly
experiencing a change of business strategies
• Examples of types of carriers:
– Legacy carriers
– Regional carriers
– Low-cost carriers
What are some emerging non-conventional ideas?
 Out of this world?
• Aside from conventional
carriers, a new generation of
carriers, such as Virgin Galactic
(sub-orbital tourism), various
supersonic commercial aircraft
and pilotless commercial cargo
and passenger airlines, have
the potential to disrupt the
current business environment.
 Flourish or Fail
• What might cause an airline or airport to
be a success or go out of business?
 Achieving Success indicators
Success may be accomplished by:
• Development of solid business plan
• Flexible and diversified business structures
• Effective leadership
• Steady and moderate growth and cost-cutting strategies
• Fleet commonality
• Route network optimization / alignment
• Partnerships and alliances
• Listening to customer demands, being a good neighbor
• Good media and labor union relationships
• Effective lobbing efforts to influence policies and laws
 Failing indicators
Failure occurs when:
• Undercapitalization (as airline business is characterized by extremely
high capital cost)
• Overexpansion or overcapacity, leading to high revenues but low
profitability
• Lack of flexibility in regard to a changing business environment
• Lack of leadership skills
• Lack of competitive advantage
• Failure to demonstrate revenue growth and profitability
• Excessive top heavy legacy management structure
• Inability to maintain positive media relationship
 Conclusions
• The aviation industry is a vital global economic engine
• Aviation regulators attempt to balance the aspects of
protection of the public and promotion of the industry
• There is a cyclical financial history that challenges the
aviation industry sustainability, driving up cost to the
airline while benefiting the public with lower price tickets
• Innovation, extending the income stream across many
linked industries, and having a favorable reputation with
the public and media are essential.
 Summary
• Stages of development of modern industry
• Past, present and future trends
• Regional analysis
• Challenges and Strategies
• New and emerging aviation opportunities
• Achieving and Failing to succeed