Case study: Chaos in the Skies

Introduction

This case study begins with an emotive introduction which makes someone to recall the events of 9/11. Even up to now this human tragedy is still hard to understand. This introduction was given for helping someone to appreciate the case is far more than just changing the industry, structures but also the effect which the disruptive event was having to millions of people who included the ones who died in the bizarre event. This case offers analysis of the airline industry before the 9/11. It also offers a similar analysis for a post-9/11. This analysis also helps students to recommend on the way airlines might better plans for and also react to disruptive events like the 9/11 happenings.

This gives a true story from the various episodes of the September 11, 2001. This incident happened in a typically routine early morning flight home. It happened when a united flight had left Japan some hours earlier and the sun could be coming up very soon. A captain by the name Jim Hosking wished to get home to see his wife in Los Angeles. All of a sudden a cockpit teleprompter was heard from the US Federal Aviation Authority (FAA). These were common messages on poor weather or requirements of maintenance but this message was different and it was warning on a terror attack.

Attractiveness of the airline industry pre 9/11

Fundamental economy

Essentially air travel is essentially a commodity with service being just a differentiator. After the taking off of a flight, there has been a consumption of a seat or a place and the ones that do not get crew are forever lost. In terms of economics the considerations were pointing to the break-even load factor achievements to have been crucial for survival. After achieving the break even point, the marginal cost to carry an extra customer in a flight that is designed is very limited.

There had been considerable changes in structures within the global airline industry fro several decades. For instance since the 1960 there had been noteworthy ongoing advances in the efficiency of the jet engines that were allowing routes that were much longer to be served. After the introduction of newer and larger aircrafts, the competition between aircrafts increased considerably. Some of the contributing factors to the change in structure entailed technology improvements, consolidation, deregulation, and globalization together with the high costs that were associated with the Full Service Carrier business model.

Demand

The air transport demand was a resultant demand coming from some final activity like leisure or business. Normally passengers fly since they want to go to some place, and mail or mail was being moved to a given destination. The majority of drivers for increase in demand resulted to increase in GDP; increase in investment and world trade; market liberations together with growth in retirees numbers. For instance between 1990 and 2000, the global number of tourists passengers went up from 450 million to 700 million with a large travel proportions connected to the increase in the retirees numbers. Close to 55% of the air travel passengers was just for leisure, which was a function of wealth and income.

Cost factors

There were variations in the structure of cost for diverse airlines which could be partially explained by factors like geography, the market, in terms of the haul length or by the exchange rates of currency. In addition variations were also relating the protection given and as a result, the management complacency together with the power of unions on labor. The costs of airlines were rapidly rising through 2000. The prices of fuel rose to an excess of 50% from the 1999 to 2000. Characteristically the costs of labour were accounting for between 25% and 40% of the revenue of airlines and 75% of the controllable costs. The prices of labor were rising at a rate that was substantially above the rate of inflation. Large US domestic trunk carriers were 50% more efficient with considerable cost advantage in compassion to the European airlines. Nonetheless, despite the given efficiencies, the airline industry of US was only earning an average of 1-2 % net profit as compared to the average of 5% of the US industry in total.

Returns (Yields – RPKs)

Despite the increase in the air travel, since the deregulation, with the US passenger travel increasing to more than 160% from an approximate of 250 million in 1978 to almost 660 million in 2000, and the increased drive towards attaining a better margin through cutting of costs; there was a steady and gradual decline in the airlines yields real value all through the US as per the RPKs measurements. Since the 1970, the yields of airlines had reduced at a rate of approximately 2.5 annually.

Internationally, within the short-haul market, the highest percent of the fare payers was accounting for 8% of the revenues of airlines in 1992 and by 1998 this amount had increased to about 18% of the revenues. Majority of the travelers also were in need of car rental as well as other auxiliary services that could be offered or not offered by the airline. During the 1970s, a number of airlines increased their service offerings to include the entire experience. Nonetheless, by the 1990s, majority of them had relocated to their main business and had separate from or subcontracted their non-core activities.

Full-service carriers

Typically, the business models for a Full Service Carrier (FSCs) also referred to as a networked carrier and focused on networks product quality and that which was having emphasis on provision of service to various cities, and with high levels of frequency as well as interconnectivity examples of Fuss were including the American Airlines, the Singapore Airlines and Qantas. Normally Fuss was having a variety of was having many aircrafts and support systems for supporting the complex itineraries within and also between destinations and airlines. Another connectivity feature was the hub and spoke airport network structure. Even at the time when FSCs did not have market oligopolies, just limited destination pairs were supporting more than two carriers. Density as well as economies of scale specifically through the ability of attracting higher business travel share was forcing FSCs that did not have financial will in many routes. Passengers were in need of convenience like interlinking of smooth connections between airports or terminals. The FSC model was providing with increased inter-connectivity within as well as between airlines which are having relatively low passenger transaction costs. This provided passengers who needed a supple or composite itinerary high value.

Low Cost Carriers (LCCs)

Prior to the September 11, 2001 incident, some structural changes within the industry had experienced the emergence of a new business model for airlines which was the Low Cost Carriers (LCCs). The LCCs was focusing on the cost management, and were effectively getting rid of the market share of FSC with the pattern changes in patterns of passengers demand with what was representing a value for money fare, offering simple itineraries of point to point. The LCC growth had altered the type of competition in the airlines.

Fragmentation

The international airline industry was basically fragmented from the national and international regulation restrictions and politics as well as public ownership. The limiting effects were usually in the form of landing rights as well as associated competitive restraints. In general, even larger FSC airlines were only able to attain a regional domination at best.

Open Markets

Since the 1970s the deregulation of the air passenger transport industry in both the US as well as the globally had brought about major changes structurally within the industry. Most notable was the 1978 policy on open markets in US. The policy on open markets ensured removal of hindrances to the entry and also made it possible for upcoming competitors to join the industry. Deregulation brought the freedom of choosing the routes, setting of prices according to the demand of the market and also increased competition from fresh entrants.

Concentration in market followed soon with deregulation as many as FSC carriers had come together gaining the benefits of economies of scale as well as scope so as to remain competitive. In the United States specifically concentration resulted to emergence of mega carriers like American airlines as well as United Airlines. The first eight airlines were accounting for 90% of the market in US as per 1990, while 15 airlines were having around 90% in 1984.

Hub-and-Spoke

The measures to cut cost in US resulted to rationalization of majority of route structures. Extra efforts for increasing the efficiency saw the configuration of hub-and spoke networks to develop during the 1980s, whereby the traffic of aircraft feed was being brought to a mid place, referred to as the hub, from other areas within the hub vicinity. Some passengers were inconvenienced by this since they were forced to alter the aircraft at the center point. Nonetheless, for majority of the passengers, there were numerous benefits like lowers prices and single tickets. With the cheaper prices of tickets as the inconvenience trade off, the network for the hub-and-spoke gained considerable acceptance from many travelers.

Alliances

Airlines got economies of scope after formation of alliances with other airlines that were utilizing strategies like sharing of codes, franchising and space blocking. Under the code sharing, an airline was offering services on different airline by using its own codes. Block spacing was a derivative of code sharing that was an agreement; in this arrangement one airline was allocating a certain amount of seats on its own flights to a different flight, the allocated seats could then be sold via their own marketing and systems of distribution. There was franchising after an airline sold the rights for using its name and image. All the three alliances forms were allowing airlines to be earning revenues without the need of owning and operating aircrafts within a given region which then was protecting them from operations that were not profitable if they were to undertaken them solely.

Attractiveness of the airline industry post 9/11

Demand

After the September 11 Incidence in the first four days, the US domestic airlines bookings decreased by 74% while the bookings internationally decreased by 19%. Additionally, there was a temporal as well as complete shutdown of the commercial aviation system, the attacks caused many travelers to reduce or also avoid travel using air in general; this is because they were concerned with the increase in personal risks that went together with flying. The longer queues and check-in times in main airports had increased passenger door to door travel time and also had influence on the decision of not flying. This led to some passengers looking for options like distances for distances that are less than 500 miles; and by use of high speed rail where they can be assessed; video conferencing was also preferred by many people. The 9/11 incident resulted to both negative shock of transition with more than 30% reduction in passengers that roughly dissipated after the attack, and an unrelenting negative shock demand that amounted to approximately 8% of the demand in the pre September 11.

Cost Factors

Many, large FSC carriers were focusing on dramatic programs of cost cutting and reduction of cost amongst the staff were the center of attention. United Airlines together with the US Airlines were seeking relief by filing bankruptcy of chapter 11. The United Airlines went on trading under provisions of bankruptcy though it still lost money even after reducing its staff from hundred thousand top less than seventy thousand. The bankruptcy code of the Americans made it possible for America to get on operating though it was not servicing debts. In effect this code, was allowing obsolete airlines to be pricing flights at marginal costs which created an unfair competition. The network of the United coverage had as well been condensed by 24% since the September 11 incident, however regardless of this, the United still suffered from the highest cost as well as lowest productivity within the airline industry of the United States in 2003. The American airline industry has as well shed more than 30,000 employment opportunities and decreased the operating expenses by more than 3.8% or $804 million. The cost saving that had been implemented from the late 2001 and 2002 made this possible. The Americans has identified that it needed to additionally reduce the annual operating cost by $4billion so to as to be viable though it had only been able to identify $2billion in extra cost reductions via various initiatives. These comprised of reduction if hub peaks, scheduling efficiencies; streamlined customer interaction, homogenization, in-flight product changes, distribution modifications, operational changes, and efficiencies in headquarters and administrations. For the passengers who flew in the aftermath of the terrorist attacks, the civil aviation fresh realities implied that there were other forms of cost that had to be incurred. For instance, the fresh check-in time for international flights had gone up by three hours fro the past 2hours.

The stiffening of measures of security around the globe as well resulted to increased cost of operation for systems of air traffic; at the United States airports, next to all the metal detectors there were two military policemen together with the personnel of the airport. After the 9/11 incident there was general international consensus of adopting various programs like increasing the flow of sensitive criminal and national security information from airlines of Federal Agencies, strengthening the cockpit doors, updating of airline along with the employee credentials of identification; undertaking detailed background checks of employees who can cause a security risk; and restricting access to aircrafts that are parked as well as secure areas with the terminals of airport. The policy makers of U.S. were viewing these initiatives as essential though they never seemed sufficient to ensure public safety.

Returns (Yields – RPKs)

After the September 11, there were significant losses experienced by various groups. The United States Air faced loses of about of about $766m which was the largest quarterly loss in its 61 year history. The results comprised of $331million which had been received by the airline from the federal airline for compensating for the losses which resulted from, the 9/11. In the same quarter loses of $414 were posted by AMR. Nonetheless, the worst quarterly loss ever in the industry’s history was experienced by the UAL that had already been in hardships before the 9/11 incident. Poses of $1.6billion were posted by UAL in the 3rd quarter of 2001. James Goodwin warned employees that the economy was to perish sometime subsequent year in 2002 and if radical measures were not to be taken. Then the US aviation market was to have a drop in every month which will be seen to the worst in the history of the country. This was due to the fact that revenue-passenger-miles were dropping 32% in September 2001 in comparison to the September of the previous year. During the same period, load factors for the US Airlines condensed from 70 to 59%.

Just ten days after the September 11, incident President Bush together with the Congress passed $15billion that was to be used for emergency assistance for helping the aviation industry of the United States. The act that was aimed at stabilizing the air transportation system as well as enhancing its safety was providing airlines with $10billion in federal loans guarantees together with credits, together with an additional $5billion in reimbursements for the losses incurred directly.

Full Service Carriers (FSCs)

The patterns of traveling changed after the September 11. For instance, the transatlantic market failed with the Britons deciding to enjoy holidays at locations that were closer to homes. Traffic to North America from the three main airports of London fell by more than a third while traffic to other faraway destinations which were being served by Heathrow, Gatwick and Stansted reduced by about 14%. Airlines like Virgin Atlantic and BA which had focused their profits on long-haul flights were feeling a pinch. The corporate market was also suffering as businesses swiftly cut back their spending on travel. As indicated earlier FSC were using business class so as to subside the other operations though the net effect of the September 11, for the FSC was that people would wish to travel by business class though they never wanted to pay the price differentials as compared with economy class.

Low Cost Carriers (LCCs)

In the United States, there was a prominent and unrelenting fall of around 44% in the short-haul air travel segment of less than 500miles in mid of 2002 in comparison to the same period in 2001. this was basically related to increase in the factor of hassle and it was associated with increase in security issues and regulations together with the increase in the risk of flying. Nonetheless, LCCs like the Southwest Airlines were still capable of generating profit. The way in which the airline has been fairing is in large part depended on the way they quickly responded to the 9/11 in accordance to the Corporate Communications Manager at EasyJet at UK.

Alliances

September 11, had as well affected the formed alliances considerably. For example, in United States it played a fundamental role in the Star Alliance; this group had 15 airlines and it was sharing reservations information as well as some revenue; they were marketing its products and services jointly; they were also redeeming one another frequently. Being the only carrier in US in the alliance that was including Singapore airlines, Lufthansa, Air Canada and Varig, almost others, the ability of United in funneling customers to the foreign partners was critical and that capability had been truncated since United had scaled back routes after the attacks.

Planning better for disruptive events such as 9/11 amongst airline

The global airline industry was having a turnover of more than $3.5 trillion and 1.83 passengers flying annually, this nearly accounts for about 3.3 Trillion RPK’s. The global industry employed directly by some 1.77 persons and more than 18,000 aircrafts which included freighters were operational. The 9/11 incident disrupted a lot of airline activities in many areas; it made airlines think that it was not possible to forecast. Nonetheless others within the industry of airlines assess the probability of developing future strategy for an airline was probably concerning panning and thinking for ongoing chaos in the skies. The industry should put in place measures to ensure that there is sufficient security in all the areas in which it operates. Security is very crucial as it assures passengers of their security the air crews will also few safer when working with in an environment that is safe and free from any interruptions.

Reference

Brown, S. L., & Eisenhardt, K. M. (1998), Competing on the Edge: Strategy as Structured Chaos,  Harvard Business School Press, Boston.

Watkins, M.D., & Brazerman, M. H. (2003), Predictable Surprises: The Disasters You Should Have Seen              Coming, Harvard Business Review, March, pp.72–80.

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