The Airline Industry

In the wake of the September 11 Attacks on New York City and Washington, the already flagging airline industry has taken another great hit. Airlines and manufacturers are both suffering from decreasing sales and falling profits, whilst the employees are counting their losses and losing their jobs. Carriers have announced massive cuts in staffing and manufacturer Boeing have also axed 100,000 jobs which could just be the beginning. Several airlines have already announced that they will be ceasing business and a few (internal small American airlines for example) have already gone bankrupt.

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However, the September 11 attack wasn’t the only factor that has caused the problems. Many analysts and critics have said that many companies are blaming the violence for that downfall of their companies when in reality, the airline industry was already at a low point and continually falling even before September 11. Losses were forecast to be between $2-3 billion but since the attacks, analysts predict that by June 2002 the cash shortfall will be at least $10 billion, if not more.

The airline industry isn’t a single unit though and through its demise, many other types of business will suffer as well. There will be a ripple effect to hotels and car rentals with bookings decreasing and hire rates slowing down. Already, the industry has seen a huge drop in demand for the number of tickets. This is partly due to the lack of requirements before the attacks, but also because of the ever-increasing and reintroduced fear of flying.

Although flying is safer than ever now, there is a general consensus that if such attacks could happen once then they can happen again – despite the tightened security worldwide. However, because of the increased security, some will see it as an inconvenience and attempt to make their journeys by other modes of transport. As the cost of running an airline is so high (tickets, fuel, pilots and cabin crew etc. ) the company generally tend to only make money on a few passengers per flight. The companies’ fixed and variable costs are so high that the airlines are starting to run out of money.

Job cuts in the industry will soon reach 200,000, almost 12% of the airlines’ pre-attack workforce and many planes will need to be grounded and taken out-of-service – not for security reasons, but for the simple reason that not enough people are there to buy the seats. In Europe the pressures on Swissair, Sabena and KLM are ever increasing. Sabena has ceased trading and KLM look in trouble and most airlines are no longer making profit but are ever falling into debt. Indeed, in America, it has been necessary for the government to bail out several domestic airlines.

The measure has given the nation’s airlines $5 billion in immediate cash assistance and $10 billion in loan guarantees in an effort to keep several major carriers from collapsing. However many senators were worried about bailing out an industry that already had severe financial problems even before the terrorist attacks. Another benefit of the package is that the government are offering to compensate the victims of the attacks by giving them one of two options: either to take considerable compensation money from the government or take none and try to sue.

An added advantage is that it also limits the bonuses and salaries that the airline executives receive so that the money can be spent elsewhere. In the long term, it is possible that many more small airlines will file for bankruptcy if they are unable to keep in profit and furthermore, if the “War Against Terror” continues and there are more aircraft crashes, then it is likely that passenger numbers will fall even more despite aircraft and airport security being stepped up. Since the September 11 attacks, passenger figures for many airlines are already in decline.

As running an airline is not cheap, it is becoming increasingly difficult to continue running them, let alone start up a new one. Many planes are now out of service because there is simply no demand. The Economist believes that the right way forward would be to start letting more airlines go under. Rather than dole out random subsidies that benefit mainly shareholders and already well-paid staff, it would have been better to push most American airlines into bankruptcy. That would have given a breathing-space in which to sort out how many ought to survive and in what form.

In Europe too, the worst flag-carriers, such as Aer Lingus, should now be allowed to go bust or be taken over by a bigger airline rather than being kept alive on artificial support. This way, it would open up the market and reduce the competition and help demand curves. There is a great deal of boundaries on air travel at the moment. For example at Heathrow in London, only around four airlines can currently fly transatlantic routes. These include British Airways, American Airlines, Continental Airlines and Virgin Atlantic.

For this reason, many airlines who want to offer services from Britain to America cannot because of the strict landing regulations at Heathrow. This also enables price-fixing so that theoretically all the airlines could group together to decide on a price for each of their flights to specified destinations in America and there would be no real competitors. If one airline then chose to lower their prices the others would, in turn, be forced to in order to stop their passenger figures dropping. One real incentive nowadays is low-cost airlines.

Carriers such as Easyjet and Ryanair are still thriving despite the attacks. This is because their prices are considerably lower than those of British Airways and other rival firms. Despite falling sharply after September 11, Easyjet passenger numbers have bizarrely risen over the last few months. As both Ryanair and Easyjet are both relatively new ventures, they have virtually impeccable safety records which may also be a contributing factor to the reason that more people are flying with them. However, the underlying reason is that their cost is a lot less.

Both airlines operate a “no-frills” policy in which they do not include the cost of refreshments on board the flight. Additionally, they significantly reduce the overall cost of running the airline. They do not send out tickets at all so therefore do not have to pay either printing or postage costs. If you book over the phone you are given a reference number that you take to the airport desk which is exchanged for a boarding pass. Easyjet and Ryanair both make extremely good use of their Internet booking systems. They have an initial fixed cost of setting up the system but after that the costs are again very small.

Similarly, if you book on the net, you are simply sent an email with your reference and booking number. Your name is then automatically put onto the system for the particular flight and when you arrive at the airport you are not allocated a seat as it is simply on a first come, first serve basis. Again this saves on costs. This initiative has taken off extremely quickly with more people wanting realising that it is more cost-effective to fly with airlines that don’t include all their drinks and food – especially on short-haul flights.

Therefore the only real costs that airlines such as Easyjet or Ryanair have are fuel, pilots and cabin crew. They also select their airports so that the landing fees are not as high tending to fly from London Luton, London Stanstead, London Gatwick (occasionally) and other small airports. At the moment, the future seems fairly stable for these low-cost airlines and the real problem tends to lie with the flag carrier. Companies such as British Airways and Air France are under increasing pressure to re-think their strategies by their respective governments.

Although it is unlikely that British Airways will fall under (because of its shear turnover and size) the government are still keen to persuade them to change their policies so that it is better run in the future should something similar happen again. In the short term it appears that many small airlines will go bankrupt whilst only the very strongest will survive. It is going to take a lot of effort to get the airline industry back to its previous standard and the longer that the carriers delay reassuring passengers and telling employees their plans, the longer it will take for passenger and staff confidence to rebuild.