Who Benefits from the Airline Industry Consolidation

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 allure 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 amelioration 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 Rupee’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 sass signaled many difficulties for some airlines during he sass 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. P until the 2008 recession, It Is estimated that alarm travel had been growing by about 7 percent annually over ten years with a maximum of a 1. 6 billion passengers taken Today most airlines have merged, others have entered alliances in order to share the financial difficulties of operating costs. Low-cost operators such as Asset, Rainy and Are Lingua 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 hat 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 recent years, air fares have fallen a lot and for leisure trips abroad and account on average less than a third of the total costs of the trip. As a result, the demand for air travel may be influenced by other demand rivers such as other significant costs at the destination. The demand for leisure air travel is income elastic which means that a change in income will cause a more than proportionate change in the demand. The demand for business air travel seems to be very inelastic since most business companies do not seem to care as much for the price of the airplane ticket as whether the reason of the meeting is successful or not.

It should be pointed out though that some companies like H state that their businessmen travel always in economy class rather than business as part of their marketing strategies. The last few years it has been noticed however that business meetings or conferences are sometimes done through videoconferencing which has surely affected the purchases of business tickets. It is important to distinguish between destination-specific own-price elasticity and aggregate market elasticity which can be explained by reference to the two separate effects of a price change; an income and a substitution effect.

The income effect refers to the impact of a price change on consumer purchasing power. Since air fares account for a relatively small proportion of consumer budgets, this effect is small in tooth cases. The substitution effect refers to the closeness and availability of substitutes which can explain why most operators are experiencing a highly price inelastic with respect to air fares alone. Nowadays, consumers have a big variety of choices than in the past in terms of operators, destinations, flight frequencies etc. ND easily substitute between them in response to price differences. It is true that low cost carriers have become the dominant force in aviation but the response of legacy airlines is not as muted as it was and low cost carriers are not as low cost as they were. There have been many studies regarding the cost structure of the airline industry. Most of these studies agree on two important points; firstly that there are rapidly declining unit costs of service within any city markets and secondly; that there are constant returns to scale for big airline systems.

Most passengers are tend to search extensively for the lowest price provided regardless of the airline. This is the reason why airlines are forced to compete aggressively on price to generate business, which means that they have small profits when the economy is in a boom and large losses when it is in a recession. All airlines compete mainly with the price that they provide rather than anything else. Therefore the only barrier to entry in the industry is the ability to provide lower prices than other rivals but while maintaining the same services.

As stated above before low cost operators the airline used to make small profits. When the first low cost operator appeared in the market it made huge amount of profits. This is also known as an economic moat (barrier against competition). The cost structure of low cost operators is very simple: they start at a certain price which is generally low and dependent on he destination and the time of the flight and then they increase that price while the day of the departure comes nearer and by the amount of the demand of the particular flight.

Market Structure and Competition The market structure of the airline industry as a whole is an oligopoly. This means that there are only some companies that hold the largest share of the market. There are more competitive than monopolistic firms where the market is served by only one firm and less competitive than firms who experience near perfect competition. Oligopolies firms have some pricing power but they can not charge whatever they ant like monopolies. Each airline affects the market (unlike perfect competition) but is also affected by other airlines (unlike monopoly).

A very important point of airline competition is that they engage in price wars where an airline decides to cut down their prices most other airlines will follow as well. This is due to a certain airline trying to increase their market share, so the others will follow to hold on to their share of the market. Airlines also deal with that, with other marketing schemes such as frequent flyer programs or free tickets after a certain amount of tickets a specific assenter has bought (similar to loyalty points) and thus they can make passengers loyal to a specific airline.

Low cost carriers compete with legacy airlines by other passengers for meals (asset), charging them for bathroom use (Rainy), other means are in flying where they take different routes for the same destinations based on wind directions in order to minimize fuel use. It should be mentioned though that the airline industry is also a natural monopoly on specific routes (short distances) because they are better served by only one firm, meaning that if two or more firms revered the same specific route they would be losing money.

As stated in the history of the airline industry above the deregulation help the market get strong again after the September 11 attack on the WET in the US. The deregulation of the airline industry in the US in 1979 allowed airlines to charge their on prices and make their own flight schedules. From then route schedules and pricing of the aviation industry has been major deregulated in the past 30 years other aspects of the industry, though, are still highly regulated. International routes eave been deregulated as well in some degree allowing carriers to travel abroad under the agreement of the destination country.

It is true that the airline industry has grown immensely the last 30 years which is mostly due to the deregulation of the aviation market and competition. This benefits consumers a lot since prices have fallen. On the other hand, the airline industry as a whole is very unstable and is largely affected by the rising price of oil. Competition policies have allowed airlines to compete with each other without harming consumers nor by acquiring foreign market share. A significant policy involves restricting foreign airlines owning domestic airplanes and serving domestic routes.

That policy stops domestic capital going abroad. Another very important policy does not allow mergers of big airlines because the market concentration would increase thus increasing the prices of the tickets as well which is harmful to consumers. Although, it could also create larger network with more frequent and convenient flights which would be beneficial to consumers. So regulators should calculate if mergers are beneficial to consumers or not and then ecocide whether to approve or decline a merger.

Conclusion In conclusion, and according to the above mentioned benefits of airline industry consolidation can consist of and extended network, it can reduce costs by sharing of sales offices, maintenance and operational facilities and investments and purchases. Passengers can benefit from lower prices provided by lower operational costs, larger variety of choices between destinations and departure times, shorter traveling times due to optimized transfers, faster “loyalty’ awards and wide range of alliance shared airport lounges.