The economic situation has proven to have impacted the airline industries in many ways. For instance, changes in price of an airline industry may also change the demand and elasticity of the services offered by the airline company. In this regard, the outlook of the airline industry can still be considered to have strong growth in spite of changing economic conditions. For airlines, the economic situation for prices, wage inequality and even monetary aspects will hold many challenges and only those airlines which continue to tackle their costs and enhance their services will remain in the market.
The rapid development of the global trade in terms of goods and services as well as the foreign direct investments has also influence the way airline industry operates. It can be said that the economic situation and condition affects airline industries’ growth. In the first half of the 90s, the airline industry has suffered not only from world recession but also in terms of the context that travel was further depressed by the existence of the Gulf-War. For instance, in 1991, the number of international passengers has experienced major downturn.
Herein, the financial stabilities were worsened by the airlines over-ordering aircraft in the boom years in the latter part of the 1980s, which leads to significant surplus in the airline market. During this time, International Air Transport Association’s member airlines have already suffered cumulative net losses of $20. 4 billion from 1990 to 1994. Because of this, the airline industries have had to give emphasis on the need for radical transformation to make sure that they will be able to compete in the fierce competition and to regain their prosperity and survival.
Many airline industries have tried to aggressively cut costs, to be able to lessen capacity growth and to enhance their load factors. During the period of the renewed economic growth, such activities have returned the airline industry to be whole again for profitability. To be able to meet such requirements of the changing customer needs, some airline companies are able to invest furiously in terms of service quality, both on the air service and ground services.
The economic condition has also set new trends for different airline industries as some of the largest airline industries started to offer ticketless travel, more comfortable and convenient seating, new interactive entertainment systems and offering products to enhance their image among the clients and to attract and retain air passengers. In addition, another impact of the economic situation with airline industries is that it enables airline companies to be more effective and customer-oriented. For instance, the European Union has regulated that government should not be permitted to subsidize their loss-making airlines.
On the other hand, the concerns of the governments over their own finances as well as their recognition of the benefits of privatization have directed them to transfer ownership of the airlines to private entities. Hence, to become more appealing to the shareholders, the airline industries try to remain effective and competitive (Wells and Wensveen, 2004). Another important aspect to consider, along with the economic condition is deregulation. Accordingly, deregulation is another economic factor that stimulates competition in the airline industries from small, low-cost airline companies (Klophaus, 2005).
It is said that the United States led the way in 1978 as well as Europe. The European Union’s final phase of deregulation have been effective in April 1997, which allows airline companies from one member state to fly passengers within another EU member’s domestic market. For instance, the price elasticity and demand affects airline industries in various ways. For instance, if competitor cuts their price, other airline industries use estimates of cross-price elasticity to foresee the impact on their quantity demanded as well as the total revenue of their own industry.
For instance, two or more airline industries that compete with each other on a specific route will have to give consideration how one airline might react to the price implemented by other airline companies. The factors that affect the airline industry are the choice of the consumers and the capacity to meet the rise in demand, because of their low price. For instance, the existence of low-cost airline also affects the current market of the airline industries. Like the existence of Air Asia. Air Asia is a pioneer when it comes to low-cost traveling and the first industry in the region to implement ticketless travel and unassigned seats.
Nonetheless, as of February 5, 2009, Air Asia has implemented allocated seating for their guests across all their flights which include Thai Air Asia and Indonesia Air Asia. The main base of Air Asia is the Low Cost Carrier Terminal located at the Kuala Lumpur International Airport. The company aims on enabling more people to travel by air by providing them hassle-free, no frills and low-cost airline services. Accordingly, the advent of aviation deregulation has been able to provide opportunities to different airline industries and started low-fares operations in 1990.
Because of this, low cost carriers has been developed in Asia since 2000 and industries like Air Asia has been able to grab this opportunities. Accordingly, low-cost carrier model is very applicable in the global market (Klemperer, 1995), even though deregulated market are most appropriate for its faster spread. It can be said that with the deregulation of aviation market in European Union, airlines are also given the chance to make decisions with regards to market access, fares and capacity (Shaw, 2004: 53).
It is said that before the deregulation, airline industries have always been restricted by governments which controlled the destinations of the airline industry and also the product planning and pricing strategy (Shaw, 2004: 51). In addition, there are also some agreements that took place like the ‘open skies’ agreements which started to take to pieces some of the regulations that govern carriers to be able fly on specific routes. Nonetheless, the airline industry is described by strong nationalist advocates towards domestic ‘flag carriers’.
In different part of the global market, airline industries tried to continue to face the impact of economic conditions. And despite all these economic impacts, the airline industries have been able to proceed to the part of globalization and consolidation, which are characteristics linked with the normal growth and development of other industries. Some airline industries have been able to face economic situation with their own marketing strategy. For instance, low cost airlines are regarded to adhere on a simple corporate design.
For example, they used only one kind of aircraft, one segment of customers and more seats are crammed within the airplane. Sometimes some low cost airlines have no airport lounges, and no food, no choice of seats for passengers and others. As much as possible, these types of airlines try to keep their logistics simples by maximizing revenue-generating air time and cutting turnaround times on the ground. Mostly, low cost airlines implement short-haul routes policies. It is said that most customers who chooses to fly with these airlines are not defectors from the present situation.
Rather, lower prices allow passengers to fly when they wanted to have a fast and cheaper travel time. It is said that low-cost airlines are found to complement both conventional and charter airlines; however, they are encountering overlaps. Low-cost airlines vie with charter airlines that provides up to one third of their passenger sears without hotel package accommodation, for the sake of independent tourists and other passengers that travels frequently to holiday homes. Moreover, they also compete with the conventional airlines, which weekend costs attracts passengers who are moderately sensitive in budgets and do not need flexible tickets.