Tizzy
Jan 6, 2009
Writing Feedback / 'Liberalisation of aviation' - Airline deregulation essay [2]
Many thanks in advance:
TITLE:" Liberalization of aviation (or surface transport) has provided, and will continue to provide substantial benefits to the travelling public, and staff of the industry". Discuss.
The airline industry currently occupies a very important place in the Irish market, due to both the major changes that have taken place over time as a result of new legislation, and the increase in competition, especially following the advent of low cost airlines.
The process of economic liberalization that has affected the whole U.S and EU started in 1978 with the Airline Deregulation Act (A.D.A) that put an end to all forms of government intervention in this area. "Under CAB (Civil Aeronautics Board) regulation, investment and operating decisions were highly constraint. CAB rules limiting routes and entry and controlling prices meant that airlines were limited to competing only on food, cabin crew quality, and frequency. As a result, both prices and frequency were high, and load factors-the percentage of the seats that were filled-were low. Indeed, in the early 1970s load factors were only about 50 percent. The air transport market today is remarkably different. Airlines compete on prices hence fares are much lower. Many more people fly, allowing high frequency, but with much higher load factors." library of economics and liberty.
Changes of the air travel sector has had overwhelming positive results, air travel has increased and prices have fallen, after deregulation airlines reconfigured their routes and equipment making possible improvements in capacity utilization, it was subsequently established the success of the Act when ten years after the Transportation Research Board (T.R.B) was highlighting that the number of passengers had doubled as result of fare been lowered by 15-20% and air travel became accessible to everyone.
One of the consequences of liberalization was the entry in the market of the "low cost airlines" also known as "no frills". The strategy put in place by these companies was a strategy based on minimizing costs, implemented by offering only services deemed to be necessary. The response to these changes had not been slow to appear: the most traditional airlines decided to focus on a particular market segment, the wealthier income brackets.
In Ireland, the effects of liberalization were felt faster than in other European countries with the advent of the first low cost airline: Ryanair.
1985 saw the birth of Ryanair; the Ryan family with a share capital of £1 and a staff of 25 set up the company, it was only in 1986 that Ryanair was given permission to become competitive in the well-established market of Aer Lingus and British Airway. It follows an extract from Ryanair web site: "In 1986 Ryanair obtains permission from the regulatory authorities to challenge the British Airways and Aer Lingus' high fare duopoly on the Dublin-London route. Services are launched with two 46-seater turbo prop BAE748 aircraft. The first flights operate in May from Dublin to London Luton. The launch fare of £99 return is less than half the price of the BA/Aer Lingus lowest return fare of £209. Both British Airways and Aer Lingus slash their high prices in response to Ryanair's. Ryanair starts the first fare war in Europe. With two routes in operation, Ryanair carries 82,000 passengers in its first full year in operation.
Passenger traffic grew at an average rate of 4% from 1990 to 2006. The highest growth is in 2004 around 12% then decreases to 7% and 4% in 2005 and 2006 consecutively (Hanlon, 2007). One main reason for growth in the airline business is the new entrants. Thanks to deregulation the barrier of the industries have been non-existent, low cost or no frills airlines are entered into the market. In order to be competitive some traditional airlines have to adjust their strategies by set up subsidiaries low cost airlines to maintain the market share.
It therefore seems necessary to focus on the differences and peculiarity between traditional airlines and low cost carriers.
1.1_ Traditional Airlines and Low Cost: two different worlds.
The Irish Aviation Industry was organized in order to meet customers' requirements: the ability to reach various destinations in the shortest possible time and at competitive prices. With deregulation, a system of hub-and-spoke networks emerges as airlines rationalize the efficiency of their services; typical hub and spoke structure is shown on Figure 1.1(which I will spare u !!)
A common consequence is that each airline assumes dominance over a hub (red airline over the orange hub and blue airline over the light blue hub) and services are modified so the two hubs are connected to several spokes. Airlines will compete for flights at hubs in order to achieve specific spokes, however it becomes increasingly difficult to compete at hubs as well as at spokes, in fact when an airlines assumes monopoly of a hub it may increase air fare on a specific segment. Here follow an extract from people education website: "The advantage of such a system for airlines is the achievement of a regional market dominance and higher plane loads, while passengers benefit from better connectivity (although delays for connections and changing planes more frequently) and lower costs."
Ticket distribution evolution holds a place of great significance in the airline organization; traditionally travel agents are paid for commission based on sales volumes. In addition, travel agencies will receive overriding fees if they can reach the extra volume set by airlines (Hanlon, 2007) Nowadays Internet has overcome this system where tickets can be purchased on line, on this matter is important to highlight that most traditional companies like Alitalia, Air France, KLM, British Airways will still assure the sale both by travel agent both by internet while the low cost carriers like Ryanair, Air One, Easy Jet, will only assure ticket sale by internet.
1.2_Price Discrimination
One of the most important issues in the analysis of the air transport industry is the wide range of fares on offer. Price discrimination means charging different prices to different customers, where the price difference cannot be fully explained by differences in cost.
In this contest we can analyse two types of passengers:
TIME SENSITIVE: it includes people who use the plane for business and therefore are more interested in the flexibility of the service by paying a higher fare.
PRICE SENSITIVE: it includes people who use the plane for leisure and are interested to the price fluctuation.
According to Borenstein (1985), Holmes (1989) and Gale (1993) price discrimination may increase as the market becomes more competitive.
"Both consumers groups and the press have scrutinized the large dispersion in airfare paid by passengers traveling on the same flight, who question the fairness of charging different prices for the same good: a seat on a given flight" Joanna Stavins (1996)
Following these assumptions airlines set tickets fares, implementing price discrimination, recommending different prices according to different characteristics:
THIRD DEGREE PRICE DISCRIMINATION: Airlines charge different prices to different groups of customers.
SECOND DEGREE PRICE DISCRIMINATION: each customer pays her/his own price, depending on characteristics of purchase (bundling) - in this case the airlines is not aware of the characteristic of the segment and sets a range of offers.
FIRST DEGREE PRICE DISCRIMINATION: price varies by customer, the airlines are aware of each individual needs hence are capable of defining a price for each customer (a very unrealistic hypothesis).
The success in airline operation depends on individual strategies. In order to set up a successful low cost airline, culture, market environment, people and politics have to be taken into account. Low cost airlines need to operate their costs effectively in order to maximize profits. Major strategies that low cost airlines using for cost effectiveness are as follows (Bieger and Laesser, 2004):
ˇ Keep away from highly frequented airports and use small airports instead. This can reduce the airport fees, which the small airports charge at the lower fees.
ˇ There is no-frills for in-flight services. Passengers need to buy foods or beverages during the flight. This strategy not only saves in-flight costs, but also makes other revenues for the airlines.
ˇ Keep low distribution costs by taking advantage on internet and using call center channels. Most low-cost airlines have a large proportion of booking online. This distribution channel can eliminate intermediate agents that caused high commission expenses, which traditional airlines normally pay for them.
ˇ Minimize turnaround time to keep aircraft at the high utilization, revenues are recognized while the aircraft flies in the sky.
The graph underneath shows that Ryanair has significantly lower CASM than the major European carriers.( again I will not attach)
In conclusion, the airline industry has an optimistic view for future years, however various factors might slow the growth: the actual financial crisis, the rising of oil price, rising inflation, unemployment and the terrorist attack.
Many thanks in advance:
TITLE:" Liberalization of aviation (or surface transport) has provided, and will continue to provide substantial benefits to the travelling public, and staff of the industry". Discuss.
The airline industry currently occupies a very important place in the Irish market, due to both the major changes that have taken place over time as a result of new legislation, and the increase in competition, especially following the advent of low cost airlines.
The process of economic liberalization that has affected the whole U.S and EU started in 1978 with the Airline Deregulation Act (A.D.A) that put an end to all forms of government intervention in this area. "Under CAB (Civil Aeronautics Board) regulation, investment and operating decisions were highly constraint. CAB rules limiting routes and entry and controlling prices meant that airlines were limited to competing only on food, cabin crew quality, and frequency. As a result, both prices and frequency were high, and load factors-the percentage of the seats that were filled-were low. Indeed, in the early 1970s load factors were only about 50 percent. The air transport market today is remarkably different. Airlines compete on prices hence fares are much lower. Many more people fly, allowing high frequency, but with much higher load factors." library of economics and liberty.
Changes of the air travel sector has had overwhelming positive results, air travel has increased and prices have fallen, after deregulation airlines reconfigured their routes and equipment making possible improvements in capacity utilization, it was subsequently established the success of the Act when ten years after the Transportation Research Board (T.R.B) was highlighting that the number of passengers had doubled as result of fare been lowered by 15-20% and air travel became accessible to everyone.
One of the consequences of liberalization was the entry in the market of the "low cost airlines" also known as "no frills". The strategy put in place by these companies was a strategy based on minimizing costs, implemented by offering only services deemed to be necessary. The response to these changes had not been slow to appear: the most traditional airlines decided to focus on a particular market segment, the wealthier income brackets.
In Ireland, the effects of liberalization were felt faster than in other European countries with the advent of the first low cost airline: Ryanair.
1985 saw the birth of Ryanair; the Ryan family with a share capital of £1 and a staff of 25 set up the company, it was only in 1986 that Ryanair was given permission to become competitive in the well-established market of Aer Lingus and British Airway. It follows an extract from Ryanair web site: "In 1986 Ryanair obtains permission from the regulatory authorities to challenge the British Airways and Aer Lingus' high fare duopoly on the Dublin-London route. Services are launched with two 46-seater turbo prop BAE748 aircraft. The first flights operate in May from Dublin to London Luton. The launch fare of £99 return is less than half the price of the BA/Aer Lingus lowest return fare of £209. Both British Airways and Aer Lingus slash their high prices in response to Ryanair's. Ryanair starts the first fare war in Europe. With two routes in operation, Ryanair carries 82,000 passengers in its first full year in operation.
Passenger traffic grew at an average rate of 4% from 1990 to 2006. The highest growth is in 2004 around 12% then decreases to 7% and 4% in 2005 and 2006 consecutively (Hanlon, 2007). One main reason for growth in the airline business is the new entrants. Thanks to deregulation the barrier of the industries have been non-existent, low cost or no frills airlines are entered into the market. In order to be competitive some traditional airlines have to adjust their strategies by set up subsidiaries low cost airlines to maintain the market share.
It therefore seems necessary to focus on the differences and peculiarity between traditional airlines and low cost carriers.
1.1_ Traditional Airlines and Low Cost: two different worlds.
The Irish Aviation Industry was organized in order to meet customers' requirements: the ability to reach various destinations in the shortest possible time and at competitive prices. With deregulation, a system of hub-and-spoke networks emerges as airlines rationalize the efficiency of their services; typical hub and spoke structure is shown on Figure 1.1(which I will spare u !!)
A common consequence is that each airline assumes dominance over a hub (red airline over the orange hub and blue airline over the light blue hub) and services are modified so the two hubs are connected to several spokes. Airlines will compete for flights at hubs in order to achieve specific spokes, however it becomes increasingly difficult to compete at hubs as well as at spokes, in fact when an airlines assumes monopoly of a hub it may increase air fare on a specific segment. Here follow an extract from people education website: "The advantage of such a system for airlines is the achievement of a regional market dominance and higher plane loads, while passengers benefit from better connectivity (although delays for connections and changing planes more frequently) and lower costs."
Ticket distribution evolution holds a place of great significance in the airline organization; traditionally travel agents are paid for commission based on sales volumes. In addition, travel agencies will receive overriding fees if they can reach the extra volume set by airlines (Hanlon, 2007) Nowadays Internet has overcome this system where tickets can be purchased on line, on this matter is important to highlight that most traditional companies like Alitalia, Air France, KLM, British Airways will still assure the sale both by travel agent both by internet while the low cost carriers like Ryanair, Air One, Easy Jet, will only assure ticket sale by internet.
1.2_Price Discrimination
One of the most important issues in the analysis of the air transport industry is the wide range of fares on offer. Price discrimination means charging different prices to different customers, where the price difference cannot be fully explained by differences in cost.
In this contest we can analyse two types of passengers:
TIME SENSITIVE: it includes people who use the plane for business and therefore are more interested in the flexibility of the service by paying a higher fare.
PRICE SENSITIVE: it includes people who use the plane for leisure and are interested to the price fluctuation.
According to Borenstein (1985), Holmes (1989) and Gale (1993) price discrimination may increase as the market becomes more competitive.
"Both consumers groups and the press have scrutinized the large dispersion in airfare paid by passengers traveling on the same flight, who question the fairness of charging different prices for the same good: a seat on a given flight" Joanna Stavins (1996)
Following these assumptions airlines set tickets fares, implementing price discrimination, recommending different prices according to different characteristics:
THIRD DEGREE PRICE DISCRIMINATION: Airlines charge different prices to different groups of customers.
SECOND DEGREE PRICE DISCRIMINATION: each customer pays her/his own price, depending on characteristics of purchase (bundling) - in this case the airlines is not aware of the characteristic of the segment and sets a range of offers.
FIRST DEGREE PRICE DISCRIMINATION: price varies by customer, the airlines are aware of each individual needs hence are capable of defining a price for each customer (a very unrealistic hypothesis).
The success in airline operation depends on individual strategies. In order to set up a successful low cost airline, culture, market environment, people and politics have to be taken into account. Low cost airlines need to operate their costs effectively in order to maximize profits. Major strategies that low cost airlines using for cost effectiveness are as follows (Bieger and Laesser, 2004):
ˇ Keep away from highly frequented airports and use small airports instead. This can reduce the airport fees, which the small airports charge at the lower fees.
ˇ There is no-frills for in-flight services. Passengers need to buy foods or beverages during the flight. This strategy not only saves in-flight costs, but also makes other revenues for the airlines.
ˇ Keep low distribution costs by taking advantage on internet and using call center channels. Most low-cost airlines have a large proportion of booking online. This distribution channel can eliminate intermediate agents that caused high commission expenses, which traditional airlines normally pay for them.
ˇ Minimize turnaround time to keep aircraft at the high utilization, revenues are recognized while the aircraft flies in the sky.
The graph underneath shows that Ryanair has significantly lower CASM than the major European carriers.( again I will not attach)
In conclusion, the airline industry has an optimistic view for future years, however various factors might slow the growth: the actual financial crisis, the rising of oil price, rising inflation, unemployment and the terrorist attack.