Airline Sector and Aviation Industry: What you need to Know

Introduction & Overview

This report, prepared at the request of the BBC Travel Editor, aims to provide information about the evolution of airlines in recent decades, with particular regard to the impact of technology. The report also provides some details about the role of airlines and their interaction with tour operators and other travel intermediaries on the provisioning of packaged holidays to tourism customers.

The airline sector has been experiencing extremely troubled and difficult conditions in the last two decades, more so since the September 11 terrorist attack in New York (Sin & Chellappa, 2012). Political volatility across the world, along with epidemics like Avian Influenza and sharp increases in fuel prices, have impacted the industry, even as the advent of technology, e-commerce and low cost carriers have added new dimensions and challenges to the working of the sector (Sin & Chellappa, 2012).

This short report aims to provide relevant details about various aspects of the airline sector and its interaction with the tourism industry for the use of the BBC Travel Team.

Roles and Types of Airlines

Airlines comprise business firms that provide air transportation services for travel seeking individuals and freight (Huber, 2013). They can range from single aircraft organisations ferrying passengers, mail or goods to full service international corporations with hundreds of aircraft (Huber, 2013).

These organisations can be categorised in various ways (Huber, 2013). One important approach to categorisation focuses upon the areas serviced by these organisations and terms them as international, regional or domestic in nature (Civil Aviation Authority, 2006). The advent of low cost airlines in recent years has led to an additional type of categorisation, i.e. full service carriers and low cost / no-frills carriers (Civil Aviation Authority, 2006). Airlines can also be operated as scheduled services or charters (Civil Aviation Authority, 2006).

The airlines sector, as evident is characterised not just by a large number of carriers, but also an abundance of terms in their classification (Cento, 2009). The complexity of classification is further increased by the fact that these are not mutually exclusive (Cento, 2009). It is advisable to categorise the industry on the basis of geographical scope of operations and the type of underlying operational infrastructure (Cento, 2009). The US Department of Transportation (USDOT) has stated that airlines can be categorised into three groups, i.e. (1) network, (2) low cost and (3) regional airlines (Wagner, 2013). Network carriers use traditional hub and spoke systems for scheduling their flights (Wagner, 2013). Low cost carriers operate under generally recognised low cost business models, which could include standardised aircraft utilisation, single passenger service class, restrictive in-flight services, use of smaller and less expensive airports and low employee benefits and wages (Wagner, 2013). Regional carriers provide services from small cities and use smaller aircraft (Wagner, 2013). They are also used to assist larger network carrier traffic in and out of smaller airports to the hub airports of network carriers (Wagner, 2013).

Historical Perspective (Pre E-commerce of Airlines)

The world’s first airline DELAG was established at Frankfurt, Germany in November 1909. It operated airships that were made by The Zeppelin Corporation (Doganis, 2001). This was followed by the setting up of the first fixed-wing airline, i.e. Aircraft Transport and Travel in 1916 in the UK (Doganis, 2001).

A number of airlines were established in Europe after the closure of the First World War (Cento, 2009). Some airlines started offering international services from the mid 1920s; services being opened up from the UK and other European cities to distant locations like Calcutta, Rangoon, Singapore, Hong Kong and Brisbane (Doganis, 2001). The Russian airline, Aeroflot, became the world’s largest airline, operating 3000 aircraft and employing more than 4000 pilots, by the 1930s (Doganis, 2001). Significant further expansion in the airline sector took place after the Second World War, with a number of US-based airlines like Pan Am, United Airlines, Delta Airlines, American Airlines and Northwest Airlines expanding their operations significantly in North America (Pirie, 2009). This period also witnessed the introduction of advanced jet aircraft like the Boeing 707, the Concorde and the Airbus with consequent enhancement in speed of air travel, passenger capacity, payload and range (Pirie, 2009).

Recent decades have witnessed two significant developments with far-reaching consequences in the airline sector, namely deregulation and the introduction of no-frills, low cost carriers (Carey, 2014). Deregulation in the airline sector, which commenced in the USA in 1970 resulted in the reduction of government control barriers for new airlines and the entry of several new organisations in the sector (Carey, 2014). Subsequent years witnessed the spread of airline deregulation across the world and the emergence of several new airlines in Europe and Asia with consequent benefits by air passengers by way of greater options, lower fares and addition of more travel destinations (Carey, 2014).

The second major development in the airlines sector concerned the establishment of no-frills / low cost aircraft carriers, first in the USA and then in Europe (Cento, 2009). These organisations practically revolutionised air travel by providing extremely economic fares to various destinations, making economic air travel possible to thousands of individuals and families (Cento, 2009).

Package Holidays

The introduction of package holidays in recent decades has resulted in significant expansion in tourism activity (Nick, 2009). Package holidays are essentially organised by tour operators who group various elements of a holiday together into a package and sell them either directly to travel consumers or through travel agents (Nick, 2009). The costs of such holidays can vary significantly and typically include (1) charter flights, (2) accommodation, (3) meals and (4) transfers between airports and hotels (Nick, 2009). Such package holidays can also include various other elements like tickets for theme park and ferry crossings (Deimezi, 2005).

Package holidays, it should be noted, are becoming increasingly flexible, ever since their introduction in 1950 by Vladimir Raitz (Deimezi, 2005). Whilst package holidays became extremely popular in the 1960s, the collapse of important package tour companies in the 1970s led to significant customer difficulties and disenchantment with the business (Deimezi, 2005). Package holidays have experienced a resurgence in customer interest during the last five years (Deimezi, 2005). Modern customers however seek much greater financial security after the failure of several package tour companies (Nick, 2009).

The package holiday sector is also experiencing much greater usage of dynamic packaging, which allows customers to develop their customised and flexible package of flights, accommodation and car rentals, instead of purchasing predefined packaging (Nick, 2009). Dynamic packages often vary from traditional package tours, because their pricing is based upon current availability and they allow several types of add-on facilities like show tickets and airport packaging (Deimezi, 2005).

Interaction of Airlines with Tour Operators and Other Intermediaries within the Tourism Industry

The growth of travel and tourism activity across the world has resulted in the development of a strong and yet demanding and challenging relationship between airlines and tour operators and other travel intermediaries (Time Inc, 2010). Airlines sell significant numbers of tickets to travel agents and various tour operators. Such tour operators combine tour and travel components to create holidays and often arrange for air travel for their clients either through block bookings on specific flights or through chartering of aircraft (Time Inc, 2010). Major tour operators thus often have influencing powers over airlines because of their bulk purchases (Rogers, 2013).

The relationships between airlines and tour operators are however often put under significant pressure because of the competing priorities of the two parties (Rogers, 2013). Airline managements are primarily interested in ensuring capacity utilisation of their aircraft at the best possible rates, even as tour operators wish for competitive and economic pricing and adherence to flying programmes (Rogers, 2013). These competing priorities often result in disagreements between the two parties and the need for extended negotiations (Rogers, 2013).

Evaluation of Changes in the Airline Sector Over the Last Thirty Years

The global airline sector has experienced significant upheaval and change over the last 30 years (Peck-Winter, 2009). Whilst the initial decades after the closure of the Second World War saw the progressive sophistication of the airlines sector with the introduction of newer, larger and more sophisticated jets, flying continued to be restricted, until the mid 1970s, to business travellers and affluent social segments (Peck-Winter, 2009). The deregulation of US airlines in the 1970s resulted in increasing pressure on governments across the world to reduce their involvement and oversight of the airline sector (Peck-Winter, 2009).

Deregulation resulted in the entry of several new airlines, increased competition, lower prices and significantly increased air travel across the world (Sin & Chellappa, 2012). Such competition primary resulted in pressure on cutting costs, which combined with greater profit volatility, merger and acquisition activity and several bankruptcies resulted in job losses, reduction in wages and the lowering of power of airline labour unions (Sin & Chellappa, 2012). The financial pressures on the airline sector were aggravated by the September 11 attacks, which resulted in sharp reductions in passenger traffic, setbacks in system capacity and employee layoffs (Sin & Chellappa, 2012). Airlines management also had to cope with worsening of relations with labour, sharply increasing fuel costs, infrastructural constraints, flight delays and customer dissatisfaction (Sin & Chellappa, 2012).

The growth in low fare air travel options on account of the growth of low cost carriers (LCCs) has however offset the decline in air travel to a significant extent and resulted in growth of airline activity, both in the business and in the leisure sector (Sin & Chellappa, 2012). The airline sector has also benefitted significantly in recent times from the growth in ICT and e-commerce (Peck-Winter, 2009). The spread of e-commerce and the emergence of various online travel booking portals have resulted in significantly increased interaction between customers and airlines, as also to the bypassing of travel agents and other travel intermediaries (Peck-Winter, 2009). Whilst the progressive improvement in the economic environment across the world is expected to result in enhancement of airline activity, all existing airlines face the challenges of sustaining airline profitability and ensuring safety and security in the face of competitive pressures and the continued threat of terrorist attacks (Wagner, 2013).

Conclusions and Recommendations

This short report, prepared at the request of the BBC Travel Director, aimed to evaluate and assess the growth and evolution of the airlines sector in recent years, with particular regard to the advent of sophisticated modern technology.

Commercial air travel, which commenced in the first decade of the 20th century grew significantly, both after the closures of the first and second world wars on account of the introduction of new aircraft, various types of technological developments, and increase in the desire to travel amongst individuals (Peck-Winter, 2009). Such enhancement in airline travel options has also resulted in greater tourism interest and activity and to enormous growth in the tourism sector (Sin & Chellappa, 2012). The steady growth in airline and tourism activity notwithstanding, the airline sector has over the years had to face and overcome numerous challenges stemming from fuel price increases, labour union militancy, terrorist instigated violence and economic fluctuations (Sin & Chellappa, 2012).

The working of the sector has also been significantly affected by deregulation and liberalisation across the world, the emergence and growth of low cost carriers, the development of the tourism trade and the increasing spread of the Internet and online commerce (Wagner, 2013). Whilst several airlines have been unable to face these challenges and have closed down, others, especially in the low cost sector have thrived and grown consistently (Peck-Winter, 2009). Whilst the airline sector is expected to grow in the coming years on account of global economic recovery, all airlines will have to constantly work in the face of intensifying competition and continuing terrorism threats (Peck-Winter, 2009).

References

Carey, S., (2014), “First Airline Offered No Frills, Many Thrills”, Available at: http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-415780/ (accessed October 23, 2014).

Cento, A., (2009), The Airline Industry: Challenges in the 21st Century, Berlin Heidelberg: Springer-Verlag.

Civil Aviation Authority, (2006), “No-frills Carriers: Revolution or Evolution?”, Available at: http://www.caa.co.uk/docs/33/cap770.pdf (accessed October 23, 2014).

Deimezi, R. (2005). “Travel agents could lose out in the dynamic packaging battle”, Available at: http://www.eyefortravel.com/archive/travel-agents-could-lose-out-dynamic-packaging-battle (accessed October 23, 2014).

Doganis, R., (2001), The Airline Business in the 21st Century, Routledge: New York.

Huber, N., (2013), “Airlines redefine IT’s role in the business”, Available at: http://www.computerweekly.com/feature/Airlines-redefine-ITs-role-in-the-business (accessed October 23, 2014).

Nick, B., (2009), “Package Holiday Makes a Comeback”, The Daily Telegraph, Available at: http://www.telegraph.co.uk/travel/travelnews/5989163/Package-holiday-makes-a-comeback.html (accessed October 23, 2014).

Peck-Winter, B., (2009), “30 Years After Airline Deregulation: Who is the Big Winner?”, Available at: http://moritzlaw.osu.edu/news/allrise/2009/01/30-years-after-airline-deregulation-who-is-the-big-winner/ (accessed October 23, 2014).

Pirie, G.H., (2009), “Incidental tourism: British imperial air travel in the 1930s”, Journal of Tourism History, Vol. 1: pp. 49-66.

Rogers, M., (2013), “Working With Airlines”, Available at: http://www.travelagewest.com/Tools/Travel-Articles/Working-With-Airlines/#.VEiywyLLeLU (accessed October 23, 2014).

Sin, G.R., & Chellappa, K.R., (2012), “Airline Classifications”, Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2148381 (accessed October 23, 2014).

Time Inc., (2010), “Are Airlines Beginning to Get It Right?”, Available at: http://www.departures.com/travel/travel/are-airlines-beginning-get-it-right (accessed October 23, 2014).

Wagner, R., (2013), “Three Types of Commercial Aircraft Used by the Major Airlines”, Available at: http://traveltips.usatoday.com/three-types-commercial-aircraft-used-major-airlines-63148.html (accessed October 23, 2014).