Case 1 "Airlines"

Summary

This is a summary of the text "Chaos in the skies - the airline industry pre- and post-9/11", written by Gary J. Stockport. The case study states the difference in the industry before and after 9/11, in terms of demand, cost factors, returns, full service carriers and low cost carriers.

The global airline industry changed rapidly the 11th of September 2001. Four aeroplanes were hijacked and three of them were crashed into the towers of World Trade Center and the Pentagon. The airports across the country closed outgoing traffic and all US and Canadian flights were paralysed. The global industry in fact was affected of this incident, mainly because US accounted for around 40 per cent of the world air travel market. The industry was closed for three days and the total lost was estimated to over US$300m.

The year before the stock market suffered a crisis when the dot-com bubble burst. Now it was the sectors airlines and insurance that dropped with around 50 per cent in theirs share prices. Financial markets around the world were also affected, for example British Airways was down 33 per cent and Swissair more than 40 per cent.

Service is the main object in air travel. It is important to have fully booked flights because the cost to transfer an extra passenger is very low. There have been some structural changes in the industry for the last decades. Better jet engines that make it possible for longer routes and globalisation, deregulation, consolidation and technology improvements are main causes for structural changes.

The demand before 9/11 was very high mainly due to an increase in the number of retirees. Other aspects are the rise of world GDP, increasing world trade and investment and the liberalisation of markets. Both fuel prices and labour costs rose significant during year 2000.

US airline industry had problem with net profit where its figures counted for only 1-2 per cent average compared to the US industry average of 5 per cent, despite the US airlines ability to cut cost compared to European airlines. Air travel increased a lot between 1978-2000, almost 160 per cent. Despite this the US airlines did not manage to rise their RPKs (the average revenue per passenger kilometre); it was fallen by 2.5 per cent per annum. The main idea of Full Service Carrier was to provide product quality and service to a huge number of cities. They wanted to attract passenger that was willing to pay extra for in-flight catering, entertainment, leg-room and loyalty programmes. Another model, which was developing long before 9/11, was the Low Cost Carriers. This model took shares from FSCs, when focusing on simple point-to-point itineraries and secondary airports.

The demand after 9/11 fell tremendously by 74 per cent in bookings in US and in the rest of the world by 19 per cent. People looked for not-to-fly alternatives, for example video conferencing, driving for distances less than 500 miles and using the rail. The demand has decreased by 7-8 per cent after 9/11. Cost-cutting programmes and minimize staff cost were the main focus objects to work with. For example United Airlines reduced employees with a third. Operating cost rose dramatically when new security systems were implemented at airports. Also insurance cost rose when premiums increased with 200-500 per cent. President Bush and Congress assigned the US aviation industry US$15bn in emergency assistance. By mid 2003, the industry had lost US$18bn since the 9/11, despite emergency assistance. New travel patterns made big looses for Full service carriers because people decided to holiday closer to home and they did not want to pay that extra money for business class. Low cost carriers took advantage of the situation and offered cheap seats and also started to work with the business travel segment; Ryanair increased their passenger with 37 per cent in 2002.

The Issue

How can the airline industry handle the increased cost after 9/11?

How can the airline industry handle the shrinking number of passengers after 9/11?

How can the airline industry handle the need for security measures?

How can the airline companies be less vulnerable to new terrorist attacks?

Analyse and discussion

How can the airline industry handle the increased costs and losses after 9/11?

One of the important strategic issues in this case is how the airline companies handled the increased costs and losses that terrorist attack 9/11 brought with it. During the four first days airline bookings went down by 74% in the US. The first days after the attack the whole aviation system where shutdown and many travellers made the "not-to-fly" decision. To cover these losses the airlines, mostly the "Full Service Carriers", had to present cost-cutting programmes regarding such as staff reduction, scheduling efficiencies, operational changes and changes in HQ/administration.

Seen from a strategic point of view these costs and losses probably will postpone the airlines future goals and therefore also affect the strategic plan. For example if you assume that one of the FSCs future goals is to expand into a new market or maybe extend their aeroplane fleet, they would probably need a lot of financial resources. When this kind of unforeseen incident happens they will probably need to change their whole strategic structure because of that much of their financial resources must instead be used to handle this kind of crises.

How can the airline industry handle the shrinking number of passengers after 9/11?

The 9/11 incident made big changes for the airline industry.