The International Aviation Policy - Term Paper Example

?Running Head: Business The International Aviation Policy Term Paper Introduction The forces that influence international aviation policy are many and multifaceted; they take place on regional, national, and global arenas. These factors are evolving as current patterns change, new patterns emerge and old ones disappear. These factors are social, political, economic, geographical, infrastructural, and demographical. Air transportation is one of the leading industries across the globe and it also wields significant influences on the larger social, political, and economic mechanisms. For instance, air transport can positively contribute to a region’s economic growth, but there has to be an underlying demand. This essay is divided into two parts. Part one discusses the social, political, economic, geographical, infrastructure, and demographic influences on air transportation. Part two addresses the impact of air transportation liberalization on market, traffic patterns, and fares; carrier’s financial performance; and future prospects of carriers based in a global environment. Part I: International Regulatory and Oversight The absence of air transport, just like with any other operations in the economy, can confound economic progress. Where there have been more or less complete stiffening of regulations that interfere with or oppose the liberalization of markets, have been ‘social regulation’ (Wald, Fay, & Gleich, 2010). This involves issues like labor and consumer security, defense, safety, and environment. These are domains that have been usually addressed at the global arena by the International Civil Aviation Organization (ICAO) together with a number of unusual international agreements like the Warsaw Convention (MacKenzie, 2010). Of late, national or regional programs have also acquired global importance such as the US’s launching of more rigid security strategies (e.g. passenger information requirements), and the expansion of carbon trading inside the European Union (EU) to include all air transport. International air transport is currently a leading partner of globalization and is persistently redesigning itself to deal with the pressures of the social and economic integration that the process of globalization brings about. In economic terms, globalization takes place to foster a deepened division of labor and helps economies take advantage of their comparative advantage more fully (Wensveen, 2011). Possibly, though, more essentially, globalization promotes workforce and technology transfers and facilitates the energy that goes with entrepreneurial ventures to encourage the growth of new technologies and mechanisms that boost international interests. Another group of factors to be taken into account in evaluating international aviation policy are political and economic settings. The five basic known catalysts of stable international air transport are trade expansion, developments in the quality of service, cost adjustments, political disorder, and GDP rate. Political disorder would involve terrorist activities and protectionism. Although protectionism weakens trade expansion it seems as well to reduce foreign direct investment (FDI) (Wensveen, 2011). These restrictions weaken trade and boost capital costs eventually. Political disorder also boosts costs through regulation and defense. Such costs put service providers and shippers into a more disadvantaged position and reduce air travel. Changes in costs, specifically the costs of fuel, are a continuing hazard; increases in the costs of actual fuel before was zero (Wald et al., 2010). In the coming years this will cease to be the case as actual fuel costs will escalate. This kind of changes severely affects international aviation policy. The third group of factors is geographical, infrastructural, and demographical. Geography affects international aviation policy because cargo airlines choose to carry out their operations from airport near to their target markets. Some researchers studied major airlines operating in Europe and found out a core geographical site with regard to the markets catered to as crucial to reducing cost and time. Several researchers report that freighter operators may acquire benefits in operating at an airport that reduces their flying time. The point underlying this is that additional flying time is more costly than trucking expenses because of crew, aircraft, and additional fuel costs (Graham, Papatheodorou, & Forsyth, 2010). In addition, an unfavorable weather record is a disadvantage for airline operators. Weather conditions can have an effect on airports’ operational dependability and hence the possibility of passenger airlines conducting operations there. Climactic conditions like mist or thick smog can bring about airport shutting down and interruptions which airlines are obviously trying to prevent. Meanwhile, according to Wensveen (2011), several studies identified demographic factors influencing international aviation policy. These studies reported that gender, marital status, occupation, and educational attainment have a substantial impact on customer satisfaction with a number of services offered by the airline passengers. However, there is still a dearth of available studies or literature on these demographic factors. On the other hand, two of the most challenging concerns confronted by international air transport are substantial costs and inseparable form of associated infrastructure. With regards to present blockages, enlarging total infrastructure facility is often a requirement for handling growing traffic sizes or patterns. Nevertheless, due to experiences and the difficulties of the planning procedures there are uncertainties with regard to whether presently suggested infrastructure ventures anywhere in the world will be completely achieved. Even though they are achieved, it is evident that this would not suggest excess capacity, and excessive air traffic would keep on creating serious difficulties across the globe. Besides constructing additional facilities, capacity may be expanded as well by boosting efficiency in the current infrastructure’s activities. There are actions taking place to enhance airport management and the actual infrastructure’s productivity. Still, generally, existing costs of air transport infrastructure is seldom financially capable, and providers of different airport-based services are still faced with regulatory, material and other obstacles. Accessibility of air transport infrastructure is a problem equally crucial as that of capacity. For viable competition in air transport services, it is vital that infrastructure access requirements are reasonable to all competitors (Havel, 2009). The charges imposed on infrastructure use and access requirements influence the context of airline competition. Currently, there are proofs that several markets are being negatively affected by changes in areas like handling fees and distribution of landing spaces. Specifically, according to Havel (2009), new competitors can be influenced by limitations in infrastructure access, particularly because liberalization could contribute to infrastructure jamming. Air transport is an industry which creates various security, safety, and environmental issues. Just like in other industries, there are reasonable economic bases for including the security and environmental costs of air transport via either regulatory or economic policies. Almost all governments get involved strongly to control the quality of competition in international air transport economies (Vaibhav, Sharma, & Singh, 2011). Bilateral air service agreements (ASAs) were developed to facilitate, based on fairness, direct participation of every country in international aviation; they specify the quality of competition in relation to airlines that can take part, the capacity that could be contributed and the level of cooperative operation or alliance tolerated. In numerous instances, according to Vaibhav and colleagues (2011), these arrangements have become less limiting nowadays, and regional agreements have initiated major liberalization within their application capacity. Policies presiding over ownership can also hinder new competitors, but adjustments are slowly occurring as ownership policies are relieved and privatization takes place. There are measures as well through government financial backing or funding. Yet, these interventions are usually not evidently focused, so that their execution often implies that their economic goals are not realized. Thus, even though there is transformation, institutional limitations restricting the degree of actual competition linger. A lot of international markets remain well controlled; governments keep on participating completely in market operations, and withdrawal of poorly performing airlines is often avoided (Havel, 2009). Thus, international aviation policy confronts demands for change from three components: (1) from the regulatory setting, where numerous governments are thinking about significant institutional amendments, either with regard to new arrangements, such as multilateral, or concerning changes to the previous systems; (2) from the supply setting, where contemporary management approaches, technology developments, and new products/services demand new strategies; and (3) from the change in demand, where emerging incentives and possible disruptions weaken the presence of earlier trends (Dwyer, Forsyth, & Dwyer, 2010). An additional factor affecting international aviation policy is rates of population growth. Fast growing populations in developing societies like China and India have contributed to the expansion of air travel (Weber & Giemulla, 2011). Yet, population growth should normally be in combination with increase in income for this factor to substantially influence international aviation policy. Economic liberalization is a further key factor influencing aviation. Government restrictions on a market, like price and income regulations or too much restriction, eventually hamper demand. When these unnatural limitations are removed, the economy determines produce and/or service demands, and expanded air transport is nearly always the outcome. The explanation for this is that government regulation in air transport normally includes access to market and ticket fees/fares—specifically, preferred airlines, commonly national airlines, are given exclusive access alongside a certain form of a fare system that is controlled to include standard costs (Havel, 2009). This successfully discourages competition and limits the increase in air traffic. A perfect case of economic liberalization is the one that took place in the United States. After liberalization, ticket fees dropped and air traffic grew substantially. Furthermore, the privilege for airlines to go anywhere they want made air travel handier for travelers by offering more continuous air travels with better regularity (Graham et al., 2010). Current liberalization of air transportation in India and Europe has resulted in a massive expansion in air traffic patterns in these nations. Part II: International Air Transport Liberalization Liberalization of international air transport is a mechanism of continued removal of restrictions on tariff designation, regularity, and capacity in international aviation. Its objective is to build a well-competent air transport system rooted in free market processes where every action or decision is initiated as an outcome of mutual demand-supply relationship (Weber & Giemulla, 2011). The duty of national governments is restricted to defense and safety. Liberalization air transportation represents an entirely new stage of globalization. According to Vaibhav and colleagues (2011), the enormity of its effects is determined by a variety of factors, as well as by the level of liberalization of other industries or sectors and saturation of the market. Airlines gain from heightened productivity or efficiency based on density economies, economies of scope, and economies of scale. International passenger transport particularly and international aviation generally serve an important function in the global integration process and also influence the growth of other economic sectors. By shortening the time needed to get to a far-flung destination, air transport is a key predictor of total transport overheads. Time is a major driving force of trade and it is a key variable in preference for means of transport to far-flung destinations. Therefore, air passenger transport is fundamental to the growth of global tourism, particularly in distant places. Similarly, air passenger transport is necessary to establish and sustain business relations between far-away countries (Wald et al., 2010). Several current studies have emphasized the value of people’s movement for trade. People go to countries they trade in from so as to build trade relations, for instance, for they have to look for a suitable supplier. Greater movement of people between two countries reduces implementation and information expenses, hence facilitating trade. The continuous deregulation of international air transport policy since the middle part of the 1990s has served a vital function in the development of the aviation industry by building a supportive regulatory landscape. Globally, the overall figures of annual travelers have increased by 46% in the recent decade, according to ICAO in 2007 (MacKenzie, 2010). Several studies and reports from industries, governments, and academic circles, validated that the liberalization attempts had generated substantial welfare benefits and economic progress all over the world. The liberalization of ASAs has largely facilitated stronger competition, leading to lower ticket fees for passengers, more travelers, enhanced levels of service, and better selection of directions and airlines. Greater liberalization of international airline transport can offer substantial advantages for customers. A report published by the UK Civil Aviation Authority demonstrates that an evident route toward complete airline transport liberalization is present. Complete liberalization is needed to capitalize on the possible advantages (Dwyer et al., 2010). The advantages of liberalization are exploited where both regulatory, ownership, and operation constraints are taken out. The airline industry’s structure suggests that getting rid of operational constraints can reduce entry barriers to the industry. However, it will not capitalize on the possible advantages to airlines, customers, and the larger economy if ownership constraints and capacity or exit barriers are not taken out. Greater ownership and operational liberalization can secure and improve consumer gains, as regards lower ticket fees and better selection, already acquired from liberalization up until now in the airline sector (Wensveen, 2011). Liberalization can also broaden and extent these consumer gains to new locations and destinations that presently have vastly regulated markets. Thus, it can keep on generating advantages for airline passengers, while also generating substantial gains for the larger economy. This pattern toward deregulation of economic regulation considerably transformed market circumstances in several countries where the process of liberalization occurred. Specifically, it led to the appearance of new airlines on numerous international air transport destination. In several instances, these were newly-built airlines, in other instances they were recognized carriers going into certain international destinations for the first time. According to Weber and Giemulla (2011), quite dominant but thus far mostly localized U.S. carriers like Delta, United and American, established new global ventures, the former two by taking over and enlarging the trans-Atlantic and trans-Pacific ventures of Pan American correspondingly. Another outcome of international air transport liberalization was that there was weaker regulation of frequency and capacity on various destinations while simultaneously there was significantly better pricing autonomy. Although declared international fares were still determined through the mechanism of the International Air Transport Association (IATA), these established fares were often and explicitly disobeyed, particularly in liberalized markets. The international airline industry seems innovative, highly developed, and dynamic, venturing at the borders of technological revolution (Havel, 2009). Few understand that, in spite of its prestige, it is a sector whose continuous productivity and success is both minor and quite recurring. Over the past forty years, six years of acceptable profitability have been pursued by four years of waning profitability and, in the situation of numerous airlines, of failures/losses (MacKenzie, 2010). The airline sector is naturally volatile because it is a sector continuously pounded by new restrictions and developments. This was especially existent in the initial period of the 21st century. Throughout the early years of the 21st century, airlines have had to confront not just numerous unfavorable distresses but also forceful and capably detrimental internal factors. ‘Open skies’ and sustained liberalization, the effect of international alliances, privatization of nationalized airlines, online trading, and new no-frills, affordable carriers are several of the major occurrences that have been influencing the airline industry at a period of constantly declining standard fares and profits (Wensveen, 2011). As a result, airlines have had to create new approaches and structures. Nevertheless, one should understand that there are a number of external factors which deserve more thorough consideration in a different perspective. These involve future airline or environmental limitations of the expansion of air travel. One of the key issues is the intensified liberalization of the economic regulatory system, which thus far has hampered and restricted the airline business in numerous ways. The reduction of numerous bilateral and international policies over the past three decades has opened up both risks and opportunities for airlines across the globe. The framework of the airline sector and its existing challenges can merely be recognized against the framework of regulatory reforms. However, the trend is ongoing. The significant change expected in the coming years is the continuous loosening of the rigid nationality tenet, which thus far has obliged airlines to be bindingly regulated and nationalized. As a component of this liberalization process, a primary goal is the formation of a Trans-Atlantic Common Aviation Area including the United States and the EU (Wald et al., 2010). These regulatory reforms, as they slowly expand globally, will affect numerous features of airline ventures. Dynamic economic incentives are shoving the airline business toward centralization or integration into bigger business entities. However, the nationality law has discouraged cross-border acquisitions and mergers and, consequently, airlines have joined in international and bilateral commercial alliances in order to acquire several of the advantages of expansive scope and size. Throughout the past decade there has been a whirl of alliance formation. A large number of airlines mistakenly suppose that forming alliances is adequate to alleviate financial problems (Graham et al., 2010). Creating and executing a competent alliance approach in a time of structural flux will be a major task for airline management. In a situation where standard fares will keep on plummeting, cost reduction and control in all sectors becomes a crucial and long-term requirement. In such situation, reducing the costs of labor is the solution: (1) because disparities in efficiency/productivity and rates of labor wage are a primary variable in distinguishing operating expenses between rival airlines; and (2) because it is the biggest sole input outlay that the management can regulate (Wensveen, 2011). Hence, trimming down the costs of labor and enhancing labor efficiency create another significant demand for the airline sector. An attribute of the airline sector outside the U.S. throughout the recent decades has been the continuous privatization of numerous nationalized airlines. However, more than seventy international airlines, several of substantial size, remain state-owned. In a period of intensified liberalization and competition a large number of these airlines persist to be innately unsuccessful. Nationalization or state ownership creates a major problem. On the one hand, state subsidy is vital in allowing numerous of these airlines to carry on with their operations. On the other hand, quite frequently government intervention and meddling in management decision making stops them from becoming profitable (Dwyer et al., 2010). Thus the important questions are: are these airlines meant to disappear when states realize they cannot financially support their national airlines anymore in the hope that private carriers can offer almost all of the needed air transport services? Do these airlines have the capacity to be effectively reorganized and possibly privatized? These are the issues confronting numerous state-owned airlines across the globe. Conclusions The future looks bleak for the airline industry. There will be episodes of long-term instability as airlines struggle to deal both with the consequences of the crisis periods and the different issues mentioned previously. The established airlines will be trying to overhaul the network framework, which has been severely hammered in fly-by-night markets by affordable airlines. However, low-priced airlines will also have to restructure their processes and policies. The adjustments which will develop from this episode of structural insecurity will build an airline business which immediately will evolve quite differently from that of the earlier period. The airlines that will manage to excel and triumph will be those that are highly adaptable and resilient to change. References Dwyer, L., Forsyth, P., & Dwyer, W. (2010). Tourism Economics and Policy. New York: Channel View Publications. Graham, A., Papatheodorou, A., & Forsyth, P. (2010). Aviation and Tourism: Implications for Leisure Travel. England: Ashgate Publishing, Ltd. Havel, B. (2009). Beyond Open Skies: A New Regime for International Aviation. UK: Kluwer Law International. MacKenzie, D. (2010). ICAO: A History of the International Civil Aviation Organization. Canada: University of Toronto Press. Vaibhav, S., Sharma, S., & Singh, V. (2011). Exploring the Variables for Assessing the Competition Provided by Low Cost Carriers to Indian Civil Aviation Industry. European Journal Management, 11(1), 128+ Wald, A., Fay, C., & Gleich, R. (2010). Introduction to Aviation Management. Germany: LIT Verlag Munster. Weber, L. & Giemulla, E. (2011). Handbook on Aviation Law. UK: Kluwer Law International. Wensveen, J. (2011). Air Transportation: A Management Perspective. England: Ashgate Publishing Ltd. Read More