Impact of Financial Crisis on the Airline Industry - Case Study Example

Impact of Financial Crisis on the Airline Industry           Impact of Financial Crisis on the Airline Industry The general elections conducted in Turkey in the year 1999 ushered in a new coalition administration. On the final month of 1999, the administration forwarded a Letter of Intent to the International Monetary Fund. The Letter of Intent contained the government’s economic policies it aimed at achieving during its reign. The Letter of Intent also requested the International Monetary Fund to support the government’s economic policies with a donation of 4 billion dollars. Nonetheless, an economic crisis occurred in between the year 2000 and 2001. Within this period, Turkey faced one of the worst economic turmoil, with the unemployment rate reaching over 11%. In addition, the Turkey government borrowed an additional 23 billion dollars (Reinhart & Rogoff, 2009). This paper will analyze the impact of the financial crisis on the airline industry, focusing on Turkish Airlines. The Aviation sector is expanding by day with progressing technologies and economies. Developments on aviation sector affect airlines operations. The Airline industry or sector is connected with international trade laws or policies. The Turkish Airline sector is growing fast and has a large significance to economic progress. Their international and countrywide financial crisis also had a tremendous impact on Turkish Airlines. At the period of the financial crisis, Turkish Airlines was faced with decreased air travels, massive retrenchment of workers, among others. This also contributed to the economy of Turkey becoming delicate, not only domestically, but also internationally (Rigas, 2001). Not only, did the financial crisis affect Turkish Airlines and its workers, it also affected businesses that were depending on the Airline services, for example, tourism and shipment of goods from Turkey to other areas. Turkish Airlines is the Turkish national transporter airline in Turkey. Turkish Airline headquarters is situated in the capital city, Istanbul, at Ataturk Airport. Turkish Airlines offers its air travelling services to over two hundred and four domestic and international destinations in the Americas, Africa, Europe, and Asia. In addition, Turkish Airline offers its carrier services to an additional ninety one countries (Rigas, 2002). This makes its destination system from one area the largest in the whole world. Turkish Airline’s central station is Ataturk International Airport. Turkish Airlines has been on the rise since 2006. The number of passengers using Turkish Airline increased from 17million passengers in 2006 to 29 million passengers in 2010, earning over $15 million dollars over the five years. A report released in 2011 showed the airline had employed 18,188 workers. Turkish Airline has also been a constituent of the Star Alliance network from 2008. Turkish Airline also co-owned B&H Airlines, AnadoluJet, North Cyprus Airlines, SunExpress, and Cyprus Turkish Airlines. Turkish airline has been affected by financial crises since the olden days. Turkish Airlines suffered financial losses between 1987 and 1988, mainly because of significant expenditure on its numerous new Airbuses. This is according to a report released by Air Transport World. The fleet of airplanes also comprised DC-9s and Boeings. Turkish Airlines finished the period with less than 10,000 airline workers. In addition, after the Persian Gulf War, Turkish Airlines also suffered in the world wide economic crisis (Rigas, 2002). Nonetheless, Turkish Airlines got back on its feet in the middle of 1990s. The largest contribution to its financial development came from destination in North America. Turkish Airlines capital continued to increase, attaining the 10 trillion mark, in 1995. During the same year, Turkish Airline had switched some of its Boeing to cargo planes. Turkish Airline attained a $6 million profit within the same year. Nonetheless, Turkish Airline had to compete with the extreme inflation of the country due to the global financial crisis, making it difficult to realize capital improvements. The local airline market was freed from regulation in 1996 due to the economic crisis. This permitted rivalry from other licensed airlines. Similarly, superior international airlines were offering tough opposition on airline paths to Western Europe. The global crisis forced Turkish Airlines to engage in marketing contracts with different international airlines to develop its relevance in the airline industry. Turkish Airlines merged with Japan Airlines to give carrier services to Tokyo and Osaka between 1997 and 1998 (Rigas, 2001). Additional combined flights ensued with Croatian Airlines, Austrian Airlines, and Swissair. Later on, Turkey suffered another economic disaster through a large part of 2001. This economic crisis resulted in Turkish Airlines reducing the number of air travels in domestic routes. In addition, Turkish Airlines managed to continue with operations in the United States after the September eleven attacks without mass workers dismissal or government bailout, though approximately three hundred middle management employment positions were scrapped. Almost four hundred part time workers were discharged, and the wages of those who continued working were reduced by 10 percent. The survival of the airline during the September eleven attacks was because of entrepreneurial management. The entrepreneurial management was fast to terminate routes that were causing losses both abroad and home. In 2003, Turkish Airlines also faced another crisis. The war in Iraq forced the airline company to block a number of routes in these areas. Turkish Airlines also suspended flights to Asia due to the SARS outbreak. Nevertheless, Turkish Airlines quickly recuperated, increasing airline services and increasing planes on present routes (Reinhart & Rogoff, 2009). In the past, Turkish Airline also concentrated too much on passenger transport, but after the worldwide economic crisis has enhanced their outlook to perceive air cargo as an alternative source of revenue. Turkish Airline is increasing services to suit both cargo handling and passengers. Unpredictability on demands is tolerable at unstable periods because the airline industry works hand in hand with international trade operations. International trade commodities recession hastens the airline industry operations diminish. Freight, frequencies, and passenger demands in Turkish Airlines decreased during the international economic crisis. The decrease in passenger and freight numbers during the international economic disaster led to a slowdown in Turkish Airlines incomes and operations. Turkish Airlines illustrated losses and felt the impact of the economic crisis (Reinhart & Rogoff, 2009). Turkish Airlines also experienced butterfly effects, uncertainty cuts of demands, and lack of confidence. In addition, Turkish Airlines has increased freight services, after the effects of the international economic crisis. Extremely precious and valuable products are transported using Turkish Airlines. Currently, Turkish Airlines are working for a number of clients from several areas with different goods at discrete charges. In addition, air cargo industry plays an essential part in global trade between different countries all around the world. Turkish Airlines transports products, for example, perishable goods, medicines, chemicals, and microelectronic components. Nevertheless, the financial sector of Turkey was faced with a banking crisis in 2001. This made the government take precautions in a number of sectors, including the airline sector (Reinhart & Rogoff, 2009). Domestically, the economy crisis made Turkish Airline given preference over external investors and traders in the airline industry. Moreover, the butterfly effect at the global trade resulted in recession between financial systems of different nations at financial markets. Turkish Airline, a registered entity in the financial markets was extremely affected. The decrease in demand of international trade affected the economy of Turkey and hampered trading activities between Turkey and other international partners. This means Turkish Airline could not conduct its business dealings with other countries in an effective way (Rigas, 2002). The outcome was a decrease in Turkish Airlines carrying of passengers to different destinations and transportation of products. Most of Turkish Airline’s services were concentrated in Middle East and African markets during the economic crisis. Turkish governmental safety measures guided trading activities abilities to Middle East and African markets. Additionally, Turkish Airlines was forced to alter its services to developing economies so as to expand its capacity. Liberalization increased the activities of Turkish Airlines. The economic crisis also forced the Turkish government to enforce new policies on air transport. With the impact of the new administration policies, Turkish Airlines faced additional completion from newly established airline companies and Turkish Airlines was also forced to operate in different airline routes. Moreover, the economic turmoil made Turkish Airlines increase its services in the domestic front (Rigas, 2002). The policies implemented by the Turkish government in relation to the economic turmoil saw the growth of the airline sector. In contrast, the growth rate of Turkish Airlines slowed due to the newly found competition by other airline companies and policies related to the economic disaster. Even though, the international economic crisis negatively affected a large part of Europe, Turkey adopted a different strategy to overcome the crisis. Turkey concentrated on developing economies. In relation, Turkish Airlines, being the leading airline company in the country, also targeted and offered its services to emerging market, for example, Black Sea region, African, Balkans, Middle East, and Asian countries. Turkish Airlines enhanced passenger and freight services to these areas. The increase in Turkish Airlines services in these regions meant additional flight operations, consequently, an increase in profits (Reinhart & Rogoff, 2009). These assisted Turkish Airlines to restructure and attempt coping with the losses and negative impacts of the economic turmoil. In addition, the economic turmoil made the airline industry fragile. Turkish Airlines was faced with a decrease in air fares and a decline in revenues for the airline company. The negative financial impact on Turkish Airlines was as a result of the pricing transparency facilitated by online travel distribution channels and the internet, competitive demands from low cost airlines, and the decrease in the client’s belief in the Turkish Airlines operating performance and reliability after the economic turmoil. In addition, the international financial turmoil had a negative impact on fuel prices (Rigas, 2001). Turkish Airlines had to contend with high fuel prices which exceeded the cost of labor for the first time in the Turkish Airline’s history. Moreover, the financial crisis also had a negative impact on the infrastructural capacity of Turkish Airlines. The infrastructural capacity comprises airspace and airports. Since, the economic turmoil, it has been difficult for Turkish Airlines care for and expand its airspace and airports. The hope for the tremendous support on the capability façade is dull. Turkish Airline cannot focus on building or expanding its airspace and airports while it is struggling to ascertain its place as one of the leading airline companies in the world. Among the challenges of Turkish Airlines after the economic turmoil, are the terminal airspace in its airports and the runway systems of its significant airports. Turkish Airlines may be forced to go into privatization if the economic turmoil continues. This will help in the large investments needed to maintain and expand the capacity of their airports and airspaces or construct new ones (Rigas, 2001). Finally, the financial crisis has made Turkish Airlines directly impose taxes on cargo and airline passengers. References Reinhart, C., & Rogoff, K. (2009). This time is different: Eight centuries of financial folly. New Jersey: Princeton University Press. Rigas, D. (2002). Flying off course: The economics of international airlines (3rd ed.). New York: Routledge. Rigas, D. (2001). The airline business in the 21st century. New York: Routledge. Read More