The Changes That Have Been Taking Place in the Airline Industry - Essay Example

Full topic and Section # of Executive Summary The aim of this white paper is to detail the changes that have been taking place in the airline industry and focusing those factors that directly impacting on the firm to restructure their firms across their border lines. The paper in its initial stage provide a description on the airline industry, its origin and then focusing more on the airbus industry as this industry is capturing more than 50% of the market share at global level in the airline sector. Boeings and other air crafts industry is also touched by the writer but its emphasis is more on the airbus sector. The explanation of this brief description provide different examples to show that why the firms are going for joint venture and mergers. Later, detail descriptions on the external factors are provided showing their affect on the airline sector. Introduction Airline Industry remains a most important figure at global level as it is providing different services at the same time. We found its first origination in 1909, and since then the structure of this industry changes over time showing a regular boosting and improvement. The structure of airline sector compromises of passenger services and freight services. On the other hand, its services are categorized as intra-continental, inter-continental, domestic services, operated or scheduled services and charter services1. The airline industry includes different sectors that together give rise to a complete Airline Sector. These sectors are Airbus, Jumbo Jets, Boeings and other small jets. The airlines deal with different services and among them passenger services and freight are the most common and most important services. Brief history and changes of the Airline Industry Though, it was 1909 when the first airline craft was introduced by the Germany but this wasn't the most important figure. The actual industry starts when the airbus discovery took place. But before that, in 1914 the very first commercial flight in the US starts but this remain the only service till 1925 when the ford introduces their commercial flight holding 12-passengers capacity. At the same time the US decided to operate at global level and by 1930, the introduction of Boeing was made2. But till this time, the airline sector did not show any good performance and enhancement. Actual chronicle belongs to the year 1970 when European consortium (Germany, France, Great Britain and Spain become the member later after few years) started an airbus Industry. The objectives of the goals behind this industry were to create commercial aircraft with Germany, Great Britain and Spain. Where as, within the consortium France play the role of assembling. The logic behind this was to give a growth to international travelling. As, the need and demand for the international travelling increases in that era, the airbus industry play an important role in Airline sector3. The industry employee more than 57,000 people and are working in sixteen regions. The Airbus Industry has its subsidiaries in United States, China and Japan due to the reason that these countries are ranked top in the most advance technological growth. The Airbus was named by the airline industry due to its specific size and range. Airbus includes different types of Jets and planes namely as Aerospatiale, Deutsche airbus, Hawker Siddeley and Fokker. Within the airbus industry, Aerospatiale and Deutsche took 36.5% of share according to production; Hawker took 20% and Fokker as 7%. During the year 1971 in October the Spanish company CASA acquired 4.2% of the share of Airbus Industry. Than later in the years different changes took place including the British acquisition of British Aerospace and acquired 20% of the share. This impacted on the share of shareholders which reduces to 37.9%. Initially the growth of consortium was poor by 1979 much of the improvements take place and among them was the services of 81 aircrafts or airbuses. It was 1981, when the launch of A320 gives a boost to the airbus industry. The initial challenge for the airbus was to gain much of the market share as to toehold the industry of airlines. This wasn't a big challenge for the consortium and thus they decided to divide different functions among them. At its initial step, the consortium was required by investing a huge amount in the research and development as to keep augments the airbus industry. The research and development augmentation is required to build a state-of-art crafts for the world and to gain competitive advantage. The discovery of Boeing was the great problem that the airbus industry faced. Later, the airbus industry try a lot to gain much government support but again the Boeing industry claims that they airbus industry is gaining much favouritism4. They claim that they airbus industry is being subsidized by the government and they want state of protection against such favouritism. The later in 1990, consortium was much able to boom the airbus industry and by that time they were holding 1100 planes which increase to 2300 till 1997. From 1990 to 1997, the airbus industry captures 50% of the world market. The reason behind its success was building fuel-efficient crafts. Later in the years the company decided to build a double-decker super jumbo jets and it was known as A380. This Double Decker jet can hold 555 passengers and it were predicted that the firm will be able to launch this jet till 2006. This deal is still in process as the consortium was unable to reach at a point to make such craft. Within this agreement, different changes occur and one of them was making the airbus a corporation. Now in today's era, the demand of the huge crafts is required and thus airbus can only remain successful if the corporation is able to launch a huge double-decker craft for the world. While the sector of Boeing is still facing problems as the competition is huge and required much for advancement. The Boeings and airbuses are the major part of airline making a complete structure. The Boeings at global level are working but their most of the threat is from airbus. Fokker belonging to airbus creates lot problems especially in the eastern countries. Examples of Alliances taking place at Global level The merger of Air France and KLM Royal Dutch Airlines is done that will make the two firms third largest airline firm and Europe top first airline firm whish will surpass the British Airline. The tow firms merge only to gain the oligopoly in the market and it seems that these two will be a great threat for other firms. As these mergers are happening to gain the maximum efficiency and effectiveness, other examples of merger in airline industry is also taking place only to gain maximum market share. The recent example of merger within the Belgium airline and Sabena in 2001 affected Swissair so much that in 2003 Swissair fails to operate. There are three major alliances taking place in the airline industry to deal with the global market and these are alliance between Northwest Airlines and Continental Airlines. These have already alliance with KLM and soon they are joining the Sky team Group. 1. Star Alliance (26%): it includes Air Canada. Mexicana, Air New Zealand, SAS, ANA (Japan), Singapore Airlines, Asian Airlines (South Korea), Spanair, Thai Airways, Austrian Airlines Group (Austrian Airlines, Tyrolean Airways and Lauda Air), British Midland (BMI), United Airlines (US), US Airways, Lufthansa (Germany), Varig (Brazil) 2. One world Alliance (19%): it includes airlines as British Airways, American Airlines, Swiss International Air, Aer Lingus (Ireland), Finnair, LAN Chile, LAN Ecuador, Cathay Pacific (Hong Kong), Quantas (Australia) Changes that have been taking place in the airline structure Different changes took place with time in the airline structure. These changes are the results of different external and internal factors impacting a great change. The restructuring of airline firms out side their borders are due to many reasons. And among these reasons, the most important factor is the competition5. The level of competition in the global market increases thus causing a great change in the firms. The firms out side their borders are trying to achieve the competitive advantage through joint ventures and acquisition as they think that together two firms will be able to provide much more facilities. The firms are trying to use different sources to enhance their productivity level. The restructuring of the firms out side their border is becoming complex as they want to remain unique than others. The firms are trying to use more technologies within the firm to advance their performance. The decentralization of the firms took place. With time, the airline structuring is becoming more augmented. As first the agents are allowed to deal for the reservation of the airline tickets. But now as with advancement in technologies, the firms are offering online booking of the seats. The use of online services is a new change in the airline firms. Within the structure of the airline firm, different departments are taken in account and these are line personnel (sales and marketing, reserves and ticketing) sub-contractors (operations and maintenance) and Staff personnel. Among this structure the firms are seeking to adopt different changes to change their structure. For instance, the firms are doing the private joint venture to develop their research and development department to gain maximum advantages in the future6. Moreover, the firms are trying to own the services of other firms for their sub-contractors while working outside the border. The reason for all these is to provide better services. With time the concept of the international marketing and services are changed. Now the firms are trying to provide better quality with minimum price level. And the reason is once again the same, to meet the global competition. The restructuring of the airline companies took place according to the type of external forces they seek. The example of joint venture of SAS and Iran air informs that these two wants to change their overall structure in order to compete best at global level. Moreover, most of the firms are doing vertical integration and horizontal integrations adopt better results in the future. The merging or forming their own food by the airline companies for their services is another example. The merging of suppliers is done by most of the firms to keep the quality of the services high. Now the airline industry is trying to use maximum resources to achieve the opportunities they are seeking at global level to gain maximum revenues in the ended year. Airline firms using joint ventures, mergers and acquisition that are totally impacting on the existing structures of the firms. Now different airline firms restructure their firms only because they want to compete best. The decentralization and more formal structure is used to keep the operation of each department more powerful and enhanced. Moreover, the most important change in the structure of the airline firms is the development of separate technological department that keep them updated about the latest technology that the firm can used in their firms7. Better research & development, marketing and sales departments are now required by the firm to capture maximum customers from domestic and international destination. Though, still different developments and changes are taking place in the airline sector, but what are those external factors that causing this change is described below External factors allowing the change of airline industry structure Increase level of competition The increase level of competition at global level motivates the firm to change their existing structure to capture maximum international destinations and customers. The emerging of new firms especially in the region of Europe causes a great competition. Thus, to cover with this competition the firm changes their overall function and structure to meet with this competition at better level8. The firms are doing joint venture, mergers and acquisition to gain much more resources and opportunities to meet with high level competitors. Therefore, the level of competition in the global market is the major external factor causing restructuring of the airline firms out side the boundaries. Increase price of fuel The price of fuel is increasing daily at global level thus this directly increasing the cost of the firms. Therefore, to meet with this problem the firms are restructuring their firms to adopt such mechanisms and tools that can lower their internal cost9. The price of fuels increases the price of the tickets but this directly shows a negative impact on the yearly sales of the firm. As different new firms are developing in this industry, therefore an increase in the price tags of the tickets will switch off your customer level thus decreasing the retention level. Therefore, firms found that increasing the prices of the tickets is not the ultimate results and they must adopt some other strategies that can help them in lowering their cost. This provides the firms a new way to restructure their firms in a way that it can lower their internal cost. Increase cost of labor The cost of labor outside the boundaries differs than the domestic rates and the firm mostly faces high cost labor at global level10. Therefore, the firms felt to change their structure in a way to use minimum level of labor that can ultimately lower their cost. For this firms feels to go for joint venture and merger with the host country to gain maximum benefits from them. Among these benefits, the firm also gains maximum advantages from the host government through their joint venture and mergers. Level of technology The advancement in the technology with time increases the level of competition. Therefore, it was remaining the most powerful external force that restructures the firm's original structure. Different airline companies are trying to change their structure and adopting different method to compete well in the market. The technology changes the overall conditions and thus firms are required to use much more new technologies in their company11. One of the most important emphases of the technology is the use of less human labor while depending more on the technology. Therefore, airline firms are trying to sue latest technology in their firm in order to compete at global level. This external factor changes the overall condition of the firm. Demand in international traveling The demand of the international traveling increases and this mostly happen due to enhancement in the tourism field. The level of tourism increases and thus demand in the international traveling increased12. Therefore, the customers are now demanded more quality services with low price tag tickets. This pressurize the airline firms to changes their structure and adopt such methodology that can give more productivity while reducing much of their cost. For this, the firms are now restructuring their firms and using different techniques and tools to meet with this demand Terrorism The level of terrorism increases and 9/11 story is one of this event of terrorism. Therefore, the level of security in the airline firm's increases and especially different firms fails to compete as they were unable to provide secure services. This external force and specially the event of 9/11 switch a huge amount of customers towards other mode of traveling. Thus, this pressurize the firms to change their strucutres in a way that it can provide much more security and quality services that they capture at least same amount of customers back13. The level of terrorism with time increases and especially in many countries this risk is more. Therefore, the airline industry is restructuring their over all firm structures so that they can gain maximum competencies and quality services. High cost structure to low cost structure The firms are restructuring their firms outside the national boundary to compete best while remaining the cost-effective. For this, the companies are restructuring their firms by emphasizing more on research and development, marketing and sales to enhance their yearly revenues14. They are changing their structure from high cost to low cost structure, using tools and techniques that can lower their overall cost of the firm. Government deregulations The government deregulations outside the national boundary are also a main external force that pressurizes the firms to restructure their firms in order to remain safe from the government deregulations15. This overall, changes in the political conditions at global level emphasis the firms to restructure their over all firms. Consolidation To become stronger, firms are consolidating through different alliances and mergers. The example of this consolidation is the joint venture of different firms adopting best methods to enhance their over all performance. This consolidation of the firms increasing the level of competition and they are able to use more resources and opportunities while cutting much of their extra cost. Conclusion Airline industry is the one that have to seek the changes not even at national level but also at international level as their services are always at global level. There are different external and internal factors that pressurize the firms to change their structure with time. From 1909 to 2007 a huge change in the structure of airline companies occur and the reason is the changes in the environment and global economy that directly impact on the airline firms. The paper concludes that still the firms are required to keep changing their structure so that they can adopt a stronger infrastructure and techniques that can make the operations of the companies more efficient and effective. Their fore this change in restructuring to compete best at global environment was very important and thus in the near future we will see these airline firms more enhanced and augmented. References Alan M. Rugman and Richard M. Hodgetts (March 2000) "International Business", Third Edition. Anant K. Sundaram, J. Stewart Black, (1995) "The International Business Environment" First Edition. Charles W.L. Hill, Gareth R, Jones (2003) "Strategic Management" 6th Edition Fred R, David (2005) "Strategic Management" Eleventh Edition Garth Saloner, Andrea Shepard (2001) "Strategic Management" Gregory G. Dess, G. T. 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