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Strategic Analysis

Essay by   •  December 7, 2010  •  Essay  •  657 Words (3 Pages)  •  1,679 Views

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Aviation is moving from being highly regulated to a more liberalized and competitive marketplace. During the past 25 years, three main forces have radically changed the airline industry: the regulatory environment, airplane and aerospace capabilities, and airline strategies.

Government regulations have been critical in shaping the structure of the airline industry. We have also seen increased liberalization - even "open skies" - in international markets. This freer market access intensifies airline competition.

Airplane capability has also reshaped airline networks. Today, airlines have much greater selection of airplane capacity and range combinations to meet competitive market demands.

The combination of changing regulation and improved airplane capabilities has shaped airline strategies in recent years. The events of the recent down cycle have accelerated the effects of these factors. These three main forces will continue to drive the industry's evolution.

Passengers drive airline strategies

In today's competitive marketplace, passengers drive airline strategies. So, what do passengers want?

* Safe, reliable service

* Shortest trip times - nonstop, point-to-point flights with more frequency choices

* Low fares in comfortable surroundings

The recent down cycle has placed considerable emphasis on lowering airline operating costs. This, in addition to the competitive, more liberalized environment, has forced airlines to re-examine their business models. The result has been more efficient airline systems to meet the desires of passengers for lower fares. A good example of this is the significant growth in low cost carriers who base their networks on the more efficient point-to-point systems instead of the more expensive hub and-spoke systems.

The reality is that the market demands more new nonstop flights and frequencies, not increased airplane capacity or size. Successful airlines focus on using multiple sizes of airplanes to find the balance between passenger desires, quality revenue generation and low network costs.

Industry data demonstrates the growth in air travel has been met by an increase in new nonstop markets (city/airport pairs) and by frequency growth--not by an increase in airplane capacity/size. In fact, average airplane size (average airplane size = total available seat kilometers divided by total aircraft kilometers) has remained constant with a slight decline since the early 1990s.

Since 1995, all air travel growth has been met by frequency growth and new non-stops

Historical industry data demonstrates that airlines have been accommodating airline growth by adding new nonstop flights and by adding more frequency choices- not by an increase in airplane size. Boeing expects this trend to continue because it is what passengers want. Over the next 20 years frequencies will grow by nearly two and a half times, nonstop flights will nearly double, while airplane will size remain constant.

Boeing and Airbus forecast similar air travel growth rates over the next

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