Written Analysis of Case - Euro Airline Industry

WRITTEN CASE ANALYSIS: EUROPEAN AIRLINE INDUSTRY

By: Leo Allan C. Halcon The European Airline Industry before the year 1993 experienced problems. Instead of gaining profits, the industry was actually incurring losses. Because of tight regulation by each European country, there is very little room for competition. This was in contrast with the United States which was experiencing great profits in their airline industry. Thus, leading to the European Union to liberalize the same industry patterned to what the United States did in 1978. Government regulation is the main culprit for the troubles of the industry. It sure does have its share of advantages and disadvantages however, in the case of the European Airline industry, I would say that it is more of the disadvantages. One negative effect of the airline industry being regulated is that it compromises personnel performance. Security of tenure deteriorates zest and motivation to further improve airline logistical operations and procedures. The labor unions were also powerful in a sense that they have a huge burden on the airline‟s productivity and costs. For productivity, the unions can impact the decision making process of the airline and in case of a labor strike, will bring the operations to a full stop, thus bringing down revenues and forcing airlines outsource personnel. The unions can also hinder positive changes and innovation as they have the power to reject them if not properly compensated. In terms of costs, the unions also have a large impact as they use their power to bargain for higher wages, further increasing the airline‟s costs. In terms of the routes, it was also tightly controlled by each European country. Both routes and capacity on routes cannot be increased without the consent of both parties as decisions are made bilaterally. The rules were so strict because foreignowned airlines, including that of other EU countries were not allowed to run on any domestic route. Other flag carriers that time are also operating on their countries‟ for  mer colonies even though there is little traffic on such routes and there is low growth potential. The full capacity of the airlines was not maximized and also translates to higher costs and lower productivity as those routes are unprofitable.  Another problem brought by the industry being regulated is when it comes to financing. The airlines needed to increase their fleet by acquiring new aircrafts but the Government was not always willing. The airlines were forced to borrow heavily in order to finance these aircraft acquisitions but as a result, did damage their balance sheets as they relied heavily on debt. On the other hand, because airlines were under Government ownership, policies on aircraft purchases were heavily influenced as governments preferred that the airlines, especially the flag carriers, acquire aircrafts from a national supplier which can have hidden subsidies. With all these disadvantages happening inside the European airline industry, there are also negative externalities to the customers and the environment. For the customers, the service quality provided by the airline industry suffers a whole lot. In terms of alternatives, there was none as the customers have no choice but to take the

services of the flag carriers for there is lack of competition in the regulated industry. As for the environmental aspect, the airline industry is being criticized for its contribution to the problem pertaining to the carbon dioxide (CO 2) emissions. Critics are saying that at the rate the global air traffic is growing, and in the future, the airline industry may have the biggest share in affecting climate change. That is why I can say that there is perfect “economic sense” when the European Union decided to deregulate their airline industry. Upstart carriers were allowed to join the airline industry in order to increase competition which yielded positive returns for customers as they are now given options. For Europe‟s competitive response 1 (Low -cost competition), the incumbent flag carriers tried to adapt to the changing environment of the industry by trying to dominate the national hub airports. They also tried to extend into other European markets such as UK, Germany and France. Some big time players like the British Airways even tried to enter the low cost segment as well by setting up its own subsidiary, Go. All these different strategies were devised in order to keep up with the increased competition of the low cost segment improving all the airlines‟ ability to innovate and enhancing their marketing strategies. In retrospect, low cost carriers possess the ability to thrive and survive considering structural developments on the consumers‟ perspective. In general, globalization and internationalization not only increased the mobility of goods, but also of people. Trade agreements (bilateral or multilateral) and expansion of cargo transport also contributed to the increasing mobility of business travelers. Another item worth noting is the changing behavior of tourists  – as travelers prefer multiple and short stays than longer-term stays. The loss of glamor involved in flying is generally accepted by travelers nowadays. Competitive response 2 (Alliances) is considered to be in a form of collusion but in a “positive light” since such a move results to the standardization and improvement in the safety of air flights, as well as the enhanced network of partner air carriers. Airline alliances create substantial opportunities for generating economic benefits. These benefits can be viewed as demand-side (consumer)  – relating to the creation of new or improved services through expanded networks or seamless service, or supply-side (firm/company)  –  essentially the ability to produce the same services at lower cost, improved utilization of capacity and lower transaction costs. Potential demand-side benefits include the expansion of route networks, expansion of flight frequency, and improved „online‟ service options. Supply -side efficiencies include cost reductions through coordination of non-price competition (such as sharing of facilities), and cost reductions through coordination of price and output competition (pricing and yield management, capacity control). The challenge for the European deregulation model is to further innovate and embrace more competition  –  as new members of the European Union suggests new entrants in the airline industry segment.