Airline Economics

• Fuel and Oil

• Outsourcing
• Low Cost Carriers
• Impacts of Unforeseen events
 Fuel and Oil

The role of fuel and oil in the airline industry

• Cooking and lighting lamps
• 1941- the invention of the jet engine
• 2000- anticipated recovery from the past decade
• 2001- the 9/11 attacks, Iraq wars and SARS
outbreak
 Economic impacts

• OPEC- Organization of Petroleum

Exporting Countries
- Airlines’ next big enemy
• Taxation
• Potential Causes
– Unexpected events
– Demand- Supply Relationship
 Pricing

• Expected affluence due to perceived

economic recovery in 2000
• Environmental issues
• Shortage?
– Demand exceeding Supply
• Growing industry
– New airlines
– Low cost carriers
 Operational Impacts

• Contingency fuel
– Extra fuel carried preempts revenue load
– Ground and Flight crew conflict
• Alternate Airports
– Causes excessive fuel consumption
• Use of APUs
– Auxiliary power unit
– Due to lack of GPUs in most airports
 Operational Impacts

• Lack of Refueling points

• Empty fuel tanks
• Fuel Theft
• Fuel Burnout
– Due to excessive hand-carry baggage
• Fuel Contamination
• Environmental Issues
• “Corrective” measures
 Operational Impacts

• Save fuel
– Direct routing
– Re- evaluation of hub operations
– Calculating the pros and cons of using APUs as to
GPUs
– Buying new aircrafts with new engines
– Adding winglets
– Reducing contingency fuel
– Collect fuel surcharges to customers
 Future fuel saving
• Development of efficient flight routing
systems
– FRS to CRS
– Avoiding flight disturbances such as weather
problems
 Outsourcing

•delegation of non-core operations or jobs from

internal production within a business to an external
entity (such as a subcontractor) that specializes in
that operation
•pertains to the procurement of supplies, materials
and spare parts using the e-business vehicle for
almost real time inventory, ordering and delivery
on just in time mode
 Economic Issues

An airline can exist virtually without having

physical assets in terms of facilities and
equipment and much of the labor force

The core is able to do away with the

burdens of having to worry about airline
activities. On the other hand, it has to
consider looking for the best service
providers.
Operational Issues

Image and Identity

Commitment to Vision and Mission

Product and Service Quality

Legal and moral issues

There has been no legacy airline that

succeeded in becoming a virtual or a
low-cost or a no-frill airline

Having dual identity in the airline

industry is a problematic proposition

Legacy airlines have legal and

moral responsibilities to their
employees
 Outsourcing

ADVANTAGES
Outsourcing is a business decision that is
often made to lower costs
The company can focus on core
competences
The firm's motivation to outsource is trying to
maximize the quality of its product given
cost (its productivity)
 Outsourcing

DISADVANTAGES
One criticism of outsourcing is that product
quality suffers

The decision to outsource is like any

other business investment decision in that
there is risk
The downside of this is the tacit
repudiation of the opportunity to diversify
business within the airline umbrella
 Low cost carriers vs. Legacy
Airlines

Legacy airlines

Concept of full service  market segment

 Low cost carriers vs. Legacy
Airlines

• Objective: most modern gadgetries

– Widest and most convenient seats
– All amenities
– Providing privacy
– Best in-flight cuisine
• Operation: giant aircraft/smaller but equally modern
sophisticated aircraft
• Connection: within 1 hour or take advantage of the airport
amenities
• Must: their airport are the biggest, most modern and most fully
equipped with all the modern tools, equipment and gadgetries
of trade
 Low cost carriers vs. Legacy
Airlines

Vs

LCC  offers pure air transportation without

any frills but with lots of warmth, love and
friendliness
 Low cost carriers vs. Legacy
Airlines

• All employees’ job:

– public contact
– backroom experience
• Business precepts by Don Burr: to ooze
humanity, service commitment, best in air
transport, high quality leadership, becoming role
model to others, simplicity and maximum profits
 Low cost carriers vs. Legacy
Airlines

Competition
• Legacy Airlines
– AA’s SABRE screen science enable to put their flights
not only on the first screen but also online
– frequent flyer program to create brand loyalty among the
high-end
– super saver fares for the low-end
• LCC
– establish the LCC standards
– the value of commonality in a fleet of one aircraft type
and the advantages of outsourcing much of the task
 Low cost carriers vs. Legacy
Airlines

Misery
• Events:
– 1978-deregulation - 2001-9/11 bombing
and crippling walk-
out of air traffic - fuel price increases
controllers - roller costing global
– 1979-economis
crash economy
– 1980-recession - Iraq war
– Domestic passenger - War against terrorism
traffic fall from 317M
in 1979 to 279M in - SARS
1980 and 286M in - 2004-Asian tsunami
1981
 Low cost carriers vs. Legacy
Airlines

Vision, Mission and Goals

• LCC
– to provide inexpensive air transportation to the
widest segment of society
– to tap the vast majority of people who might not
have experienced how it is to fly
– to take away 50% traffic from legacy airlines
– no interline whatsoever to whomsoever
 Low cost carriers vs. Legacy
Airlines

No cost booking, selling,checking-in

• LCC
– 75% on the web
– 24% call centers
– 1% mobile phones or the ATM
– hosted by Navitaire, charges .20-.30 dollar per
passenger
– do not use travel agent, no direct booking
– low operating expense budget for distribution cost
– office are located on inexpensive low-cost area
 Low cost carriers vs. Legacy
Airlines

No cost booking, selling,checking-in

• Legacy Airlines
– Have CRS, GDSs and Agents to interface with costly
CRS charges
– $4 per line segment of booking to major GDSs like
SABRE, Galileo, Amadeus, Worldspan and Abacus
– travel roundtrip=2 line segment=$8 per passenger
– pay 7%-9% commission to travel agent
– use travel portals
– offices are in the central business district
 Low cost carriers vs. Legacy
Airlines
More convenient, secured and safer airport
operation
• LCC • Legacy Airlines
– operate in secondary – big airports, big aircrafts and
airport to reduce the big airlines
cost of operation – redundant checking starting
– minimum security miles away from the airport
inspection – cars and vehicles are
inspected creating traffic
– double duty high jams
productivity – they pack the passenger in
– hub-and-spoke the jumbo jets and take
crossroads them from one hud to
– commonality in another connect them to
fleet,engine and all smaller aircraft to their final
destination
 Low cost carriers vs. Legacy
Airlines

• economies of scale
• operational Cost differential Low-cost vs
Legacy Airline
• basics of aircraft/month economics
 Impacts of unforeseen events

While the international airline industry has been

propelled forward at an extraordinary pace of progress
and development, a number of disastrous events such as
911, SARS, Iraq War, Bird Flu, etc have greatly set the
industry back on an unprecedented level.
 Impacts on International level
• Sep 11 attack: Just after the attack, United
States’ aviation system was shut down
and produced a cash “burn rate” for the
industry in excess of $ 300 million per day
for the duration of the stoppage. It has
been estimated that just in the first week
after the tragedy the US airline industry
lost between $1 billion and $2 billion.
 SARS
According to the World Health Organization
(WHO) the following countries and regions
suffered the worst exposure to the SARS outbreak:
China, Hong Kong, Singapore, Taiwan, and
Canada. Each of these markets registered a
severe drop in travel to the U.S. in April and May
2003. The impact of SARS is evident. However,
each of these markets also registered declines in
March and most registered declines in February as
well, indicating that the drop in arrivals is a
combination of economic, political, and SARS-
related concerns that dissuaded travelers.
Key SARS 2003 Arrivals
Markets Jan. Feb. Mar. Apr. May
ASIA 437,550 387,205 359,449 251,346 326,143
CHINA,
PRC 18,005 13,129 10,760 7,035 326,143
TAIWAN 29,945 16,304 14,003 9,451 6,441
HONG KONG 13,705  7,881 6,588 4,443 10,191
SINGAPORE 7,546  5,313 5,271 2,715 5,588
CANADA 863,767 770,967 1,144,466 980,655 1,005,147
 Percent Change 2003/2002
Markets Jan. Feb. Mar. Apr. May
ASIA 6.60% -2.20% -22.90% -39.10% -35.10%
CHINA,
PRC -8.90% -13.60%  -31.3% -60.60% -69.40%
TAIWAN 9.00% -23.80%  -24.3% -46.80% -62.20%
HONG KONG 17.90% -31.40%  -33.5% -46.30% -53.00%
SINGAPORE 4.30% -2.60%  -18.7% -61.20% -49.10%
CANADA 4.80% 1.70%  -5.7% -11.10% -8.70%
 Impacts in the Philippines
• The impact of 911: The knee-jerk reaction,
particularly of the US, when the 911 incidents
happened was to shut down its airspace, grounding
every single aircraft in all of North America. PAL
aircrafts were caught in flight and on the ground
followed by almost a week of no operation into the
US, which happened to be its major market.
• The impact of SARS: it was much more devastating.
It happened at the peak of airline operation at a time
when school was about to close and usher the onset
of summer vacation. Necessarily, the airlines lost
during the peak months and lost as well during the
lean months resulting in another disastrous fiscal
year.
 Threat of overcapacity

• Internationally speaking, while more and more

airworthy aircrafts and mothballed capital
equipments are needed in the market, more and
more venerable airlines have to stop operation for
lack of revenue traffic to service.
• In the sense of the Philippines, thanks to robust
OFWs traffic, the airline industry can be greatly
relied upon it prosperously.
 Runway insurance problem

• Because of the threat of terrorism, the airline

industry insurers decided to hike the premium at
astronomical levels, all airlines were faced with the
inevitability of either biting the bullet or stop
operating.
• While airports refused to allow airlines to operate
unless sufficiently covered by insurance, some
airlines specially from developing countries had to
cease operation under operational and financial
pressures.
 Unleveled playing field

• While airlines of the affluent countries are receiving

additional subsidy and loan guarantee from their
governments to bailout from their new economic strain
in terms of paying insurance covers and new
equipments such as Kevlar cockpit doors, stun guns,
x-ray machines, etc because of terrorism and of
SARS, airlines from developing or less affluent
countries again have to shoulder these new expenses
by themselves creating a truly lopsided playing field in
favor of the rich and the powerful.
 Remedial measures available

• The government may provide relief in terms of

legislations to alleviate the flight of the industry on
certain issues such as aeropolitics, economics,
particularly on the oil issues, the level of charges in
facilities mostly owned by government to
counteract the unleveled playing field.
 Remedial measures available

• The aggrieved airlines continue making representations to

both the legislative and executive bodies of their
governments to enlighten and guide them towards arriving
at proper legislations responsive to the industry’s needs.
• The aggrieved airlines also can ask support in other areas
like in the bilateral negotiations with different organizations.