Worldwide Air Travel

INTRODUCTION

Worldwide air travel is, at most surreal, a parallel universe. While the airline industry is in contact with terra firma for a certain percentage of its kinetic life, it is also spinning invisible (and sometimes visible) wells of vapour trails around planet Earth. Over the decades, as aircrafts got bigger, faster and more reliable, more and more people wanted and were able to travel by air. New airlines came (and sometimes went), often opening up original destinations to different types of passenger but often competing directly with established carriers. The identity, design and culture of air travel has, in short, adapted, developed and sometimes mutated. (Lovegrove, 2000)

The aim of this report is:

  • To analyse factors driving globalisation of the airline industry
  • To analyse the airline industry environment, identify the main opportunities and threats arising from environmental change for the firms within this industry using Porter's five force analysis
  • To analyse the strategic capability of Air France KLM Group (“Air France”)

The objective is:

To give a clear understanding of how the airline industry operates and relate the existence of Air France in the industry by showing how it has thoroughly affected the airline industry as a whole.

GLOBALISATION OF THE AIRLINE INDUSTRY

Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalisation taking place in many other industries. (The Airline Industry)

In the past decade, air travel has grown by 7% per year. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried 1.5 billion passengers last year. In the leisure market, the availability of large aircraft such as the Boeing 747 made it convenient and affordable for people to travel further to new and exotic destinations. Governments in developing countries realized the benefits of tourism to their national economies and spurred the development of resorts and infrastructure to lure tourists from the prosperous countries in Western Europe and North America. As the economies of developing countries grow, their own citizens are already becoming the new international tourists of the future. (The Industry Handbook)

Business travel has also grown as companies become increasingly international in terms of their investments, their supply and production chains and their customers. The rapid growth of world trade in goods and services and international direct investment has also contributed to growth in business travel.

Using the Yip's model framework of global strategy, the airline industry is ready for the next level. Worldwide, IATA, International Air Transport Association, forecasts international air travel to grow by an average 6.6% a year to the end of the decade and over 5% a year from 2000 to 2010. These rates are similar to those of the past ten years. In Europe and North America, where the air travel market is already highly developed, slower growth of 4%-6% is expected. The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with rising domestic prosperity. Air travel for the region has been rising by up to 9% a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997 and 1998 will put the brakes on growth for a year or two. In terms of total passenger trips, however, the main air travel markets of the future will continue to be in and between Europe, North America and Asia. (The Airline Industry)

Airlines' profitability is closely tied to economic growth and trade. During the first half of the 1990s, the industry suffered not only from world recession but travel was further depressed by the Gulf War. In 1991 the number of international passengers dropped for the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft in the boom years of the late 1980s, leading to significant excess capacity in the market. IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990 to 1994. (The Airline Industry)

Since then, airlines have had to recognize the need for radical change to ensure their survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity growth and to increase load factors. At a time of renewed economic growth, such actions have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in 1996, less than 2% of total revenues. This is below the level IATA believes is necessary for airlines to reduce their debt, build reserves and sustain investment levels. In addition, many airlines remain unprofitable.

To meet the requirements of their increasingly discerning customers, some airlines have to invest heavily in the quality of service that they offer, both on the ground and in the air. Ticketless travel, new interactive entertainment systems, and more comfortable seating are just some of the product enhancements being introduced to attract and retain customers.

A number of factors are forcing airlines to become more efficient. In Europe, the European Union (EU) has ruled that governments should not be allowed to subsidise their loss-making airlines. Elsewhere too, governments' concerns over their own finances and recognition of the benefits of privatization have led to a gradual transfer of ownership of airlines from the state to the private sector. In order to appeal to prospective shareholders, the airlines have to become more efficient and competitive.

Deregulation is also stimulating competition, such as that from small, low-cost carriers. The US led the way in 1978 and Europe is following suit. The EU's final stage of deregulation took effect in April 1997, allowing an airline from one member state to fly passengers within another member's domestic market. Beyond Europe too, ‘open skies' agreements are beginning to dismantle some of the regulations governing which carriers can fly on certain routes. Nevertheless, the aviation industry is characterized by strong nationalist sentiments towards domestic ‘flag carriers '. In many parts of the world, airlines will therefore continue to face limitations on where they can fly and restrictions on their ownership of foreign carriers. (ScienceDirect, 2006)

The benefits, however, of these global strategies can be assessed from the business and competitive point of views. This can be further grouped into four categories:

  • Cost benefits: These benefits come from economies of scale owing to products/processes standardization in the airline industry, as well as increased bargaining powers over suppliers of materials, components, equipment and services.
  • Timing benefits: These benefits are due to the co-ordinated approaches in product launching in the early stage of the product lifecycle.
  • Learning benefits: These benefits accrue from the co-ordinated transfer of information, best practices and people across subsidiaries. Such transfer eliminates the costly “reinvention of the wheel” and facilitates the accumulation of experiences and knowledge.
  • Arbitrage benefits: These benefits come from the advantages that a global company in the airline industry can gain in using resources in one country for the benefit of another country subsidiary.

The benefits of costs reduction obtained by economies of scale are contingent upon the market responsiveness to standardization and whether customers are price sensitive. If, on the contrary, customers are not responsive and prefer tailored products and services to standardization, a global approach is less appropriate. A similar reasoning applies to the benefit of timing. As for the purchasing power, it may be limited for culturally sensitive services such as advertising in the airline industry.

The benefits of learning are positive if the experience gained in one country is applicable to another. If it is not, there is a timing deficit: the time of realizing that one has made a mistake plus the time to learn the new environment.

ENVIRONMENTAL ANALYSIS

Globalisation became a necessity in the airline industry due to the convergence of several political, economical, social, technological, environmental and legal factors. It can otherwise be known as the “globalisation push factor”.

PESTEL ANALYSIS OF THE AIRLINE INDUSTRY

Political factors

  • Terrorism fears/political instability: In a real sense, airlines do not have control over the size of the markets they have available to them because wars and terrorist attacks, e.g the September 11, 2001 attack, or the threat of them - can have a sudden, strong and negative impact. Giving the growing instabilities in the world political scene, it is unlikely that this fact will change significantly in the industry's favour. The industry will therefore have to bear a burden of security costs. It will also have to understand that demand to travel from those who do not have to do so will be held back as a result of some people at least feeling that the airport hassles associated with air journey just render the whole exercises too difficult and time-consuming to be worthwhile.
  • Deregulation and “Open Skies”: Throughout its history, the airline industry has been constrained by decisions made by politicians and governments. Governments have controlled where airlines can fly and aspects of their product planning and pricing policies. They have also had a major involvement in the industry through the ownership of airlines. In USA, between the passing of the Federal Aviation Act in 1938 and the Airline Deregulation Act in 1978, carriers could only enter new routes by going through a cumbersome and extremely slow bureaucratic procedure. The Airline Deregulation Act in 1978, allowed for much greater freedom for airlines to enter new markets and to exploit them free of constraints on capacity or pricing policies.
  • Privatization: Historically, state ownership has always been important in the airline industry. Many governments regarded the existence of a national airline as an essential requirement for national hood. Besides questions of prestige, an airline might bring benefits as a back-up for national defence capability, in employment, and in balance-of-payments and tourism income.
  • Airport slot allocation: Slot can be defined as “pre-agreed times for take-off or landing at a particular airport”. However, there has been one major recent development in slot allocation principles. It has always been possible for airlines to exchange slots on which they hold but a high court in 1999 confirmed the legality of an airline with a less attractive slot time to be able to pay money to another carrier with a more attractive time, to encourage the second airline to undertake a slot exchange. This will undoubtedly give opportunities for airlines to grow their route networks and increase frequencies which would not have been possible.

Social factors

  • The ageing population: In Europe, the average age of the population is now increasing steadily. Fewer babies are being born and improving medical provision is allowing more people to live longer. Therefore, the product that airlines offer will have to evolve with more provision being made for all class of passengers including the disabled who particularly need help at airport, and medical care services will have to be improved.
  • The uncertain, deregulated labour market: The changes in the job market have consequences for airline marketing policies, in both the business travel and leisure travel segments of demand. In business travel, the fact that people are under great time pressure means that issues such as the ability to make a day-return trip, rather than take two days, is becoming more important still in the short-haul markets. On the long-haul routes, for many executives, it is now a thing of the past to expect to take a day off on arrival to recover from tiredness and jet lag. They are now expected to arrive at a destination in the morning and step off the plane into a busy day of meetings.

Technological factors

  • The Internet: Almost all major airlines have websites which they use for promotional purposes, with these sites supplying timetable and product information and also often having an interactive component which allows people make bookings. Sites are also being used as a way of increasing the attractiveness of an airline's Frequent Flyer Programmed by permitting programme members to check on their mileage accounts and also by giving the availability of flights for seat redemption. In the field of air freight, firms such as UPS and Federal Express allow customers to track their consignment.
  • Alternate means of transport: Today, many countries have seen a resurgence of interest in surface- especially railway- transport investment. Railway operators have largely won the battle to be viewed as the most environmentally acceptable form of transport. Surface transport investment provides both problems and opportunities in airline industry. The problems come from the fact beyond question; railway investment can have a significant negative impact on the demand for air transport. The opportunity is for airlines to lobby for improved public transport links to major airports. If these come about, they will enable train operation to deliver long-haul passengers to airline hubs, thus freeing valuable airport slots for further long-haul services.

Environmental factors

  • Climate change and global warming: It now seems clear that one of the effects of rising sea surface temperatures is that tropical storms and hurricanes are becoming more frequent, especially in the Carribbean and the Southern United States. This is already making people reluctant to visit these areas during the August to November period, when the hurricane risk is at its peak. Also, there is no doubt that air transport is significant in terms of the quantities of emissions of carbon dioxide and the other Greenhouse gases increasingly being blamed for the warming of the world's climate.
  • Tourism saturation: All tourism-receiving areas have a finite capacity. This may be due to factors such as the limited amount of accommodation that can be provided. More importantly, though, over-exploitation of a torism area can mean that the reasons for people going there are often destroyed. These reasons may include prestige and status through the exclusivity of a resort, natural resources such as wild-life, or un-crowded access to sites of historic importance.

PORTER'S “FIVE FORCES” AND THEIR APPLICATION TO THE AIRLINE INDUSTRY

In understanding these strategic options, a useful start can be made by looking at some of the ideas of the Harvard professor, Michael Porter. Porter states that in different industries, strategic issues are coloured by the interplay of the Five Forces of the rivalry amongst existing firms, substitution, new entry, the power of customers and the power of suppliers.

STRATEGIC CAPABILITY OF AIR FRANCE

In 2004, Air France and KLM decided to join forces to build a new entity, the AIR FRANCE KLM Group, on a par with the Great European market, and be able to meet the challenges of the 21st century. Today AIR FRANCE KLM is the world's leading airline group. (Air France KLM Group)

Air France has focused its activities on three strategic segments, passenger transport operations, cargo and maintenance. Together these three represent 97% of the company's revenues. The remaining three percent is generated by Air France subsidiaries such as Servair, specialized in in-flight Catering, or Air France Consulting which provides management and engineering solutions for air transport.

Passenger Operations

Air France has built a well-balanced network offering passengers a wide choice of flights out of Paris-Charles de Gaulle, the main hub for Air France traffic, in addition to Paris-Orly, essentially operating point-to-point flights, and Lyon-Saint-Exupéry, linking major regional and European destinations.

Air France and KLM

The Air France and KLM networks have been combined to form a perfectly complementary network. The hubs at Paris Charles de Gaulle and Amsterdam-Schiphol are the cornerstones of this dual network linking Europe and the rest of the world, with 252 destinations in 106 countries.

This vast choice of destinations enables passengers to combine an outbound flight on Air France with an inbound flight with KLM (or vice versa). (Air France KLM Group)

Air France, KLM in SkyTeam

To respond to an increasingly globalised market, Air France, Delta, Aeromexico and Korean Air set up the SkyTeam alliance in 2000. Today the alliance groups ten European, US and Asian partners. In 2007 three associated airlines joined the alliance, namely Air Europa, Copa et Kenya Airways. SkyTeam offers customers access to a constantly growing global network. SkyTeam is the second largest global alliance, with a market share of 19%.

For SkyTeam members, apart from offering travelers more flights and destinations, the alliance is an effective way of maintaining or extending their networks and improving their profitability. Cargo (Freight Transport)

Since the merger between Air France and KLM in 2004, Air France Cargo and KLM cargo have strengthened their cooperation in the cargo field. In October 2005, in response to the fundamental principle of “one face to customer” the Joint Cargo Team was set up, with ajoint sales and marketing division. This enables the Group to offer its customers one contact point, and a single contract and network, with the choice of two operating systems, via Paris-CDG or Amsterdam-Schiphol, or a combination of the two hubs.

By combining their strengths in the cargo sector, Air France-KLM Cargo has become the worldwide market leader excluding integrators, with cumulated revenue of 2.91 billion euros. Air France Cargo and KLM Cargo are part of SkyTeam Cargo, the world's foremost cargo Alliance, covering the main strategic commercial routes with 728 destinations worldwide. Maintenance (Aircraft repair and Maintenance)

Since the merger of Air France and KLM in 2004, the activities of Air France Industries and KLM's Engineering & Maintenance Division have been coordinated. As their activities are complementary, Air France and KLM have shared out the technical responsibilities and product management between the two airlines. This new organization has enabled the group to reduce outsourcing and to specialise Group investments. (See Air France group structure at appendix).

Subsidiaries covering the needs of the markets

Air France has eight subsidiaries, specializing in air transport (regional airlines) and complementary activities such as airline Catering services (Servair), aeronautical maintenance (CRMA) and cargo forwarding (SoDExi).

To expand services out of the French regions, feed the hubs in Paris and the French provinces, win over new market segments and even acquire new expertise, Air France relies on its subsidiaries both within and outside the air transport sector.

Air France's Men and Women

Air France's most important resource is its men and women whose first priority every day is to make the airline successful.

Throughout the complex history of Air France, its industrial relations policy has been guided by a will to cultivate harmonious labour relations that are a precondition for the development of a strong company.

CONCLUSION

The airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers.

For airlines, the future will hold many challenges. Successful airlines will be those that continue to tackle their costs and improve their products, thereby securing a strong presence in the key world aviation markets.

BIBLIOGRAPHY

INTERNATIONALISATION STRATEGY OF AIR FRANCE KLM GROUP

Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!