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Industry Analysis- The Airline Industry

3 Jun 2020

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The Factors that Affect The Airline Industry:

 

The airline industry is facing an era of unprecedented change. The players of this industry are typically identified by owning or leasing an aircraft to offer transportation services for passengers or freight. The path of balancing costs with evolving customer demands and business imperatives is more complex than ever before.

The Major Costs that affect Airlines:

Labor Oriented: About 33% of the airline cost is associated with its flying operations i.e. operation of aircraft, maintenance of both labor and parts. If you think about an airport, the thought is incomplete without pilots, baggage handlers, flight attendants, etc. One-third of the revenue generated by the airline industry goes into paying their employees which makes them the highest labor cost industry.

Fuel: Fuel is the airlines’ second-largest cost. Fluctuation in crude oil prices can have a massive impact on the airline industry.

Travel Agent Commission: Travel agents commission is the third largest. However, with an increase in the eCommerce sector, the booking is now directly taking place without the presence of an agent.

Capital Requirements of the Airlines Industry:

Capital Intensive: Unlike other industries, the airline industry needs big money to operate as their capital expenses are huge. The need for expensive airplanes to maintenance hangars to flight stimulators, the industry’s capital needs require consistent profitability.

Adequate Inflow of Cash: Since the industry works on airplanes which is technical equipment that depreciates over time, it is important for the sector to maintain positive cash flow. As the airplane depreciates, the company uses the cash flow to buy a new aircraft or repay debts.

Other Factors that affect the Airlines Industry:

Seasonal Trend: Can we always travel? Is most of our dreams but the reality is quite different. The airline industry shows a seasonal trend for various reasons such as the weather or holiday month. Although this is less witnessed in recent times, the demand for air transportation is not always at its peak.

Fleet Planning: Financial success of the airline industry largely depends on its fleet planning. There are various factors that need to be considered- do the aircraft need a replacement? If yes, what size should be the new aircraft? If yes, is the company ready to take on more debt? If yes, then what is the company’s credit rating and where should it borrow money from? Though it is efficient for a company to buy a new craft rather than maintaining an older one (majorly for its fuel efficiencies), the decision is usually directed to airlines, top officials.

Airline Revenue:

Revenue Pie: Air passengers contribute more than 50% of the airline revenue for various advantages that are associated with air travel. Cargo stands next in line and then comes other transport-related services. Travel agencies contribute to the highest air ticket sales whilst the airline company pays the agents commission for each ticket sold. Likewise in the case of air-cargo, freight forwarders book the majority.

Seat Count: The addition of seats in an aircraft is more revenue-generating that costs bearing. Thus if an airline’s USP is low fares, the smart thing done there is a high number of seats. Also, there are airlines with minimum seating and maximum passenger comfort in terms of leg space, etc. The right mix satisfying the two sets of customers makes the win for an airline company.

Pricing: Since deregulation, airline companies have the freedom to price their tickets which is mostly based on competitors’ pricing and customer demand. The complexity in pricing is that each seat values differently to a different individual. A leisure traveler will wait for airfares to decline whereas a businessman scheduling an important project will travel for the necessary. Sophisticated computer software and data analytics can help the airline company achieve the right pricing mix.

Digital Transformation:

Advancement In technology is guiding the airline sector is becoming more data-centric thereby finding new ways in curbing customer demand and engagement.

Airport Self Service: The main focus here is on customers waiting time before boarding the flight in terms of baggage handling and check-in facilities. The market is being transformed by biometric and cybersecurity advancements that help create a seamless passenger flying experience.

Aero Parks: Traditional airports are now focusing to look stylish by integrating a shopping mall experience. The city authorities also are interested in developing aero parks as it promotes economic development and various business integration within the city authorities.

Impact of COVID on Airline sector:

With restrictions on international and domestic travel, the demand for turbine fuel will substantially decline however due to large scale cancellations of tour operations, the travel sector may incur great losses and the impact is most likely to fall on the white and blue-collar jobs. Nevertheless, if the pandemic is controlled, the domestic travel market is expected to recover sooner as compared to the international market.

In the current situation, the airline industry is trying its best to survive. However, the rapid digitalization in the sector, seamless airport experience and contactless services will lead to recovery of the industry. In no time we all will be flying again!

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