2007-2009 Recession: Impact on Airline Industry - Research Paper

Introduction

During the 2007 to 2009 recession, the economy went through a severe downtime period. Many sectors were affected, and the high unemployment rate was witnessed. One of the industries that experienced a tremendous downfall was the airline industry. Nearly ten years later, the industry is still struggling to get back to its feet. The recession caused a lot of financial strains on the industry and a decrease of about fifteen percent on the revenues (IATA, 2009). Many airlines had to file for bankruptcy while others resorted to mergers to sustain themselves in the harsh economic times. The losses experienced by most airlines during the recession also acted as a signal to investors wishing to put their money in the airline industry.

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The airline industry is an essential sector of an economy as it offers support to other sectors such as transport and trade. A fall in this sector, therefore, has adverse effects on the economy. Airline transport is tied to business expenditure because the bulk of airplane travelers are business people seeking to carry out business in different countries. When the economy goes down definitely, the airline industry gets affected as well. The 2007 to 2009 recession was one period that significantly hit the world's economy. Though the airline sector is slowly rising to its feet with a set of measures that have enabled enable it to increase its profit margins it will take a little longer to say that it has fully recovered because though the economy has improved, the challenges that hit this sector are far from over yet. However, the lessons that the industry picked during this period could be instrumental in combating future similar scenarios when the economy experiences a downturn.

Jet fuel is a significant component and necessity for air transport that is quite volatile and experiences constant fluctuation in prices. The recession period caused an increase in fuel prices, which in turn caused a rise in the airline's operational costs. Fuel is one of the most substantial expenditures for airlines, and therefore a doubled increase in fuel prices during the recession period caused a massive blow to the industry. In 2008, airlines spent about forty percent of their operational costs on fuel alone (Scovel, 2012). Fuels have become the most substantial proportion of the operational cost for airlines surpassing labor costs. This affects the price of plane tickets and also the frequency in which an airline can make flights, especially short-haul domestic flights.

In addition to the rise of jet fuel, a reduction in air traffic contributed to the financial crisis experienced by many airlines. During that period, there was a considerable decline in the number of international passengers getting in and out of the United States. Cargo carriers were not spared either as the recession had impacted the volume of exports and imports. To salvage the situation, airlines drafted several measures to curb the case: some airlines grounded their older aircraft, airlines reduced the number of their scheduled flights, and airlines had to halt the process of ordering new planes. The airlines also had to cut off their operational costs in other areas such as laying off cabin crew to lower their overall finance expenditure.

As a result of the recession, many people lost their jobs, and others got a cut on their wages. The decrease in income caused a reduction in people's purchasing power, and many people could not afford the cost of air travel. This was especially hard on the passengers who had aimed to travel for leisure activities such as tourism and visiting friends because, due to the harsh economic times, they had to prioritize essential needs. The decrease in purchasing power saw a reduction in the number of people who made bookings for flights. The airlines had to cancel some of the trips as well as reduce the number of scheduled flights because they did not meet the minimum passenger capacity. Some airlines also had to reduce the cost of the fares to attract the few customers who had an extra coin to dispose of.

The decrease in demand for air travel resulted in surplus capacity in the airlines. The available seat capacity of the airlines was increasing with the reduction in order while the load capacity of the airlines was declining. Although the airlines could carry many passengers, the number of passengers who were purchasing airplane tickets was deficient, and therefore a large number of seats were not occupied (Ruder, Bennion, 2012). The process of reducing the capacity was quite long, and it took time before the airlines had reduced the available seat capacity. The airlines resorted to stopping flights in routes that had a small number of passengers. The airlines also grounded planes that attracted minimal seat occupancy.

All the above effects affected the industry and other sectors that relied on the industry as well. A reduction in the number of customers meant that many airlines had to lay down most of their workers since they could not keep up with the growing labor costs. Many airlines also had to cancel a lot of its flights, thus affecting many customers who still had the urge to travel. This majorly affected domestic flights because they were considered less profitable. With the companies grounding its older aircraft and stopping the ordering of new planes, this meant that the leasing countries would face huge losses as well. The most notable effects on the sector during this period are that the most vulnerable airlines halted their operations while those that were left in the process had to operate with huge deficits or turn to the government for a bailout. The sector has not fully recovered from the adverse losses it experienced during the period, and productivity is still quite low.

Strategies Took by Airlines After the Recession

The recession period had its toll on the airline industry, and getting back to reaping large profits needed a lot of work. After the recession, airlines realigned themselves with several measures to go back to their former profit levels. Though a few challenges are still crippling down the aviation industry, major airlines have started reaping profits again. In a bid to restore profitability, some airlines have resolved to mergers. The mergers have reduced the operational costs for the airlines by consolidating their operations. Mergers have reduced the number of competing airlines operating in airspaces as well as eliminated the redundant hubs. Some of the airlines that are currently reaping prominent include Delta and North West merger. US Airways is also acquiring big following its consolidation with Delta air to increase its market control in Washington DC.

To increase their profits, airlines have also increased the fares and introduced new fees such as baggage fees, which is charged on customers' luggage. Other services such as food and selection of seats are also charged separately. The increase in fares has proved fruitful as the airlines have witnessed a rise in the amount of revenue. However, some attempts to increase the fares have failed as the airlines saw a minimal number of customers interested in flights with such, and the increase had to be abandoned. In maximizing profits, the airlines have to keep their operational costs very low. Lying off some of its employees also had a positive impact because the airlines were able to reduce operational costs in other sectors other than fuel.

Most airlines have had to reduce the overall number of flights offered and increasing the load capacity of the aircraft. Even after the recession, fuel prices have continued to experience fluctuations, and the demand for travel has also not reached to its peak. Airlines have chosen not to restore some of the domestic flights that were canceled during the recession period. This was majorly the flights involving small aircraft with a carrying capacity of about fifty passengers. The reduction in the number of scheduled flights does not affect the number of available seats per mile. Hence, airlines ensure that they have fewer empty seats during a trip, thus increasing profitability.

As the airlines try to improve their financial position following the significant losses experienced during the recession, this has come with adverse effects to the customers. Most customers have to contend with fewer short-haul flights. With most airlines reducing the frequency flights that cover shorter distances, this has inconvenienced many customers. Towns with smaller airports have also been affected by airlines choosing tom to cancel their trips to this airport, thus inconveniencing many travelers. However, passengers haven't just had to near the burden; there have been some positive impacts as well. Passengers can now enjoy fewer flight delays and cancellations. This can be attributed to the reduction in the number of flights, and hence airlines can easily manage the time of the operational flights.

The strategies are taken by airlines so far have proved useful in reinstating passenger confidence on the ability of the airlines to deliver. The little gains are, however, not something to celebrate yet, and airlines need to shift focus to finding more permanent strategies to ensure that they cushion themselves from losses in times when the economy faces a downturn. The airlines can result in long-term plans that offer better solutions. The primary strategy that is bound to revolutionize operations in the airline industry is controlled capacity addition. This can majorly be done by halting new fleet addition and maximizing the already acquired aircraft. This is because if the airlines have a large fleet of airplanes, they are faced with new fuel prices. In a situation where the purchasing power of customers is negatively affected, then the airline has to suffer huge losses since the leasing companies expect to be paid.

The airlines should also adopt the strategy of maximizing on the high season. Travel is cyclical and depending on economic changes. The airlines expect to have more people traveling during the summer. Airlines also experience increased travel during major holiday seasons such as Thanksgiving and Christmas because, during this period, many people have saved enough money to use in traveling for leisure to enjoy the holidays. During these high seasons, airlines can advertise more flights and even afford to give discounts to attract more customers. In low seasons the majority of customers are business people traveling for business-related operations, and they can provide high priced tickets because, in most cases, the travel expenses are covered by the organization.

Investing in low-cost carriers for airports has also proved to be a successful strategy employed by airlines to increase their profits. Low-cost carriers have the advantage that they can easily adjust their prices, and they have control over smaller markets compared to large carriers. With most carriers shifting to investing in low-cost airlines, this has increased the amount of air traffic, especially for the domestic flight, which has, in turn, increased the productivity and efficiency of these airlines. Low-cost carriers have also seen an increase in the number of scheduled flights a contrast to large airlines that have had to drop most of their scheduled flights. Some o the low-cost carriers that have enjoyed an increase in expected flights are Allegiant Spirit, Frontier, JetBlue, and South West (Scovel, 2012).

The measures are taken by airlines after the recession was mainly aimed at increasing the profits of the airlines. Still, they have also affected the overall experience of the travelers using the airlines. Most airlines concentrate on the aspect of increasing their profits and forge...