Airline Service Industry - Research Paper Sample

Introduction

The airline industry is a typical service business that provides transport services for freight and traveling passengers (Amankwah-Amoah, 2020). The airline industry is classified as a service industry because no tangible commodities are offered in return for the money paid by the customer or storage of inventory for future transactions. The airline service industry is characterized by capital and labor intensiveness, high cash flow, and thin profit margins (Amankwah-Amoah, 2020). The paper aims to address demand and supply elasticity in the airline industry concerning their determining factors. It also seeks to analyze the current demand and supply changes impelled by the COVID-19 epidemic, availing evidence from a comparative meta-analysis of empirical and credible studies in the aviation field.

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The Current State of the Airline Industry

A few years ago, the airline industry had remained steady despite poor macroeconomic conditions and voices against globalization. Currently, the world's commercial airline businesses face substantial financial stress and possible bankruptcy due to the unpredicted and broad shutdown of freight travels due to COVID-19. According to Donovan (2020), most airlines have only about three months to cover their operations. The aviation industry encounters extreme pressure on cash flow from freight restrictions and a significant decrease in customer demand leading to a decline in profitability (Donovan, 2020). The COVID-19Airline Tracker reported that by March 14, over 117 airlines had grounded more than 90% of their capacity. Ten days later, over 167 had dropped about 40% (Donovan, 2020). Ten days later, the TSA estimated over 87% decline in passengers in the USA than a similar period in the previous year (Donovan, 2020). It will thus be hard for demand and supply to keep pace with the rising capacity and cost due to the slow growth of the economy.

In Britain, Gatwick airport records a pre-tax loss of over 343 million Euros after the airline passenger number dropped by two-thirds before the first half of 2020 as the COVID-19 takes a hefty toll on the airline business (Sweney, 2020). Britain’s second-busiest airline publicized a plan to cut over 600 jobs due to a 61% plunge in revenue over the same period (TTnews, 2020). The case is similar in U.S airlines, where the industry reports over 19,000 job cuts once the federal payroll aid ends due to a decrease in demand for airline travels (TTnews, 2020). American Aviation industry plans to withdraw more than half of its regular flight schedule based on this low demand.

Without government supports and subsidies, the International Air Transport Association predicts a further loss of 252 billion dollars by the end of this year (Amankwah-Amoah, 2020). Before the COVID-19 crisis, the aviation industry's fundamental target was to reduce emissions and embrace environmental sustainability practices (Amankwah-Amoah, 2020). For instance, Turkish airlines had already integrated tactics to reduce fuel, paper, and natural gas consumption. It also sought to reach a target of 120 million airline passengers and adopt over 500 efficient aircraft that ensure environmental sustainability (Amankwah-Amoah, 2020). Since the financial burden continues to intensify, it will not be easy to meet the operational needs and reevaluate their environmental footprint simultaneously.

Causes of the Decline in Demand in the Airline Industry

Several economic variables affect the demand for services apart from price. These non-price factors are often termed as underlying factors. These influences include customers' income, habit, brand loyalty, the expenditure of complementary and substitute products, expectations, and natural elements (Xu & Kouwoaye, 2019). The current low-states of demand and supply in the airline business were triggered by a natural disaster (COVID-19), leading to freight travel restrictions. Different studies have examined the impact of natural disasters on business services because services like airline business have become a fundamental component in the modern global economy.

In the Airline industry’s case, the disaster affected demand and supply of airline services indirectly by disrupting normal economic activities due to the air space and worker's limitation for fear of their health (Xu & Kouwoaye, 2019). The airline industry operators might still be able and willing to offer their services to their potential customers at the usual prices. However, the prevailing condition affects the entire line on demand and supply (Xu & Kouwoaye, 2019) note that most of the impacts caused by natural disasters tend to persist for more than five years.

Within the microeconomic theory framework, the law of demand postulates that a decrease in the quantity of good or service demanded results in a corresponding increase in price caused by a shift in the supply curve (Xu & Kouwoaye, 2019). While the law of demand acts as a general guide to the business industries, they are not the only factors that affect availability. As previously noted, other influential factors tend to affect the demand law, resulting in the shift in the demand curve rather than a mare movement of the curve. Therefore, the changes in airfreight charges in airline industries results from a complete change in demand, meaning that the entire demand curve shifts to the left.

Though the initiative ‘empty middle seats’ have been proposed by airline associations, executives, and healthcare officials, experts predict a dire financial impact. Freights will have to increase the charges to compensate for the space to avoid losses regardless of the current low demand (Aviation, 2020). Policy planners and analysts seek to gain more insight into the arising trends and the effects of airfare changes for probable future circumstances. Operational costs are affected by labor costs, air technology, and fuel prices.

Strategies Imposed to Ensure the Survival of the Airline Business

Following the unleashed uncertainties in the global airline markets caused by the COVID-19, scholars and experts have emerged to develop survival strategies to manage and overcome these turbulent times (Kikoyo, 2020). The idea has focused on critical areas where the airline operations have not been grounded to a halt. Several strategies include operational restructuring, aiming to re-align the airline business operation, plan, and cost structure (Fardnia et al., 2020). The second approach entails liability management and debt restructuring. The tactic is designed to cover the capital structure's reorganization, renegotiation of onerous contracts, and resolution of liabilities (Kikoyo, 2020). The airline industry may also choose to pursue these initiatives on a consensual basis within formal insolvencies proceeding or with shareholders.

Operational Restructuring

Since the demand for airline services is predicted to follow a slow increase progression, operational restructuring will prove a critical survival factor. Through cost-cutting and cash management encompassed in operational restructuring, airline businesses will be able to match supply with demand profitably (Kikoyo, 2020). Experts argue that the control of the supply of airline service still lies within the industry. Although an individual airline network can influence the demand, it cannot control it (Kikoyo, 2020). Arguably, passengers board flights to fulfill other purposes other than for the benefit of the flight itself; hence, airline service demand is independent of other products.

Cost-Cutting

For any business under pressure, cash is the fundamental requirement. For the airline business, the pressure is excessive due to the high cash burn-in operation. Additionally, the airline industry's extended value chain creates room for hold-out creditors to seek leverage and opportunity for cash leakage; therefore, conservation plans and robust cash management must be set in place (Kikoyo, 2020). A closely related cash management alternative is cost-cutting. When unprecedented events cause a decline in demand, the chief role of aviation industry management is to reduce costs by identifying cost centers where saving strategies can be implemented (Fardnia et al., 2020). For maximum benefits, a complete change must ensue and is initiated by a significant headcount reduction. In the current COVID-19 crisis, airlines that do not uphold the cost-cutting strategy will continue to face significant financial challenges due to staff demand for attrition allowance resulting from health issues and other costs such as maintenance.

Route and Fleet Review

Although the airline's fleet and route plans are interconnected, specific aircraft have particular routes. For a quick recovery, airlines need to identify profitable routes. Abandoning poorly performing routes and assessing passenger load factors to determine each aircraft capacity utilization would maximize profitability (Kikoyo, 2020). Alternatively, an airline industry may choose to return underutilized aircraft to their lesser following a decisive termination of the leases (Kikoyo, 2020). However, the decision is subject to added liabilities, including compliance with the state of the returned aircraft and premature termination compensation.

Management Enhancement

With the impact already caused by the COVID-19 crisis, preexisting management is unlikely to have adequate resources to stabilize and dispatch strategies and simultaneously run daily operations (Kikoyo, 2020). The aviation industry board is mandated with the role of reevaluating the extent of management resourcing needs and support are required. Alternatively, a corporate reorganization of the entire airline structure should be implemented to optimize and facilitate new monetary investment and enhance operational efficiency (Fardnia et al., 2020). An example of a significant corporate structure reorganization is the idea of dividing a financially pressured airline industry into two. The division isolates the indented part and loss at the other half's expense, which has to lean on the profitable operation (Kikoyo, 2020). Still, the airline industry acquires a reasonable chance of survival.

Conclusion

Governments, policymakers, and researchers are increasingly showing concern about the Coronavirus epidemic's adverse effects on industry policies, businesses, and the general global economy. Amid these concerns, much emphasis needs to be focused on the airline transport because it serves a central role in the world’s economy by the fact that the industry supports over 65 million jobs and provides over 2.7 trillion dollars in economic activities (Amankwah-Amoah, 2020). These statistics amount to 35% of the world’s trade value. According to the Transport Action Group (2020), over four million people used airlines to travel worldwide, linking businesses and states, primarily due to the preexisting intense market competition brought about by the low-cost airlines that intersected the global aviation networks (Amankwah-Amoah, 2020).