Beyond the Stuck-in-the-Middle Carriers: Strategy Management for an Airlines
Introduction:
Skyrocketing fuel costs have pushed up ticket prices results in fewer passengers flying, according the Air Transport Association.
The American airline industry lost $1.5 billion in the first three months of the year 2008. For those low-cost carriers, they introduce stealth increases to airfares by adding ancillary charges for services such as checking baggage or airport check-in. On the other hand, legacy carriers with full-service promised choose to add “fuel surcharges” to tickets instead. However, both tactics have a natural limit and airlines will have to consider other strategies to deal with rising costs such as reducing capacity or seeking for mergers to achieve big cost reductions.
Mason (2005) indicated while the fuel charge hits the record high, the airlines yield evolution shows an inexorable decline since year 1970 due excess capacity in the market.
Fig 1. Yield evaluation 1970-2001. Source: Manson (2005), Journal of Air Transport Management
Manson (2005) also pointed out that the airlines industry has long relied on a combination of high-fare business travellers and a large number of low-fare economy passengers. However, in the past 10 years, the proportion of economy passengers has risen, while the average fare these passengers pay has fallen by a third. In this highly competitive industry, besides apportioning increasing fuel cost to passengers, it becomes airlines major target to attract as many “profitable” passengers as possible.
Objectives:
Wei (2006), the former Chairman of CAL, has mentioned in his speech “Cost Control Strategy” given to Dept. of Transportation and Communication Management Science, Taiwan National Cheng Kung University, that the fuel cost counted over 40% among the total operation cost. Although trans-pacific connections can still be profitable for China Airlines (CAL), making money has become extremely difficult.
Fig 2. CAL Operation Cost Analysis (2006 Q1-3). Source: China Airlines Cost Control
Skyrocketing fuel costs have pushed up ticket prices results in fewer passengers flying, according the Air Transport Association.
The American airline industry lost $1.5 billion in the first three months of the year 2008. For those low-cost carriers, they introduce stealth increases to airfares by adding ancillary charges for services such as checking baggage or airport check-in. On the other hand, legacy carriers with full-service promised choose to add “fuel surcharges” to tickets instead. However, both tactics have a natural limit and airlines will have to consider other strategies to deal with rising costs such as reducing capacity or seeking for mergers to achieve big cost reductions.
Mason (2005) indicated while the fuel charge hits the record high, the airlines yield evolution shows an inexorable decline since year 1970 due excess capacity in the market.
Fig 1. Yield evaluation 1970-2001. Source: Manson (2005), Journal of Air Transport Management
Manson (2005) also pointed out that the airlines industry has long relied on a combination of high-fare business travellers and a large number of low-fare economy passengers. However, in the past 10 years, the proportion of economy passengers has risen, while the average fare these passengers pay has fallen by a third. In this highly competitive industry, besides apportioning increasing fuel cost to passengers, it becomes airlines major target to attract as many “profitable” passengers as possible.
Objectives:
Wei (2006), the former Chairman of CAL, has mentioned in his speech “Cost Control Strategy” given to Dept. of Transportation and Communication Management Science, Taiwan National Cheng Kung University, that the fuel cost counted over 40% among the total operation cost. Although trans-pacific connections can still be profitable for China Airlines (CAL), making money has become extremely difficult.
Fig 2. CAL Operation Cost Analysis (2006 Q1-3). Source: China Airlines Cost Control
References: 1. Roll, M. 2002, Singapore Airlines - An Excellent Asian Brand, Venture Republic. 2. Wei, P. 2006, China Airlines Cost Control Strategy , China Airlines, Ltd. 3. Robertson, D. 2008, European airlines face squeeze on profit, The Times 4. Mason, K. J. 2005, Observations of fundamental changes in the demand for aviation services, Journal of Air Transport Management Volume 11, Issue 1 pp. 19-25 5. Swan, W. 2002 Prices, Fares, and Yields, Working paper, Boeing, Seattle 6. Franke, M, 2007, Innovation: The winning formula to regain profitability in aviation? Journal of Air Transport Management Volume 13, Issue 1 pp, 23-30 7. Porter, M. 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press (Macmillan), New York.