The History of Growth - Free Essay Example

History of Growth Since 1914, the first scheduled air service began in Florida, air travel industry has been facilitating economic growth, world trade, global integration and tourism industry over the last century. In North American, airline industry has undergone a significant development since the end of World War II. As the important of air transport has been recognized through the war, the demand for civil air transport grew explosively. Many airlines had opportunities to increase their fleets and operate new routes (Airline for America, 2007). In 1978, Congress passed the Airline Deregulation Act that transferred the control right over airline industry from the government to the market. The deregulation and liberalization widely spread from U.S. to the entire world that helped shape the evolution of the competitive international airline industry (Massachusetts Institute of Technology, 2007). In Canada, the government fully deregulated airline industry in 1987 and adopted the Blue Sky Policy to encourage the liberalization of Air Transport Agreements in 2006(Transport Canada, 2012). At the beginning of the 21st century, airline industry experienced a financial crisis because of the global economic recession. Even worse, the September 11 terrorist attacks aggravated the industryà ¢Ã¢â€š ¬Ã¢â€ž ¢s difficult situation. The safety and security issues became critical to both airlines and passengers. From 2001 to 2005, th e net losses of U.S. airline industry were over $40 billion (Massachusetts Institute of Technology, 2007). In 2008, the whole airline industry once again faced serious challenge from high fuel prices and the à ¢Ã¢â€š ¬Ã…“Great Recessionà ¢Ã¢â€š ¬Ã‚ . The operating profitability in 2008 is dropped from 4% gain in previous year to a disappointing loss of 1% (International Air Transport Association, 2010). Life Cycle: Maturity The current life cycle of Canadian airline industry is in the stage of maturity. The industry growth has decelerated and the competition is aggressive. The industry performance often fluctuates with the economy. As the result of the low industry profitability, cost management and efficiency improvement became the major strategic targets of airline industry instead of capacity growth. According to the data in Airlines Industry Profile: Canada (2005), the global economic downturn resulted in the Canadian airline industry presenting a negative compound annual rate of change of 4.4% over the 2000 to 2004 period. The demand of industry declined until 2003 that remained unchanged in the period 2000-2004. Facing the brutal market competition, airline mergers and acquisitions have been prevailing across the entire industry. In 2000, Air Canada increased their market share by the acquisition of and merger with their largest competitors Canadian Airlines. Although the performance had been im proved over 2005-2008, following the global airlines industry trend, Canadian airline industry suffered another decline in 2009 because of the high fuel price, disappointing demand and the economic recession. Over the last five years, the industry revenue growth was slightly below the Canada GDP growth after the recession. The data of Airlines Industry Profile: Canada (2014) showed that the compound annual growth rate (CAGR) of the industry in the period 2009-2013 was 7.1%, while GDP grew at the compound annual rate of 8.5% over the same period. Looking forward, the growth of the industry is predicted to slow down with a CAGR of 3.8% for the next five years. Structure Legacy carriers often refer to airlines that established before the deregulation. They usually own more luxury aircrafts and offer first and business class seating with higher level of services. After the airline industry deregulation, legacy carriers started to use a hub-and-spoke system to organize their flights. The system allows airline to select some airports in major cities as hubs and connect to other cities as spokes. It provides less number of routes with more frequent services which increases the transportation resource efficiency. In addition, the system also allows legacy carriers to provide international long-haul flights. Therefore, in order to take advantage of competition among the major international gateways, domestic carriers have built alliance relationship with foreign carriers. Canadian air carriers can benefit from the alliance because of its important geographic location (Madore Shaw, 1993). Today Star Alliance is the largest global airline alliance with 26 member airlines including Air Canada. Competing against legacy carriers, low cost carriers have played a key role in short-haul domestic routes by using point-to-point system. Instead of stopover at hub, point-to-point system reduces connections and travel time. The low cost carriers expanded their significant market share during economic crisis in 2000. They offered lower fares and less services to attract price sensitive consumers. The most successful part of low cost carriers is the higher labor productivity than legacy carriers. The flexible work culture and cross-utilization employees create a labor cost advantage for low cost carriers (Massachusetts Institute of Technology, 2007). Economics Airline industry is one of the lowest returns on invested capital among all the industries, which on average the returns hardly meet investorsà ¢Ã¢â€š ¬Ã¢â€ž ¢ earning expectation. The averaged ROIC of global airline industry is 4.1% over the period 2004 to 2011, which is enable the industry to pay for its debt interest costs and small dividend. However, it was still far below the average cost of capital of 7.5 %( IATA, 2013). According to the IATA Industry Statistics (2014), the revenue of global commercial airlines in 2013 was $710 billion, and the net profit was 10.6 million, only a 1.5% margin on revenues. The global airline industryà ¢Ã¢â€š ¬Ã¢â€ž ¢s fuel cost accounted for 30% of the total $690 billion operating expense, which continues to be the largest proportion of operating cost. The total fuel bill of $210 billion, compared with the industry profits of 10.6 billion, showed that the entire airline industry facing the structural issues that squeeze the profit too thin. F or North American market, the net profit in 2013 was $7 billion, and EBIT margin was 5.3% on revenues, which was higher than the other regions (IATA, 2014). In Canada, the airline industry value was $17255.6 million last year, and the market volume was 59.5 million passengers. For Canadian airline industry, domestic is always the largest segment of the total volume (Martketline, 2014). Technology Since the rising fuel price and air pollution are two most important issues for aviation, the airline industry has been developing technologies that would improve the aircrafts fuel efficiency throughout the years. According to the International Civil Aviation Organization environment report (2010), compared with aircraft in 1985, modern aircraft has reduced 15% fuel burn and deliver 40% lower carbon dioxide emissions. In 2007, the government of Canada launched the Strategic Aerospace and Defence Initiative (SADI) to encourage research and development of strategic innovative projects in the aerospace and defence sectors. The SADI has invested $300 million to improve aircraft engine technology and fuel consumption (Finance Canada, 2013). Three significant technologies in aircraft design are prevailing in the industry. The first is weight reduction, which can maximum the carrierà ¢Ã¢â€š ¬Ã¢â€ž ¢s load factor using same amount of fuel burn. Future aircraft will have 70% advanced mate rial, including à ¢Ã¢â€š ¬Ã…“composite wings and parts of the fuselageà ¢Ã¢â€š ¬Ã‚  to reduce 15% weight. The second is aerodynamics improvements that reduce friction drag and maintain optimal laminar flow. The potential application areas are wings, nacelles, empennages and winglets. The last one is engine-specific performance improvement, which can provide clean and efficient power. The achievement of engine improvement in last ten years provided 2% fuel consumption improvement. As the technology matures, new engine is expected to save 15% fuel consumption (ICAO, 2010, p.74-75). Reference: Airline for America. (2007). Airline Handbook. Retrieved from https://www.airlines.org/Pages/Airline-Handbook-Chapter-1-Brief-History-of-Aviation.aspx International Air Transport Association. (2010). Airline Profits 2008. Retrieved from https://www.iata.org/whatwedo/Documents/economics/Airline_2008_Profits_Feb2010.pdf Transport Canada. (2012). The 2006 Blue Sky Policy: Objectives, Principles, and Approach. Retrieved from https://www.iata.org/whatwedo/Documents/economics/Airline_2008_Profits_Feb2010.pdf International Air Transport Association. (2013). Profitability and the air transport value chain. Retrieved from https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-value chain.pdf Massachusetts Institute of Technology. (2007). Airline Industry Overview. Retrieved from https://web.mit.edu/airlines/analysis/analysis_airline_industry.html Madore, O., Shaw, J. D. (1993). The Canadian airline industry: its structure, performance and prosp ect. Retrieved from https://publications.gc.ca/Collection-R/LoPBdP/BP/bp329-e.htm#A. Industry Marketline. (2014). Airline Industry Profile: Canada. Retrieved from https://web.b.ebscohost.com.proxy.lib.sfu.ca/bsi/pdfviewer/pdfviewer?si[email  protected]/* */vid=15hid=112 Datamonitor. (2005). Airline Industry Profile: Canada. Retrieved from https://web.b.ebscohost.com.proxy.lib.sfu.ca/bsi/pdfviewer/pdfviewer?si[email  protected]/* */vid=2hid=112 Finance Canada. (2013). Budget Plan 2013. Retrieved from https://www.fin.gc.ca/new_template/2013/doc/plan/toc-tdm-eng.html International Civil Aviation Organization. (2010). ICAO Environmental Report 2010. Retrieved from https://www.fin.gc.ca/new_template/2013/doc/plan/toc-tdm-eng.html Fact sheet: https://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/industry-facts.pdf