ABSTRACT

The Aviation Industry provides service to every

part of the world and has been the most integral
part for the creation of global economy.

Kiran Rao
s0550953

INDUSTRY ANALYSIS
Scientific Writing

13 July 2015

Table of Contents
1.
2.
3.
4.
5.
6.

Introduction
Market Segmentation
Porter 5 Force Analysis
Economic Performance
Fuel Importance
Summary

Pg. 2
Pg. 3
Pg. 4
Pg. 6
Pg. 7
Pg. 8

List of Figures & Graphs

1. IATA Statistics
2. Porter 5 Force
3. Fuel Efficiency & Jet Fuel

Pg. 2
Pg. 3
Pg. 7

List of Tables
1. Worldwide Airline Industry
2. Regional Airline Performance
3. Fuel Statistics

Pg. 6
Pg. 6
Pg. 7

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1. Introduction
The global airline industry is the major economic driver both in terms of airline
manufacturing, maintenance & services and as tourism. The industry is growing rapidly, but
is a stable and healthy profit generator. Measured in revenue generated, it has doubled over
the past decade from USD 369 Billion in 2004 to USD 769 Billion by 2014, according to the
IATA (International Air Transport Association). Major growth has been seen in the short haul
flight, which cover little above 25% of the global market. These low-cost carriers are
increasing in the developing countries. However, the profit margin is less resulting to around
3% overall, as reported by IATA.
In the commercial aviation sector the major stakeholders are jet engine manufacturers,
aircraft builders, airline companies, airports, service companies and travel agencies to name
a few. However, its an irony that these companies being a major link in the value chain to
transport the customers struggle to reach the breakeven.
In spite of the fact that global air travel growth over the past 20 year average is steadily
increasing, there is much variation in the air travel market below this gross level. The
strongest markets are in the Asian region with India and China being the key players to double
the domestic flight figures and to increase the international flights within Asia. In
contradiction the other two BRIC nations Brazil and Russia are struggling as their economies
are in downfall state. In the developed countries like Japan and USA there is a modest growth.
The Transatlantic region is displaying a low growth rate and surprisingly the European region,
which suffered a severe economic meltdown is performing well. The graphical representation
shown below provides a better insight.

Fig.1 IATA Statistics

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2. Market Segmentation
The airline market consists of a wide variation of elements, all of them would prefer to a
higher quality of hospitality, reliable airlines and comforts during their air travel. The market
segmentation can be made based on the behavioral consideration on the following groups

Distribution
a. Business travelers and Government officials.
b. Individual travelers who choose their own airline.
c. Other travelers who are influenced by travel agents.
d. Travelers on package trips who cannot select the airline.
e. Back-packers who would choose the lowest fare airline.
f. Travelers who would choose the last minute online deals.

Design of flight cabin

Based on the proven market surveys each flight would prefer to distinguish its customers
preference by designing the cabin into three different classes as - First Class (5%), Business
Class (15%) and Economy Class (80%). (The percentages indicate the seat distributions)

Pricing
a. Price Elasticity- Customers who are willing to pay more (last minute booking).
b. Time Preference- Customers who book in advance and to travel on specific time.
c. Benefit Requirements- Customers who prefer seats, inflight additional services etc.

Airline Carriers even differentiate their product across the business design areas Network:
Region Focused
Intercontinental
Global Connector

Value Based:
Low Cost
Economical Cost
Traditional Cost

Regional:
Independent
Network Extender
Charter Flights

Once the airline company decided on which combination of these segments to target, they
can start looking at the customer needs. Here again the company would reach another
obstacle. Previously the airline companies used to rely on the standard source of information
like passenger surveys, opinion polls and sampling of focused groups. The information from
this would be limited and generally restricted to what the customers could possibly do. The
successful model currently existing are the frequent flyer programs, which enable the airlines
to gather more information regarding the travel history of the customers, pair city flown,
booking channels, preferred seats, mode of payments etc.

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3. Porter 5 Force Analysis

The Porter five analysis model is one of the proven model to answer the most strategic
question Why are few industries more attractive than others? This model shows the five
forces that govern the industry competition; threat of new entrants, bargaining power of
customers, threat from substitute products, bargaining power of suppliers, and competitors.
In order to analyze the airline industry we have look at each of these forces.

Threat of New
Entrants

Bargaining Power
of Suppliers

Competitor Rivalry
within Industry

Fig.2 Porter 5 Force

Statistics

Bargaining Power
of Customers

Threat from
Substitute Products

3.1 Bargaining power of Customers

The global airline industry is made up of two distinct group of customers, first the
independent buyers who are travelling for their personal or business related reason who have
their own choice of selecting the airlines based on their preferences, which is very diverse;
second the buyers who are biased with opinion of selecting airlines as per the travel agents
suggestions. The switching cost is very low and most travelers select airlines based on the
cost, travel time and in-flight amenities. Overall the bargaining power of customers has a very
low threat to the industry as most airlines offer the same quality of services.

3.2 Bargaining Power of Suppliers

The global airline industry has a very small choice of selecting the aircraft manufacturer. One
the Boeing or Airbus and even the engine manufactures are also limited to maximum five
suppliers. On a first note carriers of each class are almost similar with minute changes.

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The capital invested to purchase an aircraft is relative large and usually the supplier and
customer maintain a long term relation, which enables them to get a credit for each aircraft
procured. Due to this reason the airline companies cannot easily switch between the
suppliers. Moreover, only source of income for these manufacturers are from airline
companies, which indirectly acts a low threat for the industry.

3.3 Threat of New Entrants

The threat from new entrants is relatively low, as the initial capital to be invested is high and
the industry has to prove the quality of planes and possess flying experience for minimum of
one year period before entering the market as per the rules set by the Federal Aviation
Administration (FAA) and the Department of Transport (DOT). Further challenges to be faced
by the new entrant are that the switching cost would be low, which would reduce their
customer base. Moreover, the time and money required to open a new airline company is
more than sufficient to act as a barricade from entering the industry.

3.4 Threat of Substitutes

The substitutes do possess a medium risk to the airline industry. Customers can choose
between the various modes of transport like Rail, Road and Water. Depending on the distance
to be travelled customers decide on their mode of transport. However, all these substitutes
maybe cheaper for short distance travel and sometimes less expensive also. Airways are by
far the fastest means of transport and less time consuming. This advantage surpasses airlines
from other modes of transports. This cost of switching is high in developing countries for
which the airlines enter the price leader strategy to attract more passengers.

3.5 Rivalry among Existing Players

The strongest force in this model is the peer competition. It possess a high risk to each player
within the industry. The business cycle has reached a matured stage and the players are
almost in it for a long time now. It is not easy for existing players to exit the market as they
would be bound with some long term loans. The fixed costs are high and profit margins very
thin. Once any airline company is in the stage of irrecoverable loss their only solution is to
opt for mergers and acquisitions as each major player would be keen on expanding his
coverage and fleets by even paying extra money to acquire any airline running on loss. To
summarize the Porter five forces, the completion from the existing players is a major risk
followed by medium risk from substitutes, other three forces are of low risk criterias.

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4. Economic Performance
Economic development worldwide is getting a
significant boost from air transport. This wider
economic benefit is being generated by
increasing connections between cities
enabling the flow of goods, people, capital,
technology and ideas - reducing air transport
costs. Consumers will see a substantial
increase in the value they derive from air
transport this year. New destinations are up
1.7% this year already, and frequencies have
risen by even more. We expect 1% of world
GDP to be spent on air transport in 2015,
totaling over $760 billion. Air travel is
accelerating, with growth of 6.7% expected
this year, the best since 2010, well above the
5.5% trend of the past 20 years. This is being
driven mainly by the upturn of the economic
cycle.

Table 1 Worldwide Airline Industry

The strongest performance financially are delivered by airlines from North American region.
Highest Breakeven load factors are shown in European region, caused by a combination of
high regulatory costs and low yields because of the highly competitive open aviation area.
Airlines from the Asia-Pacific region have very diverse performances. Middle Eastern airlines
have one of the lower breakeven load factors. Latin American airlines display a mixed
environment, with weak domestic markets hampering performance, despite a degree of
consolidation and some long-haul success. Africa being the weakest region, profits are barely
positive. The Tabular column below provides a brief overview

Factors
Regions
Europe
North America
Latin America
Asia-Pacific
Middle East
Africa

RPK Growth (%)

ASK Growth (%)

6.8
3.0
5.1
8.1
12.9
3.2

6.5
3.1
5.0
7.7
12.9
3.3

Load Factor (%) Breakeven

Load Factor (%)
66.6
66.6
64.2
56.4
61.2
58.8
67.0
62.8
60.2
58.0
56.0
55.4

Table 2 Regional Airline Performance

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The fleet is forecasted to increase by over 900 aircraft by year end (2015) at almost 27,000
aircraft; lower fuel prices will lead to fewer older aircraft leaving the fleet. The average size of
aircraft in the fleet is continuing to rise slowly. So by year end, there would be approx. 3.7 million
available seats. These seats are also being used more intensively, which is critical for profitability
in a capital intensive industry and it also reduces environmental impact. Passenger load factors
are expected to rise above 80% on average this year. Aircraft are also being flown more
intensively. The number of scheduled departures is forecasted to exceed more than 35 million
by year end. Thats an average of 67 aircraft departing each minute!

5. Fuel Importance
The forecast for the current year airlines fuel bill would fall down by 15 % to $191 billion, which
will represent 28% of their total operating costs. Jet fuel prices have fallen substantially and we
base our forecast on an average price of $78/barrel this year, and $65/barrel for the Brent crude
oil price. The crack spread over Brent crude oil prices has risen above its recent average of 15%.
However, profit from jet fuel is made not in the refining part of the value chain but upstream by
the oil producers. The predicted purchase of jet fuel by the airline industry next year will generate
$16 billion of profit for the upstream part of the jet fuel supply chain.
Fuel is the major cost in the airline industry that it focuses intense efforts to improve fuel
efficiency, through replacing fleet with new aircraft, better operations and efforts to try to
persuade governments to remove the airspace and airport inefficiencies that waste around 5%
of fuel burn each year.

Fig.3 Fuel Efficiency

Table.3 Fuel Statistics

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We forecast that fuel efficiency, in terms of capacity use i.e. per ATK, will improve by 1.5% in
2015. Higher load factors are forecast to improve fuel use per RTK by 1.7% this year. Continued
fuel efficiency gains have partially decoupled CO2 emissions from expanding air transport
services. In the absence of the expected fuel efficiency gain this year, fuel burn and CO2 emissions
would be 1.5% higher in 2015. This represents a saving of around 11 million tons of CO2, as well
as saving on fuel that would have cost the industry and its consumers an additional $3 billion.

6. Summary
The airline industry had been long struggling to raise their profit percentages, however the
present growth phase in most regions including developing countries, integrated with customer
preference and evolving technology, offers a real growing opportunity. Airlines can enhance their
relationships with customers by providing better services and selective cost cutting, indirectly to
improve their financial performances in a sustainable way either alone or with strategic
partners.
The swift growth in the developing countries of Latin America and especially Asia is changing the
entire center of the airline industry. Its worth to note that Low Cost Carriers (LCC), which are
used for travelling short distances are not only attracting the first time flyers but also encouraging
passengers to travel more by air.

References 1. Industry Handbook: Porter's 5 Forces Analysis

2. International Air Transport Association (IATA) - Presentation on Industry
Economic Performance, published on [June 2015].
3. Global Airline Industry Program, report published by Massachusetts Institute
of Technology Airline Industry Consortium.
4. Aviation Trends 2015 http://www.strategyand.pwc.com/perspectives/2015-aviation-trends
5. The outlook for Global Airline Capacity, report published by - John Grants
CAPA Business Briefing [2015]

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