The Evolving Air Transport Industry

8
INTRODUCTION TO AIR TRANSPORT ECONOMICS
industry experienced overcapacity as the many new airlines that were formed as a result
of deregulation either went bankrupt or merged with other carriers. The result was four
years of global netlosses for the industry, largely based onthe situation inthe United States.
A similar situation occurred in the early 1990s as the economy once again experienced a
downturn, but this downturn was aggravated by political uncertainty from the first Gulf
War and increased fuel costs.
While the early parts of each decade following deregulation have proved to
be troublesome for the airline industry, the industry recovered sufficiently to post
record short-run profits in the late 1980s and again in the late 1990s. This was partly
due to the overall improvement in the global economy, but financial distress and
competition also caused airlines to be more innovative and conscious of controlling
costs. Tools such as revenue management and frequent-flyer programs were created
and developed during these periods. In addition, technological innovations allowed
the airlines to improve their profit margins. For example, simpler cockpit design has
enabled the reduction in the number of flight-crew members, better engine design has
reduced the number of engines required to fly long distances, and fuel costs have been
reduced as a result of more fuel-efficient engines. All these technologies have enabled
airlines to reduce their costs and/or increase revenue. A more recent technological
innovation has been e-ticketing, which allows airlines to reduce their ticket distribution
costs.
The post-deregulation airline profitability cycle continued into the twenty-first century,
with the global industry experiencing its worst downturn in the history of commercial
aviation. Although the 9/11 terrorist attacks were the proximate cause of the global
airline industry's financial problems, the root cause was a slowing economy that reduced
passenger yields. Added to this were rising jet fuel costs, increased airline operating
costs stemming from overcapacity in domestic markets, and increased security costs at
commercial airports. In fact, the airline industry was in trouble before the 9/11 disaster,
with many airlines losing money and with no significant initiatives to reduce costs and
increase productivity. The outcome was record net losses of $13 billion and $11 billion
for the airline industry in 2001 and 2002 respectively. With the resurgence of economic
growth, the global airline industry returned to profitability in 2004. Table 1.6 graphically
portrays these losses for the years in question.
However, political instability in various parts of the world, rising fuel prices, and
persistent competition between network and low-cost carriers has meant that the road to
recovery has been slow for the airline industry. This situation has been most evident in
the North American market where the high-profile bankruptcies of US Airways, United,
Delta, and Northwest highlighted the increasing effects of fierce competition from lowercost
airlines and the bloated cost structures of the more traditional airlines. Globally, we
see some different patterns. Table 1.7 presents the international air transport market's
net profits based on the different geographical regions. The Asian-Pacific and Europe
enjoy the highest level of profitability followed by Latin America. In 2006, the US airlines
returned to profitability after many years of losses.
There have been some bright spots in the industry as bankruptcy protection has (in
some cases) enabled carriers to restructure their costs and receive wage concessions from
labor groups. Moreover, the overcapacity issue has been addressed, with carriers not only
reducing capacity as a whole, but also shifting capacity to international markets that are
less competitive. Only recently, in 2006, has capacity reached pre-2001Ievels. Several lowcost
carriers have also remained successful and profitable by continuing to expand while