The year 2008 was
historically remarkable in the global economy due to the severe economic downturn
in all domestic & international sectors. The reason behind, in 2008, a
series of bank and insurance company failures triggered a financial crisis that
effectively halted global credit markets and required unprecedented government
intervention. Failure to fluctuate the capital sources in the market resulted
in declares a “Global recession” and more public cooperation had filed for
bankruptcy especially in US.
The aviation
industry contribute to the global economic growth by affecting the lives of
numerous household people and is a key employment generator (over 35 million
jobs world-wide) and impact positively to the gross domestic product (GDP) of the
world economy. During the global recession, airline industry hit massively in
terms of passenger travel, aircraft orders, fuel prices, freight, airport
expansions & collectively the manpower factor. (Ruchi Goyal & Dhanisha Negi,
April2014)
To have an explicit idea of what seems to be the consequences COVID19 in the aviation industry, I would like to discuss further in depth of the struggles that
airlines face during the severe economic downturn and alternative decisions
took place to remain in the business. Looking further the challenges arouse in
front of major airlines and how they overcome those challenges and continue to
be back in the business and gradually accelerate their potential to be one of
the leading airline products.
The impact on the Aviation Industry
There's always a synergy between the global economy and air
transportation. In any economic downturn, the air travel industry will become one of
the top affected. As per IATA specification, the Asia-Pacific region appears to
hit with a loss of 14.5 percent during June 2008 - June 2009 whereas there has
been a drop of 4.7 percent and 5.9 percent in Latin America and Africa
respectively. Below chart proves that there is a significant shift in demand
for air travel between 2008 and 2009 compared to the revenue pax kilometers
(RPK) and then there is a persistent rise except between 2010 and 2011 whereas, in air cargo, there is a significant shift in demand between 2008 and mid-2010
and then it has been flat for three years. This fall in demand starts the effect
all over the world.
Chart 1
Furthermore,
another record shows the business confidence has grown between ups and downs
compare to the revenue pax kilometers (RPK). There has been a significant fall
in business confidence in the year 2009 but in recent years the acceleration
of air travel following an improvement of business confidence in the economic
outlook.
Chart
2
Another
significant damage to the industry is reduced capacities. As we talk about the
world’s leading airlines such as KLM, Air France, Lufthansa identifies the
situation and reduced their capacities in the summer season in order to face
the global recession. In Ireland, Aer Lingus which fought off a second hostile
takeover bid from Ryanair, also continues to be loss in the passenger and cargo
capacity due to series of failures. Problem identifies by different airlines
worldwide and actioned precautionary parameters such as Cathay pacific cut the
capacity, grounded flights, delayed construction of the new cargo terminal
& offered unpaid leave to staff. Singapore Airlines had to ground 17
aircrafts and offer unpaid leave to their staff. Overall there were 9
companies announce bankruptcy such as Olympic Airlines, Sky Europe, Volareweb
and My Air.
Increasing
on fuel cost and operating cost is also one of the facts that airlines struggled. As per IATA
reports, the global airline industry’s fuel bill has been forecast to total $187
billion in 2008 whereas the net negative profit was 26.1 overall. The below chart highlights
the rise in fuel costs of the airline industry has significantly impacted the net
profit levels in the same year.
Chart 3
Chart 4
Above chart 4 describes
the percentage of fuel impact on operating costs in the global aviation
industry.
The
profit is what any industry look in to at the end of the financial year. Unlike
the other years, the global airline industry has to accept heavy losses during the year 2008-2009. Cathay pacific being hard-hit and record their biggest loss in
the sixty-three-year-old aviation history.
Most
airlines have taken heavy losses and to withstand the crisis had to use various
marketing policies of lower prices or promotions in order to diminish losses.
The main European companies as Air
France-KLM announced a decrease of over 30 % of income because of the
cheaper tickets but estimated an annual profit of over 15 %, British Airways adopted a new policy
of "flights of survival" by which companies try to provide some
incentives to loyal customers and keep them even if the company does not
register profit, Lufthansa was
also affected by the crisis but perhaps the least of them predicting only a
drop of 4.8 % in profit compared to 2008 but despite this, it intends to
purchase the SAS, Austrian Airlines and Brussels Airlines which have some
financial problems. Some low-cost companies took advantage of the crisis and
exploited the bankruptcy of other companies by entering on the opened market or
by acquiring traditional customers of line companies through an aggressive
promotion policy such as AirBerlin,
WizzAir, BlueAir, Ryanair and
EasyJet, the last ones have
announced an increase of seals of over 20 %. (Marius G. OPREA, May 2010)
Below Chart
5 proves the loss between profit margins and total airline net profits. Focus
on 2008 how the world aviation industry suffers losing billions of dollar and
by the recovery solutions in 2009 how the industry manages to minimize the loss
compare to the profit margins.
Chart
5
One of the
main cooperate value of any company is employees. The prime objective of any
company is to protect their employees in order to maximize and improve the
productivity. The image of the company, profitability & growth relies
on the productivity of the workforce in the company.
2008,
2009 global recession was strong enough to damage the manpower sector severely
and end up creating job cuts where there’s no other solution left with the management
of most of the airlines. However, this behavior attributes to many other
factors such as outsource staff at lower wages than the official airline
representatives, the growing up of low-cost airline trend (to be discussed
further) and also technology improvement which results in reducing the number of
task on each individual staff. Below list shows an overview of job cut
announcements in the European air transport sector selected by Macário in 2009.
Carrier Date
of announcement Job
cuts
SAS 4
February 2009 8,600
out of 23,000
SAS 12
August 2009 Additional 1,500 job cut
Virgin
Atlantic 12
February 2009 600
out of 9,000
Ryanair 12
February 2009 200
Air
France/KLM 15
April 2009 3,000
out of 100,000
Lufthansa
16
July 2009 400
administrative staff
Aeroflot
17
September 2009 2000
jobs
LOT 6
October 2009 400
out of 3,500
British
Airways 6
October 2009 1,700
of 14,000 UK crew
Aer
Lingus 7
October 2009 676
out of 3,900
Moving on with
US sector was prominent on cuts off starting from early May 2008 to 2009 jobs
were cut at several of the major airlines across the region such as United
Airlines (6,600), American Airlines (4,900), Northwest Airlines (4,300), Delta
Airlines (3,300), US Airways (1,900), and Continental Airlines (1,500).
Alternatively, in the Asia Pacific, the Australian airlines Qantas and Virgin Blue announced
1,750 and 400 job losses, respectively, while Air New Zealand planned to
retrench 200 jobs. Besides jobs cut-off, some major airlines reduced working
hours and some airlines actioned pay freeze such as British airways &
Singapore airlines. Nevertheless, some Asian airlines asked employees to work
without any wage and Cathay send 17000 staff on unpaid leave for 4 weeks, japan
airlines 16000 staff on two months unpaid leave.
The
industrial relations have also seriously deteriorated. Employment relations
affect company performance. Good employment relations, as measured by positive
workplace culture, seem to result in good quality of service, high levels of
labor and aircraft productivity, and contributing to a sustainable industry.
Employees play a critical role in improving the productivity of aircrafts and
gates and improving customer service and satisfaction. (Ruchi
Goyal & Dhanisha Negi, April2014)
One of the satisfactory outcomes of the global
recession is growing up the low-lost career system. Low-cost career a.k.a. no-frills airlines or budget career, a concept starts in 1970 with southwest
airline and gradually spread around the world after the US deregulation in 1978
and followed by the European Union in 1990. Basically, it means cheap airfares, on-demand cabin service (on payment basis). The urge of LCC (low-cost career)
improved during the recession due to many people not willing to pay high-price
on legacy carriers or the priority of the travel requirement. So the option is
to book on an LCC flight and fulfill the requirement. This trend creates a
positive approach on personnel travel as well as company travel whereas there’s
no high demand but very limited, yet the airline carriers maximize to hold and
create a link with the companies who keep the airline alive in the business.
The statistic proves that during the recession most of the LCC’s standstill without
losing heavy, unlike many other major carriers.
“In a downturn Ryan air growing even more than ever
before as everyone gets more price-sensitive” Michael O’Leary
“The low-cost model is most resilient during a
downturn because customer sentiments very focus on value” Marty St George
In the
recent years, LCCs have taken passengers from full-service
airlines
and created new demand in the world economy. They have been able to grab 41
percent share in the European market, 50 percent in Brazil and 70 percent in
India. Some of the legacy carriers have also imitated LCCs by cutting their
costs
(reducing
food service, charging for luggage and entertainment and reconfiguring plane
layouts) and boosting productivity. LCCs share of globally available seat
capacity is around 25 percent and 15 percent of available seat kilometers
(ASK). Some LCCs are venturing into long-haul flights and increasing
code-shares.
Many
airlines struggle to be active in the business during the worldwide recession
whereas only a few airlines tactically use their standby resources such as
reserved credit, contingency projects, cost-cutting programs which gave a
positive impression to the world. However, the airline lost billions of dollars
including the declaration of bankruptcy but many airlines manage to recover from
their loss and fewer airlines performed fast recovered and continued higher
profit.
Conclusion
According to the current statistics, the COVID19 hit severely on the aviation industry and the global economy at large. The pandemic, yet not at its peak point means that there's more to expect in the coming months. The mindset is "The industry can recover it's legacy gradually after the pandemic over". However, it takes a sequential process to gain the trust of passengers and respond to demands. During the
economic slowdown most airlines transformed and started to make airfares more
affordable so much so that everyone had a chance to travel cheaply. Still people
would try not to travel by air as far as possible, but if there were a need, would
try to travel as cheaply as possible. The aviation industry has to evolve and
remain relevant to suit these needs of travelers, and in time to come aviation
would become even cheaper and have backward and forward integration with
airport to end destination travel providers in order to recover from the
current economic crisis.
While the global commercial aviation industry has not been immune to the economic crisis,
the long–term outlook is definitely good. Forecasts for next 0-15 years foresee
5% Year on year growth in revenues which is twice the growth rate of the global
economy as a whole. Growth is expected from maturing economies and Asia. All
traffic including business, tourism and freight is expected to rise
dramatically with the increase in disposable income in developing countries and
maturing of low-cost carriers. Several examples of new practices emerged during
the crisis.
AirFrance-KLM
announced that the 3,000 job cuts required will be achieved through suspending
hiring, not renewing temporary contracts and not replacing retiring members of
staff, thereby avoiding redundancies. In the UK, consultation between British
Airways and the British Air Line Pilots Association (BALPA), the trade union
for pilots in the UK, led to an agreement over a cost reduction package that saved
the airline £26million per year. Similarly, Thomson airways cut 5 percent pay
for pilots employed at the airline in order to save up to 100 pilot jobs. But
above all aviation was seen as a luxury and traveling by air was something
only rich could afford earlier. Furthermore, it has been observed that the
economic crisis is not solely responsible for the poor performance of the
airline industry. Besides economic recovery, professional team and good
governance are required to give a push to this sector so that it can contribute
significantly to the world economy.
REFERENCES
· RuchiGoyal
(First Author) / DhanishaNegi (Co-author) IRACST – International Journal of Commerce, Business and Management
(IJCBM), ISSN: 2319–2828 Vol. 3, No. 2, April 2014.
· Aviation
Strategy issue no 132, Oct2008.
· GeoJournal
of Tourism and Geosites ISSN 2065-0817, E-ISSN 2065-1198 Year III,
no. 1, vol. 5, May 2010, pag. 52-61 Article No: 05106-40
Prepared by Ajith Fernando
