Impact of Economic Crisis to the Airline Industry (Research Paper Sample)

Impact of Economic Crisis to the Airline Industry
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Impact of Economic Crisis to the Airline Industry
One of the biggest economic challenges that most organizations in the twenty first century had to experience is the financial crisis of 2008. Initially, the crisis was concentrated in the banking and real estate industries. The negative effects caused by the crisis include the slowing down of economies across the world, declining international trade and tightening of credit. However, the financial crisis was later to spread to all other sectors, affecting industries of all diversity, including the airline industry and tourism industries (Sharpley, 2009).
Many financial analysts admit that the US house bubble may have precipitated the beginning of the crisis, but most of them contend that indeed this depression was caused by a complex set of policies that increased borrowing across the world. The financial crisis had huge negative effects on markets in the world. Practically the crisis negatively affected all industries, leading to outcomes such as a decline in employment and an increase in layoffs. The financial crisis also led to the increase in oil prices globally, which subsequently led to an increase in expenditure, and thus reduced profit margins and even extremities such as huge losses for different industries (Howard, 2009).
The aviation industry was one of the hardest hit by this increase in oil prices. There was also a reduction in the numbers of those travelling due to people’s money depleting at a high rate due to increased costs of life (Sharpley, 2009). The tourism industry was hit hard by the reduction of tourist internationally, cutting the number of flights made by airlines. Changes also had to be made by board executives on how to change corporate policies to suit the challenges that came with the financial crisis (Howard, 2009). This report will focus on the impact that the financial crisis of 2008-2009 had on the airline industry. This will include looking at some of the main challenges brought about by the financial crisis to this industry, some of the solutions and protective measures that major players in this industry took to counter the harsh economic times and the results, both negative and positive that culminated from these measures.
Using the Airlines Reporting Corporation (ARC) financial data, Douglas Quinby assessed the downward trend of air tickets in the year 2008. ARC is an organization tasked with the monitor of sales of airlines and travel agencies. During the first quarter of the year 2008, Quinby notes that business was steady, but made a sudden decline of sales when the recession hit later on in October of the same year. He attributes this to the reduced buying power of the consumers brought about by the economic downturn. This report by Quinby shows the grave reality of the impact of the economic crisis in the industry (Quinby, 2009).
The economic crisis had very many negative impacts on the airline industry. However, different airlines reacted differently to different situations that the crisis brought about. One of the biggest challenges faced by airline industry players is the fluctuating price of oil. Being some of the biggest users of oil, with it being a necessary expenditure in their balance sheets unstable oil prices poses a great risk to set goals (Quinby, 2009). During the financial crisis, this is a challenge that these airlines had to face. Increased oil prices were especially ruthless to the profit margins of many airlines, leading to bankruptcy for some. In one article, Kerry Reals contends that indeed oil prices were the most prevalent challenge the industry faced. However, the financial crisis complicated matters by bringing about more problems that did not relate to the oil problem. Though this problem existed through the crisis, immediately after the crisis was fully manifested, it became a secondary problem (Reals, 2008).
With the crunch of the crisis, all experts in the airline industry now faced the new challenge of countering the declining travel, which was compounded by other bottlenecks such as saturation in the industry in all folds. The rising oil prices did not help the situation, but they made little difference to the billions of dollars in losses made by the industry. Several factors influenced the reduction in number of travels made. The fact that the financial crisis brought about a drop in personal assets worth of each individual especially in the western economies, people had much little to spend in an inflated economy (Sharpley, 2009). Thus, most could not just afford the luxury of traveling. Even corporations that were once very willing to pay for their employees to make international travels for corporate meetings simply had to go for cheaper option such as video conferencing, just to cut the expense brought by air tickets (Reals, 2008).
There was also a reduction in the number of tourists travelling across the world. The falling credit and reducing asset base discouraged people from taking such holidays, which were simply out of the reach of most (Sharpley, 2009). This coupled with the fact that summering when all other corporations were going into bankruptcy was not an option employers were willing to risk. These factors reduced tourism and affected both the airline industry and the tourism industry negatively (Quinby, 2009). All these factors led to a decline in the sales of air tickets and led to massive losses for airline companies.
The credit factor also contributed to some of the problems that plagued this industry. During this crisis, credit became very hard to come about, what with credit risk being at its highest during this time (Smith, 2011). Lack of finances not only led to budget cuts, but also led to thinning of airline activities such fleet numbers and maintenance costs. Grounding fleets was a common method used to fight inflated expenditures as (Smith, 2011) states. However, this method was not as helpful and was even a death sentence for some, since at the time the airline industry was one of the most competitive. Therefore, credit or its lack thereof reduced the spending capacity of many airlines and made doing business very hard for the industry.
The data on the airline market provides the best indicator of how the industry reacted to the financial crisis. From the data, it is easy to see that while some companies suffered from the crisis, others were able to weather the storm just fine, and actually came out as the winners in that situation. According to data from the GeoJournal of Tourism and Geosites, the effects of the financial crisis greatly varied across different airlines. In Lithuania, FlyLal announced bankruptcy one year after the crisis began. Olympic Airlines in Greece cancelled about 69 flights on March of 2009 due to increased costs (ECA, 2012).
Apart from making losses and going bankrupt, other companies had a reduction in profits. The company Air France-KLM made an announcement of a decrease in revenues of 20% in its annual financial reports ending 2009. However, unlike other companies that were experiencing bankruptcy, this airline had taken various steps to ensure that it did not go down that road. Among these steps was introducing cheaper tickets and reducing business flights. Meanwhile, others like AirBerlin and WizAir registered profits up by over 20% during the same time. Low cost companies were not spared either. These are companies that do not operate on a large scale compared to bigger airliners, only dealing with a handful of assured destinations (Smith, 2011).
Companies such as Myair, an Italian company, or SkyEurope, which was an Austrian-Slovakian airline, went bankrupt. In the US, carriers such as Alaska (ALK), US Airways (LCC), Continental (CAL) and JetBlue (JBLU) all registered losses for the year 2008. According to a report by IATA, losses worldwide that year topped five billion dollars (Marilyn, 2010). Meanwhile, other companies in the US such as Southwest Airlines (LUV) and Delta (DAL) posted profits for the same year. This data shows that there were both grave outcomes and opportunistic chances, resulting in a fluctuation of success based on the strategies taken.
Therefore, due to demand through circumstances, many companies had to come up with ways through which they could not only overcome the constrictions of the financial crisis, but also become bigger players in their respective markets. There were plans taken by companies to counter the crisis, some more effective than others. This research includes an analysis of these methods employed, as well as the advantages and demerits of each. One strategy that changed was marketing. All companies had to re-strategize on better ways of marketing, coming up with policies such as lower prices and promotions (Mariaus, 2010). Marketing is an important tool especially in a highly competitive market. The use of slashing ticket prices was used to attract more customers while reducing comfort. This actually worked for various companies such as AirFrance-KLM. The company had a decrease of income by 30%, but due to change of marketing strategies and introducing cheaper tickets, still posted profits of 15% in that year.
The article by Al Smith also gives examples of companies that benefited from this move. In the US, Easy Jet and Ryan Air recorded profits in the year 2009, mainly due to slashing of prices and using special offers. This slashing appeals to people who have had a second thought on spending on air travel due to the economic crisis (Smith, 2011). This negative effect, which was evident in all businesses but airlines that realized there was a demand in the market took this for an opportunity, and brought in the required products to the market in terms of cheaper tickets.
Meanwhile, other airlines took the hard road and decide...