Aviation Industry: A Love Hate Relationship

by Dr. Elinor Garely, special to eTN

The airline business is the industry that consumers love to hate. Because we cannot get along without it we are a captive audience. With only 4 major USA airlines still standing (controlling 80 percent of the market), we do not have many choices as to which one to select for business or leisure flights.

Opposing Points of View

With airlines killing puppies and delivering pets to the wrong destination, beating passengers to a pulp when they refuse to respond to employee commands, forcing adult passengers into seats sized for pre-school children, stripping us of our identities as we are led like cattle onto and off the plane, and not providing food worthy of the nomenclature (for economy passengers) and then charging hundreds and thousands of dollars for the privilege of boarding the aircraft, it is difficult for the average person to feel any love or admiration for these corporations.

No Tears

According to the US Department of Transportation (DOT), airlines fall into 4 categories:

130+ seat planes with the ability to carry passengers almost anywhere is the world. Companies in this category typically have annual revenue in excess of $1 billion.
Airlines usually seat 100-150 people and generate revenues $100 million – $1 billion.
Companies with revenues less than $100 million and focus on short-haul flights.
Enterprises generally transport goods.

Aviation: Value Added

From the corporate side, the industry offers consumers value beyond comparison with other businesses:

The aviation industry creates jobs, including aircraft manufacturers, airline pilots and crew, airport operators and staff, airport on-site enterprises (restaurants and retail), navigation service providers, and many others – providing employment for at least 2.2 million people in the USA (2014).
Passengers and airline employees buy goods and services from local suppliers – supporting another 1.5 million jobs.
Foreign tourists fly to the USA and spend their money in the local economy supporting an estimated 1.2 million jobs (2014).
The transport industry supports an estimated $560 billion gross value added contribution to GDP in the USA (2014) and an additional $120 billion to GDP from foreign visitors who support restaurants, hotels, transport providers and others who cater to tourists.
The USA has accumulated $5.5 trillion through foreign direct investment thanks to the industry.
Air transportation enterprises connect the USA to other countries and drive economic growth.
Worldwide, approximately $355 billion in GDP is supported through employees in the air transport industry (direct or indirect).
Aviation plays an important role in supporting the tourism industry. Over 54 percent of international tourists travel by air. The industry also provides international jobs, for example: in Africa 5.8 million people are employed and contribute $46 billion to the GDP (2014). In some Caribbean countries, tourism is one of the few means of economic growth.

Love it or hate it, the industry is challenged to remain successful. On a daily basis, airlines constantly have to address issues that include:

Airport capacity
Route structure
Technology
Costs to lease/buy aircraft
Weather (variable and unpredictable). Extreme heat, cold, fog, snow – can shut down airports and cancel flights creating a financial burden to the industry.
Fuel costs. According to Air Transportation Association (ATA), fuel is the second largest expense for the airlines.
The ATA finds that labor is the primary cost to airlines including pilots, flight attendants, baggage handlers, dispatchers, and customer service personnel.

Barriers to Competitors

Some consider the airline industry as an oligopoly (when a market is controlled by a small group of firms). Sometimes this happens because there are high barriers to entry and they discourage potential competitors; other times it is the outcome of predatory pricing.

As of 2017, there are four major domestic airlines (American Airlines, Delta Air Lines, Southwest and United Airlines, subsidiary of United Continental Holdings) and they fly approximatey 80 percent of all domestic passengers.

Because They Can

In 2015, North American airlines were projected to early $15.7 billion in net profits and achieve net profit margins of 7.5 percent, twice the worldwide average (source: IATA). In recent years, the four major carriers have removed unprofitable flights, filled more seats on planes, slowed capacity growth to command higher fares and charge fees for ancillary services that were once included in the airfare.

Bright or Cloudy Future

The airline executives currently compete with each other for extravagant business and first class passengers. The customers occupying this space pay 4-6 times the fare of a coach class traveler. How long the people with deep pockets will agree to pay for a bit more space and a glass of champagne is questionable.

Consumer wants and needs change more frequently and quickly than many in the aviation industry are able to respond.

Want It NOW

In the 21^st century perspective, the consumer demand for “immediacy” has been altered and the expectation is for the experience to happen NOW and not later. Based on this mandate, one potential market disrupter is BOOM Supersonic Technologies of Denver. Booms’ 50-seat aircraft will deliver travelers from New York to London is half the current time. The operating costs are based on fees comparable with current charges for business/first class seats on existing airlines.

Virgin Atlantic placed an order and 2023 is scheduled for a commercial roll out. Japan Airlines has invested $10M and preordered 20 aircraft. Carbon fiber composites, modern aerodynamics and turbofan engines enable the development of small supersonic airliners that are profitable at a business –class fare level. Boom estimates there is a market (over 1000) for this type of aircraft.

In addition, new business models (think Norwegian Air) are in the process of changing the airline skyline. Economics, technology and personal dynamics will change everything about the airline industry from airports, and air travel, to demand for aircraft as well as ground transportation and accommodations.

Airports in Transition

Huntley Lawrence, Aviation Director, Port Authority of NY and NJ recently commented on the $8 billion redevelopment plan for LaGuardia Airport and the construction phase of the $2.4 billion redevelopment project for Newark’s Terminal A. In addition, there will be a new cargo facility at JFK which is a public/private partnership. He considers every passenger as “our customer,” and is unwilling to accept poor performance.

Currently, airports are about “waiting.” Wait to park, wait to check-in, wait to be screened, wait to board. New airport design will focus on movement. Thanks to technology, the transition from ground to air will be personalized and expedited throughout the airport experience. Technology is already improving the ground to air experience as passengers, in many instances, are using their phones to check in and pass-through security, enter airline lounges and clear- through to boarding gates. Self-bag tagging and self-boarding are already available at over 115 terminals around the world.

Airports, with a focus on the customer, will incorporate amenities directed to stress reduction. Processing space will morph into amenity space as remote check-in reduces the need for large ticketing halls. Portal security screening will eliminate centralized security checkpoints, and boundaries will blur-eliminating the differentiation between retail, dining and departure spaces. Airport tenants will change frequently based on customer needs and wants, eliminating the necessity for long-term leases and expensive construction. Biometrics and self-service will reduce waiting, giving passengers more time to shop, work, eat and sleep.

Customercentric Attitude

The aviation industry is looking for additional and personalized ways to reach the customer. The limited services currently offered (baggage check-in, seat upgrades, insurance, hotels and car rentals) are not meeting the wants and needs of the consumer as the focus has been on the airlines maximizing revenue. Finally, the industry is transitioning to a redefinition of their core business and seeing their operations as a “travel experience business,” with flights viewed as just one of the many products available through their travel portal and they are starting to think as retailers.

From the perspective of the airline executive, the customer should believe that their services offer value and they are not being exploited. For example, current excess baggage and seat charges have made travelers feel like they are “being squeezed rather than served” (amadeus.com/airlinemerchandising).

The airline merchandising strategy will include a focus on: the customer journey, techniques, channels, services and pricing and the experiences will be personalized. The data collected will give the traveler the impression of personalization because of the relevance of the offerings to their wants and needs.

Airlines Leadership

To reach their objectives, the industry will have to invest in new technology, engage in a new mind-set and develop a rapid-response thought process. Technology offers opportunities to reach the target markets before, during and after the airport experience and it may be possible for the airlines to be leaders in the travel experience and not just a member of the team.

Today, travelers and their communities expect more from their airlines and their airports as they are viewed as more than a place for transiting through and a way to get from one city to another. Consumers want responsible enterprises that conserve energy, water, material resources, minimize pollution and waste, and provide services that are value priced and available on an as-needed basis.

The consumer is ready to embrace change. The question is whether the industry is prepared to design and deliver these products and services.