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August 30, 2010

Trends in the Aviation Industry: Coping With Change

On a brisk winter Thursday morning, December 17th, 1903, for the first time ever, Wilbur and Orville flew the Wright Flyer, the world’s first powered flight. It was a dream come true for the tenacious brothers. It was the beginning of consumer aviation history.

It’s been 100 years now, but after deregulation of 1978, and industry consolidation of the 1980s, we’re facing some major changes in the airline industry, most importantly, the purchase of airline tickets through travel agencies, the rise of low-cost carriers and changes in the airline hub-and-spoke route patterns.

Online travel sites and low-cost carriers have definitely made flying affordable for hordes of travelers, with far reaching impact on our travel decision patterns.

Ahoy! Cost Cutting

Okay, guess how many internet users we have worldwide. Reports and surveys show that over 1 billion people are glued to the internet everyday! The advent of direct airline ticket sales, on both individual airline and discount travel web sites have brought huge transformations in the marketing and selling of air tickets. Whether it’s American Airlines, or United Airlines, Lufthansa or any other airline on earth, booking air tickets is just a mouse click away!

For instance, in 2002, over 39 million Americans booked travel using travel web sites. Did you know that this was a 25% increase from 2001?! Such exponential growth of online bookings have resulted in considerable cost savings for airlines. For example, purchasing a Northwest Airlines ticket through a travel agent costs $30. A ticket sold online costs just about $10. Hence, distribution and selling costs have been reduced by one-third to less than 10% of an airline’s total costs.

What’s the Benefit for Customers?

It’s an easy guess now that price reductions in fares are the benefit of purchasing airline tickets online. Price transparency demands that airlines acclimate to more price-conscious consumers. After all, most of us shop around and compare price options and fares across different airlines. Added to this, the cut-throat competition and increasing knowledge about surrogate flights, and airfares continue to drop.

Cost Cutting and In-flight Services

How does cost cutting affect in-flight services? An obvious outcome is the number of dwindling airlines providing amenities such as in-flight meals and other standard services. Many of the airlines that used to offer fresh and healthy meals at no additional expense are now selling snacks and meals on board. So, while flying Midwest Airlines, we purchase deli-style breakfast, lunch and dinner selections on board.

There is one upside, individual entertainment systems and data ports are becoming increasingly available to consumers. So, it’s easier for us to stay connected while in the clouds!

Implications of the Hub-and-Spoke System

We know how important the hub (main airports) are. But, so much reliance on one airport can have significant implications for both consumers and airlines. For example, a severe weather disturbance may paralyze a large airline’s entire operation. This might result in flight delays, and greater demand for direct flights (versus layovers), especially business class flyers with tight deadlines. Also, greater frequency of flights between two hub markets might lead to increased airfares. Say, if we have a higher frequency of British Midland flights between London and New York, chances are that British Midland airfares between the two hubs will see a sharp rise.

Future Trends

In 2001, commercial airlines carried 450 million passengers. This is a whopping 250% increase since deregulation in 1978. According to predictions, over the next 20 years air travel will increase threefold. An interesting prediction is that about 70% of flights will be operated from just 25 airports, many of which, such as New York and Heathrow, are already so congested they can’t accommodate more planes. Under these circumstances, the only solution lies in using larger carriers to accommodate more passengers. The doubled-deck, four-engine, 555-capacity Airbus A380 has already been tested and is scheduled to start operations in late 2007.

Aviation is going through another historical change. Bigger airplanes to carry more passengers, cheaper flights and fewer airports. 10-years from now, I wonder how we’ll reflect on this time.

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