In 2010, Emirates ordered 32 new A380 macrojets from Airbus, which opened the door for the airline market in India. Shortly after this, Airbus announced Monday that it had a received an order for $24 billion worth of new single-aisle jets from the Indonesian budget airline Lion Air. While the world is expecting growth of the airline industry in developing countries, the global air traffic industry is actually shrinking. Let’s examine the global air traffic industry and analyze the various factors affecting the business environment of the industry.
Freight markets have hit a low recently. International freight traffic reduced 8.2% and total (international and domestic) freight traffic decreased by 7.7% this past month. One may conclude that the freight market recession is due to Europe’s economic downturn, which is having a noticeable impact on air cargo. Cargo traffic, which generated $66 billion of revenues in 2010, has declined every month since May 2011 according to IATA. Furthermore, there was a 4.7% reduction in cargo demand in Oct 2011 amid reduced manufacturing confidence.
Air freight is among the first sectors to suffer when business confidence declines as shippers switch transport needs to slower and cheaper sea options to the detriment of air freight. Also, people spend less on air traffic during economic recessions. Many families cut down their holiday budgets and choose the relatively cheap traffic options such as ships or cars. At the meantime, companies downsize labor numbers and limit the budget for business traveling. Less business people traveling and a limited traffic budget bring the air traffic demand to the trough.
The airline industry has long been an unprofitable industry. Intense competition, threat of substitution, threat of new entry, and strong buyer and supplier power lead to the low profit conditions in the airline industry. To make things worse, the growing fuel prices and the global economy recession negatively affect the airline industry. Take American Airlines as an example. Increased security measures and restrictive regulations from the government have brought American Airlines a new challenge since 9/11. On November 19, 2001, President Bush passed the Aviation and Transportation Security Act, which established a new Transportation Security Administration (TSA). The most notable, and visible, effect of TSA to consumers has been the intense scrutiny placed on securing personnel and baggage. A research report suggests that the new baggage-screening process has reduced the passenger volume by 5% in the industry.
In the past decade, we have seen the airline industry contract tremendously due to decreasing air traffic demand. However, I believe that the airline industry will experience a revitalization as technology becomes more advanced, and therefore reduce the currently high operation costs in the airline industry.