Another article written by the International Air Transport Authority states that some airlines have started to see some stabilization in the business and the first class sectors of the airlines. These are the most profitable sectors for an airline.however it is pertinent to note here that not all airline have been as lucky and thus some airline are still facing a loss on these sectors as well.
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For the other airline which are seeing stabilization, these sectors are back up and running because of the fact that the economic crisis is now improving and slowly people are returning back to their normal lives and businesses have stabilized and thus they are back to doing business as they were before the crisis took place a few years ago in the world. World trade has thus become essential once again and the companies are now slowly allowing their employees to start spending extravagantly as well.
Business class has not recovered fully either on the other hand. Passengers who used to fly these classes now resort to flying economy or taking budget airlines. This is due to the new reforms that some companies have come up with restricting the use of the high end seats by its employees in an effort to save up on the money.
Economy class passengers who were the tourist class passengers have not fully come back to their original number however. As the majority of the revenue on a flight does come from the economy class, airlines are starting to feel the effects of decline of passengers now. When on certain routes the economy class used to go packed, it is now seeing empty seats as well and empty seats are causing the airlines problems and thus the management of the airlines are considering alternative strategies to deal with these seats. The strategies include offering special last minute deals on seats and thus earning something in comparison to having nothing when a seat goes empty on a flight.
The article further goes on to state that as a result of all of the above, passengers numbers are now being stabilized at the expense of much lower yields for the airlines now as airlines are trying to boost up their cash flows now. Having the financial independence is necessary for airlines in order to remain afloat thus they need to take a profit that is lower than that they would normally be receiving just to remain afloat. Times are hard for the airlines but they realize that without this they will not be able to survive and thus will see their precious consumer base going to other airlines in the market. [ii]
This article written by Jones (2012) states that at a time when the airline industry was booming, many airlines had made their future expansion and growth plans according to this. However after the global financial crisis, airlines had to cut back on their plans in order to remain afloat. Airlines used many techniques to cut back on these plans.
Airlines which had ordered planes in advance to cope with the demand that had been increasing over the last few years had to cancel their orders and thus face losses with that as well. Airlines which had merged with other airlines in order to cope with the demand were not regretting this decision as it was becoming too expensive to cope with these expenses in the prevalent economic conditions. Airplanes were being sold off as well. An example can be that of Lufthansa which added 50% more capacity in 2007 in order to cope with the increasing demand but only added 2.3% capacity in 2012. This has shown that there is a downward trend in the increasing world market and that has actually crippled the airline industry.
Airlines have also had to retire their older fleet of aircrafts as well in order to cut back on their losses. International routes have been hit the hardest as these were the routes which generated the most profitability for these airlines. The airlines have shrunk their size and laif off their employees as well in order to cope with the decreasing demand for these routes.
Many routes have also been scrapped by these airlines as now some routes are not generating the profitability that once was generated and some are even running on loss. This has also resulted in airlines reducing frequency of their flights. This all has an impact on the airline profitability and thus they are now having lower profitability.
Feeder airlines have also impacted the profitability of the larger airlines as they were the ones who used to transport people to the major airports from where larger airlines used to operate to the long haul destinations. These feeder airlines have reduced their frequency and some routes have also been closed down thus hampering the profitability of the larger airlines on the long haul routes.
Given these changes their has been an immense price competition in the market as well which has resulted in airlines offering cheaper tickets in order to grab the maximum passenger load. [iii]
Business and first class travel have been the airlines prize possession and they have counted on these seats for they are the ones that achieve maximum profitability for an airline. These seats used to be fully booked well in advance and were typically booked by business travellers. These seats are now going empty a lot of the time as there has been a decrease in the passenger revenues and thus these seats are the ones that once used to bring in a lot of profitability for the company but now are becoming a source of loss for airlines in the economic downturn.
Business class and first class passengers are now shifting to cheaper alternatives, like flying in Economy class or shifting to other modes of transportation like the train and even not flying at times and resorting to modern technology like video conferencing in order to cut back costs which are associated with the premier class travel which is expensive.
This has impacted the European market the most as the level of business confidence has gone down considerably and thus has proven to have very small increase chances in Europe. However, it is noted that the fluctuation is not consistent and can bounce back as well. However if it does not bounce back it can also spread to other markets as well and thus also hamper profitability.
This article highlights the reasons for the decline in PIA air travel which is ultimately affecting the profitability of the airline. there are many reasons given for the decline and all of them are related to PIA in terms of the way the airline is being currently run and thus are not related to the workings of the airlines who are also being faced with this problem as well.
One of the major issues faced by PIA is the devaluation of the rupee. PIA suffers high losses due to the exchange rate fluctuations. This devaluation of the rupee has thus led the airline to experience losses even in 2012. Many of the purchases are made in US Dollars are thus the rupee has depreciated and thus the airline is now suffering losses as steps were not taken in advance to solve this problem.
The article goes on to say that the airline has also had to deal with the fuel price risk as well however In 2012 the price of the fuel has declined by 8%. The fluctuations in fuel prices has thus led to losses being incurred by PIA as they were not able to protect themselves against this fluctuation. Other airlines have protected themselves by adopting many techniques like purchasing fuel in advance at pre determined rates and thus avoiding the fluctuations that were happening in the international airline market and thus avoiding the problems which were being faced by airlines all over the world as well.
Its own internal problems have also led to the profits being decreased as well. This is majorly due to the internal inefficiencies of the airline and the unstable operating performance of PIA well. However recently due to the change in the management the airline has been able to bounce back a bit and improve its European operations as well considerably but it will take more than that in order to improve the condition of the airline. policies also need to be formulated which will help the airline run properly and thus avoid losses. Experienced personnel need to be brought in to take care of this problem.
PIA needs to have a long term strategy which it needs to follow in order to improve the profitability and the image of the airline. only by having a long term strategy will PIA be able to protect itself from the changing patterns in the market and thus avoid making losses in the long term as well. Thus it can be said that a long term strategy is something that is needed but is lacking currently in PIA. [iv]
An article written by IATA(2012) states that the jet fuel prices have also been a reason for the high increase in airline tickets. This has led to the passengers sales declining. The jet fuel prices have risen at a time when there is an economic meltdown and thus passengers have already been forced to reduce their expenditures and this increase has further led them to not travel on airlines thus hampering their profitability.
Airlines have not been able to hedge themselves against this fuel rise and that is why many airlines have had to suffer losses and also face decrease in passengers as well. Very few airlines were able to hedge against the rise in fuel prices which have saved them from facing such losses. Other airlines have continued to face losses with the increase in jet fuel prices. PIA has not been able to do so and thus they have lost out on passenger revenues on long haul flights. The management does not have a long term strategy to deal with the rise in fuel prices and thus hedge from it either in any possible way that will help it minimize the losses being faced by the airline.
Airlines have also not had the breathing space to adapt to these changes as the changes in the price of jet fuel has increased steadily. Owing to this IATA has spotted a decrease in the industry profits and weak traffic volumes as well. The price of the jet fuel will also determine how the airlines operate in order to best address this situation they are facing. They may need to re think their routes and perhaps even cancel some routes as well. Restructuring will also take place. [v]
An article written by Hafeez UdDin(2012) states that as PIA is an airline which does not have many international agreements with other airlines, that is why passengers choose not to fly PIA. in this day and age, airlines have contracts with many airlines in order to facilitate the passengers so they can connect on to their destinations with another airline if a particular airline does not fly to a particular destination. Code sharing has become essential now a days and thus is proving to be useful for many airlines in order to improve their profits as well as their image as it really helps facilitate the passengers travelling with one particular airline.
However with PIA, they do not offer many options to passengers who need to connect at an airport to another airline. that is one of the core reasons why passengers then choose to fly airlines other than PIA and thus the demand for long haul flights with PIA decreases as well.
In Pakistan, there has been a lack of tourism owing to the current conditions of the country. There has been terrorism, political instability, viral outbreaks and acts of violence as well which have caused the condition of Pakistan to deteriorate. This reason has also caused the aviation industry in Pakistan to suffer as well. People feel insecure about travelling to Pakistan that is why the Pakistani tourism industry has decreased considerably. Owing to this people are not willing to travel to Pakistan in order to sight see as much as they once used to at a point in time. Even Pakistani people who reside abroad are a bit reluctant to come to Pakistan and that is why the passenger sales on long haul flights has also decreased as well as the EXPATS were the ones who used to travel on PIA long haul flights the most as well.
The reason listed above show why there has been a decline in the sales of PIA long haul routes. Being the national airline of a country that is plagued with these problems is one of the reasons why PIA has been losing out on sales. However, it is not the only reason. [vi]
According to an article published by IATA (2012), Airlines around the world have devised a new strategy in order to cope with the changing trends in the international market. These airlines are now aware of the impact of the global crisis and are thus adopting new strategies in order to effectively target that segment who has been impacted by it. The effective implementation of this strategy has led them to regain their market share and thus avoid making losses which were going to be inevitable owing to the changing market trends.
It is of most importance to note here that the consumers who travel on airlines will not be the ones to change. It is the airline which has to change their strategy in order to effectively cope with the consumers and their varying trends. Airlines have thus adopted new strategies to deal with this. Some new ways of doing it are by offering loyalty programs with added benefits. The other is by cutting on the expenses which an airline were incurring in order to satisfy their customers like providing a meal on board. Even though meals are still provided by the airlines on long haul flights, those meals are then prepared by contractors who charge the airline less for the food. This in turn helps reduce the cost of the ticket. Airlines have also resorted to using the low key airports to operate their flights which have less taxes etc. this means a lower cost ticket for the consumer. All of this eventually leads to lower priced tickets which is what in reality the consumer wants and thus the airlines needto give them. However the airlines have also taken quite a large dip out of their profits in order to provide them with this.
Airlines that are not using strategies like these mentioned above are the ones that are incurring losses on their flights. Passengers will continue to move to other airlines as they feel that those airlines are more suited to their needs and are thus a more viable option for them. Thus this will result in the airlines making more losses and losing out on the market share that is important to them. [vii]
This articles states that people are very conscious of the things they use these days. People want value for their money and as the competition is immense these days the consumers are spoilt in terms of choice and thus they will very easily switch brands in order to gain something. This shows that there is very little brand loyalty left in consumers. This is also applicable to airlines as well. Airlines need to remain on top of the game in order to deal with the competition they are facing.
Every particular aspect needs to be taken into consideration as it can be any factor that changes the mind of the consumer. Many airlines think that things like inflight entertainment are not important factors but the reality is that they are of importance especially on long haul flights. Passengers do give importance to them and thus the consumers believe that these are the aspects which are really important to them
Failing to take these into account are the reasons why some airlines are now facing losses. These airlines are also facing consumer shifts to other airlines as well hence steps need to be taken to curb this.
An article written by the centre of aviation(2012) states that the problems faced by the airlines are obvious but the successful implementation of a strategy are proving to be problematic. Many airlines face the issues of government intervention. This ultimately leads to a greater time for approving any changes that need to take place as many people/authorities need to approve of the changes before they can be implemented. By the time the strategy is actually implemented, it is too late as the airline is also facing losses owing to the loss in time that the airline faced while getting the approval for the changes that they wanted to the airline.
Given the limited finances available to these airlines as well, growth may peak at one time but the financial recovery is slow. This ultimately leads to the unability to raise capital for the airlines. And given the global economy, banks are also reluctant to give out loans as well as they are uncertain of the future in this day and age which leads to financing problems for the airlines. With lack of financing available, airlines thus resort to leasing aircrafts instead of purchasing them. This in the long run is not profitable for the airline.
The management of the airline also needs to take into account the micro issues that the airline is facing. Many a times the management aims at solving the macro issues which at the given time appear to be larger but the micro issues are also very important in the running of an airline. these are the issues which need to solved as well because a pile up of these issues will ultimately result in the airline suffering from losses if these issues are not addressed as well as the macro issues as well. Thus an environment needs to be set up where all the problems can be tackled. [viii]
The article written by Houriani(2012) states that the airline industry is being faced by an excess capacity. This is basically derived from underutilized planes which ultimately lead to an increase in competition. Airlines are facing cut throat competition and because of this the airlines have had to deal with many problems. The operational costs of actually running an airline are increasing and as a result of this airlines are not making that much profits as they once used to. The airline is not passing on the excess costs on to the consumers in fear of losing out on the consumers. This also related with the inflation which is taking place leads the airlines in a very uncomfortable position.
Airlines which are in trouble have had to take drastic steps in order to actually live through this. They have had to merge with other airlines and thus resort to compromising on many things. Another thing which the airlines have had to do is join strategic alliances. Joining these alliances have kept the airlines afloat in one way as it means that the consumer powers have gone down and thus the members of strategic alliances have more control thus allowing them to incur less losses as well in these troubling times.
The case of operational costs further split into fixed costs and variable costs particularly on long haul flights also needs to be taken into consideration. The airlines are faced with intense inflation which is happening and thus owing to that the fixed costs are rising and the airlines are trying very hard to curb their variable costs so that their expenditures do not increase by that big of a margin. However the variable costs that the airline is now cutting down on are the costs which create a deep and meaningful relation with the customers. Examples of this can be the frequent flyer programs and the lounges that the airlines operate. However, these are the costs that the customers care about the most and thus that eventually leads to the customer base diminishing. [ix]
An article written by Thompson (2009) states that long haul flights were once an airlines main source of income. Revenue earned from these were greater in comparison to the revenues earned by other flights operated by an airline which were termed as short haul flights. However in this day and age, passengers have been spoilt for choice. Many passengers prefer having layovers in other cities which lets them relax and thus does not prove to be tedious for them either. However, this has not been fared well with the airlines. This has ultimately resulted in lower profits for them.
Airlines have taken this change in customer patterns to their advantage. Many airlines now allow their passengers to have a break in many cities before continuing on with their journeys. Many airlines also offer tourism services as well in many cities which ultimately allows the passenger to see the city they are stopping over in. this allows the passenger to book tourism services with the same airline and thus can be less stressful for the passenger and possibly also more cheaper as well for the passengers.
This change of pattern has let the airlines branch out into many other services as well which ultimately allows them to have more than one source of income. This has led them to increase their income which is beneficial for the airline. They realized that the passenger patterns have changed and thus aligned themselves with those changing trends. Airlines which have adopted this technique are more profitable than those airlines who have not done so and thus still suffer from making low profits or even losses.
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Airlines which have not adapted themselves to the changes in the passenger patterns have ultimately lost out on profits and thus they are seeing that the travelling passenger loads have thus shifted to other airlines. This ultimately leads to passengers preferring one airline over the other and thus creating strong loyalties with the airline that best suits their needs. In the long run this is not good for an airline as it leads to the company losing out on its precious consumer base.
It is important for an airline to change itself with the changing passenger trends as that is what it is about at the end of the day. Airlines can not stick to their own agenda and not worry about what the travelling passengers want because at the end of the day the passengers are the ones who bring income to the company so their likes and preferences also need to be taken into consideration. [x]
An article written by Paylor (2005) states that airlines now a days are operating at a capacity that is larger than required. These airlines tend to have excess fleets, larger number of employees and overall are using resources that are not required. Owing to these excess utilization of resources, airlines are now being faced with the problem of incurring losses repeatedly. The losses can be cut down and hence the profitability of these airlines can be improved if various techniques are implemented to cut down on the expenses incurred by these airlines.
Airlines feel that they need to have a larger fleet size in order to cater to the global market. Purchasing or even the leasing of aircrafts is expensive hence airlines incur losses. One way for airlines to reduce the losses is to cut down on the flights which they operate. As many of their flights are going with empty seats especially on long haul routes, airlines should thus resort to cancelling flights and filling the load of empty planes on other planes. This can only happen if airlines cancel their scheduled flights and then operate only on those flights which they have full capacity. This way they will be able to minimize the losses incurred and thus will have more profitability as well.
The case of an airline is given where the airline should operate one larger aircraft instead of multiple smaller aircrafts and this will prove to be a more viable option for these airlines as they will be able to fill the larger aircraft with the same number of passengers as the smaller aircrafts. This will ultimately result in a lesser loss for the company as the airline will not have to incur the costs of fuel or employee salary on both aircrafts. Thus this is a useful technique.
Hence airlines can benefit from employing a strategy which will help minimize the losses incurred by the airline so that the financial position of the airline can be improved. This strategy needs to be employed so that the airline can benefit from the advantages that are derived from it. the advantages of the strategy will help improve the workings of the business and thus allow them to regain some things like the improved profitability and the internal management workings of the company. This will ultimately help the airline in its operations amongst many other things. [xi]
This article written by Chiu (2012) states that global inflation along with the global economic crisis is the root cause for the losses that the airlines are making especially on the long haul flights. The profitability of the airlines are under pressure and high oil prices are escalating the problems the airlines are currently being faced with in this economic crisis for the last couple of years.
Even freight has been showing a low trend and at one time the demand for this way very high but over the last few years this has been been showing a fall as the international market has been slowing down as well. In this condition, many airlines have no choice but to downsize. The first half of this years results have proven to not be good and thus the airlines have had to resort to taking appropriate steps to ensure that losses will not be incurred like they were in the first half of the year.
Given this not good scenario for airlines, the airlines are now cancelling orders for aircrafts that they have booked and thus losing lots of money on it as well. Moreover the airplane currently in operations in these airlines are being retired from use as well as the airline can not afford to use them anymore.
Over all it can be seen that a long term strategy needs to be in place for the airlines to start maxing profits. Firing employees will not solve the problems because the problem is much more than that. Where as that may be a short term solution in order to increase the profits, in the long term this is not a valid solution as the same thing will occur again hence steps need to be taken to avoid that from happening.
Thus these airlines need to come up with long term initiatives in order to solve this problem as this is not a small problem but will continue to increase if it is not properly handled to ensure it happens again. [xii]
The article written by Upadhyay (2012) states that the future for the airline industry in the long term does seem to improve. By 2030 the airline industry should improve its operations and thus the global traffic for airlines will also double that what it is right now. This will help create jobs as well and this will also be beneficial for the economy as well. The global GDP is also expected to rise substantially too. Thus the aviation sector is perceived to be a very successful and integral one as well to the global growth as it will help the global industry in many ways.
However currently the market conditions are not ideal for that to happen. Owing ot the tazes imposed by the EU in favour of a creating a cleaner carbon footprint. Other countries are suggesting imposing similar type of taxes on EU airlines. If this is continued it could lead to a global war which is not in favour of anyone. Thus steps need to be taken to take care of this problem as well.
Now a days the industrys profitability is precariously balanced on the edge of a knife which shows the fragile state of the industry. It will not take much to push it over and thus steps need to be taken in order to ensure that it is not pushed over to the side which will lead to a loss.
Thus steps need to be taken to ensure that there are proper legislations in place which are in favour of all the airlines and thus are not stopping the progress of any one particular airline. [xiii]
Industry Overview
Air travel remains a large and growing industry. It helps increase theinternational investment, world trade, economic growthand tourism and is therefore central to the globalization taking place in many other industries. Transportation sector is most important sector of any economy and aviation industry is major part of this sector. [xiv]
In the past decade, air travel has grown by 7% per year. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried 1.5 billion passengers last year. [xv]
Worldwide, IATA, International Air Transport Association, forecasts air travel to grow by an average 6.6% a year to the end of the decade and over 5% a year from 2000 to 2010. These rates are similar to those of the past ten years. In Europe and North America, where the air travel market is already highly developed, slower growth of 4%-6% is expected. The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with rising domestic prosperity. [xvi]
In Pakistan the transportation and communication sector holds more than 10% share in GDP (Gross Domestic Production). The aviation industry can affect the other sector of the economy, e.g. the International Trade, tourism and socio-economic condition of the country.
Historically Pakistan International Airline dominates the major portion of aviation industry. The state owned PIAC establish in 1955 to conduct the domestic as well international operations. It enjoys the monopoly until the deregulation of aviation industry. [xvii]
Pakistan has a limited number of airlines operating in the country and an even more limited number of airlines that provide international destinations as well. PIA being the National Flag Carrier Is the largest airline in Pakistan and is thus offering the largest network in comparison to any other airline in Pakistan.
In the international arena, PIA is being faced with intense competition as many International airlines, especially middle eastern airlines are operating in Pakistan on a regular basis and provide flights to destinations that PIA does not. With the advent of these airlines, PIA has faced stiff competition and has thus lost out on passenger revenues as it has done nothing to cater to those problems.
If the financials for PIA are looked at, it can be seen that the revenue being generated by international flights is decreasing at an alarming rate over the last few years. This is despite the fact that PIA has introduced new aircrafts for routes such as London, Toronto, New Yo
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