CRUISING TO PROFITS

Transformational Strategies for Sustained Airline Profitability  In January 2014, the airline industry will celebrate its first centennial, its 100th anniversary of the first commercial airline flight that took place between St. Petersburg and Tampa, Florida. Fast-forward to today and the world’s largest ever airline is in the making with the proposed merger between US Airways and American Airlines, creating an airline company with 110,000 employees with more than 1500 aircraft, 6,700 daily departures and 336 destinations in 56 countries. The industry overall is generating a whopping USD 711 billion in revenues, transporting just over 3 billion passengers per year. While for some aviation appears to be so common and interwoven in our daily lives, like it has always existed, the airline business is comparatively speaking a young industry that arguably has only started to evolve. Even so, due to the visibility the industry tends to face, many are aware of it s cyclical nature with oftentimes widely reported severe losses or revenue upswings. Although many industries experience repeated cycles, airlines can report mammoth losses in one year, then exhibit hundreds of millions of profits in the next, owing to fluctuating exchange rates, jet aviation A-1 fuel prices, union strikes, natural disasters, and overall decline in business volumes. This only demonstrates that slim margins typify the business and that a percent increase in yield can lead to profits due to the sheer size of current operations. An underlying trend has continued to harm the industry in that overall yields have been on a steady decline since the late 1970s. This is arguably related to structural overcapacity but also an underscoring and troubling tendency of the travelling public to perceive of air transport as a commodity. Today’s paradox is that customers trust airlines with their lives, but they do not trust t hem for one dollar. Willingness to pay has thus corroded, one may conclude, or we have tapped into market segments that are just not commercially viable and do not belong within scope or scale. For instance, if all airlines combined had been able to charge between USD 2 to 4 per passenger more, the global airline industry would have been profitable during the most recent troughs and downturns since 9 September 2001. Some contend that the industry appears to have a severe pricing competency problem and that future efforts should be directed towards correcting this fundamental quandary. While it is a fact that airlines have spent a great deal of efforts and invested into the area of revenue management ever since the early 1980s, this discipline has typically used, what could be called, imposed market segmentation leaving few to understand the complex fare structures and associated service l evels that so typified the 1990s.