The international commercial aviation sector is volatile, with average net profitability in the decade to 2013 just 0.1% (O’Connell & Warnock-Smith, 2013). Over the past 20 years, the landscape of commercial aviation has transformed. With the current price of fuel low and passenger demand increasing, growth is booming. However, on-going development has the potential to be limited by a number of challenges. The challenges below provide a representative sample of key issues facing the sector, and have been grouped into the following areas: air transport growth and pilot shortages, the shifting landscape of air transport, capacity issues, and the environmental challenge.
In 2017, the International Air Transport Association (IATA) announced its forecast for passenger numbers to 2036, predicting these will double to nearly 7.8 billion (IATA, 2017). Coupled with an increase in freight-tonne kilometres of approximately 4.9% per-year over five years (IATA, 2018), this will cause significant pressure on already-strained infrastructure and staffing levels. The Boeing Company’s latest forecasts project that 790,000 new pilots will be needed over the next 20 years (2018). As pilots face airline and regulatory minimums – such as the Federal Aviation Administration’s (FAA’s) 1500-hour requirement to hold an Airline Transport Pilots License and operate as a First Officer (FAA, 2013) – pilots must gain a sufficient level of experience before transitioning to a role in a large commercial airline. A major challenge for airlines is acquiring sufficiently trained pilots, which is a key factor in many organizational growth plans.
Due to the cyclical nature of demand for experienced pilots, there is a pipeline issue concerning the lead-time from ab-initio training through to sufficient experience to enter airline employment. After graduation with a commercial pilot licence, a pilot tries to obtain work in general aviation to build up hours and progress to flying twin-engine aircraft (Thatcher & Michaelides-Mateou, 2017). Several aviation authorities, such as the Civil Aviation Authority of Singapore, have sought to address this issue by introducing the Multi-Crew Pilot License (MPL). The MPL is the first airline-dedicated professional pilot license allowing a quicker transition to employment, albeit with operating restrictions (Franks, Hay, & Mavin, 2014). The use of cadet or accelerated programmes to transition graduates into airline operations may also help to ease the shortage. In February 2018, Qantas announced it would invest $20M to develop its own facilities in Australia, training direct-entry cadets, to address on-going pilot shortages (Frawley, 2018). Airlines are also using strategies to promote aviation as a career for women, with females being under-represented as airline pilots (McCarthy, Budd & Ison, 2015).
A globalization strategy offers airlines the opportunity to utilise cheaper labour costs by, essentially, flying a flag of convenience. Long utilized within the marine industry, it allows an operator to choose foreign states, registering an aircraft there in order to obtain favourable treatment (Snodgrass, 2015). While the purported rationale for this is to meet labour shortages, Norwegian Airlines has an Ireland-based subsidiary operating flights to the U.S. in order to undercut strict Scandinavian labour laws and reduce operating expenditure (Hemmerdinger, 2017). U.S. legislation is currently being considered with an aim to discouraging this type of activity (Shuster, 2018). However, if sufficient regulatory measures are not put in place, the use of flags of convenience may increase in light of an increased labour demand for pilots (Mendelsohn, 2014).
One major transformation in the airline industry over the past 15 years has been the emergence of a Middle East hub. While East-West traffic connections were traditionally made through Europe, this has shifted to see the Middle East dominate in hub connections (O’Connell, 2011). Dubai and Abu Dhabi are in a unique geographic location, with over 4.5 billion people residing within an eight-hour radius of the United Arab Emirates (O’Connell & Williams, 2011). In additional, Governmental financial investment in infrastructure, supporting expansion, has helped achieve greater hub connectivity performance than through European airports (Fan & Lingblad, 2016). As shown in Table One, a 2016 study showed that in 2014 almost 70% of hub connections via Abu Dhabi were rapid transfers, translating to an Etihad hub connectively ratio of 2.87 (O’Connell & Bueno, 2018). In order to continue to remain competitive in East-West connections, traditional European carriers are facing the question of whether to continue operating in a traditional hub and spoke model, re-hubbing, or utilising emerging aircraft technologies to capitalise on point-to-point (P2P) routes.
P2P routings have traditionally been the dominant choice of low-cost carriers (LCC’s), but there are several key advantages in operating P2P networks. For airlines wishing to increase efficiencies without making major cost-cuts, P2P routing reduces the risk of flight delays (Cattaneo, Malighetti, Redondi & Salanati, 2018), particularly in light of capacity constraints. While traditionally undertaken by single-aisle aircraft, the Boeing 787 was designed to provide better efficiencies for P2P routings, with a faster cruising speed enabling city-pair non-stop flights. With emerging technologies offering greater passenger comfort and efficiencies on P2P routings, carriers may use a point-to-point aircraft-specific strategy to remain competitive.
The emergence of LCCs, and their ability to withstand economic crises due to operational flexibility, has impacted the commercial aviation sector (Lawton, 2002). One of the strategies for legacy carriers to compete against LCC’s is the use of the Airline-within-Airline model, which has taken longer to embed in the Asian market (Pearson & Merkert, 2014). This strategy has been met with varying levels of success, with some very profitable airlines emerging (Jetstar as the LCC of the Qantas Group) and others struggling to compete (Ted, the LCC of the United Airline Corporation, ceasing operations in 2008) (Gillen & Gados, 2008).
Alternatively, some airlines are seeking a diversified hybrid model, combining elements of full service and LCC airlines, aiming to improve yield, load factor and passenger satisfaction (Avram, 2017). The introduction of U-Fly, the first LCC alliance group, may mean that further international low-cost alliances are created, streamlining efficiencies and creating a better passenger experience in light of changing customer demands (Sedláčková & Lokaj, 2017). While traditional alliances remain stagnant, individual airlines are also creating strategic arrangements outside of major alliances, such as Etihad and Air New Zealand code-sharing on selected routes (NZ Herald, 2011).
Infrastructure constraints are a concern to commercial aviation. Many major airports are operating at or near peak capacity (Steer Davies Gleave, 2011). A 2009 study revealed that holding and vectoring inbound aircraft were responsible for nearly 25% of all airborne flight inefficiencies in European airspace (Reynolds, Gilingwater, Caves & Budd, 2009), and in 2013, 57% of all flights inbound to Heathrow were required to hold due to capacity issues (Heathrow Airport Limited, 2014).
On-going airport development will contribute to reducing capacity issues, with the addition of a third runway at Heathrow likely to translate to a 21% increase in peak hour movement capacity (Irvine, Budd & Pitfield, 2015). However, using only supply-side solutions is capital intensive, and has a long-term return period (Steer et. al., 2011). Better utilisation of demand management solutions can provide relief in a shorter timeframe, and is one strategy for better capacity management. This may include the use of the slot-scheduling model favoured by many European airports, over the demand-wait based approach utilised in most American airports (Zografos, Madas & Androutsopoulos, 2017). In addition, as more airports run the risk of becoming hubs due to expanding demand, consideration should be given to bottlenecks arising from poor management of airside taxiways and aprons (Mirković & Tošića, 2017).
Capacity issues, limiting growth and potential revenue, also impact airlines. Operational aircraft leasing is one of the many strategies used so airlines can maintain technologically advanced and competitive fleets, but also minimise the financial and taxation impacts relating to ownership (Bourjade, Huc & Muller-Vibes, 2017). For an airline to be in the best position to negotiate favourable lease conditions, it should maintain a positive working relationship with lessors and financiers. Airlines using a mixed-fleet model may also use a re-fleeting strategy to reassign aircraft to flights close to departure to improve operating profitability (Garcia & Cardaso, 2017).
Originally pioneered by the LCC model, ancillary revenue gathering is a strategy used to increase revenue when a fleet is at perceived maximum yield potential (Şengür, Uzgör & Ustaömer, 2018). As well as offering ‘add-on’s’ to basic seats such as baggage, food and priority boarding, airlines also compete with transport and tourism search engines, which have taken over the historic role offered by travel agents. In 2012, in the United States, unbundled products such as seat selection and express check-in represented between 15 – 25% of all ancillary revenue gathered by airlines (O’Connell & Warnock-Smith, 2013). Table Two shows the increase in ancillary revenue experienced by British Airways following the introduction of its ‘dynamic packaging’ scheme in 2009 (Warnock-Smith, Connell & Maleki, 2017). As competitiveness increases, unbundling fares and offering ancillary products can help an airline remain profitable, even as margins tighten from traditional revenue streams.
In 2010, U.S. carrier fuel costs made up around 40% of total airline operating costs, more than any other single expense (Wensveen, 2012). That year, commercial aviation consumed 5.8% of total oil worldwide (Mazraati, 2010). While fuel hedging offers an interim solution to reducing overall fuel costs, it does not seek to reduce emissions (Lim & Hong, 2014). Despite flying producing a disproportionately high level of carbon emissions (Scott, Peeters & Goessling, 2016), International Civil Aviation Organization (ICAO) targets for emission reduction remain gravely optimistic in light of progress achieved to date (Vaishnav, Petsonk, Avila, Morgan, & Fischbeck, 2016).
The utilisation of biofuels for propulsion remains one of the key drivers of environmental change in the industry (Becken & Mackey, 2017). While consumers believe the use of biofuels to be a positive step towards sustainability (Filimonau & Högström, 2017), Hibbert, Dickinson, Gössling & Curtin (2013) recognise that many consumers fail to change their decision making to minimise emissions. This lack of consumer change underlines the importance of technological advancement to progress the sustainability goals of the sector (Kivits, Charles & Ryan, 2010). While many airlines test biofuels on a limited basis, in the short term, biofuels will not be able to compete economically with fossil based fuels (Neuling & Kaltschmitt, 2018). However, the volatile nature of fuel costs and imminent increase of fuel prices, as well as increasing public and political pressures on the air transport industry, will drive the long-term biofuel adoption in aviation (Gegg, Budd & Ison, 2014). In addition, many airlines have adopted carbon-offset programmes to try and reduce their environmental impact, and are studying the likeliness of consumers to support this work through increased subsidies on fares (Choi, Gössling & Ritchie, 2018).
Historically, aircraft manufacturers and airlines have made efforts to improve fuel efficiency through advanced engines, high-lift wing designs, and lighter airframe materials (Lee & Mo, 2011). New aircraft models are building on these developments to produce significant fuel savings. Utilising aircraft such as the A350 and the 787, which Boeing claims can offer up to 20% operating efficiencies compared to similar sized aircraft (The Boeing Company, 2014), air transport operators are able to move towards a more sustainable future, beyond being seen to merely comply with emissions regulations.
While there are several key challenges facing the aviation sector, it is noteworthy that many of these elements are intertwined, each having a possible consequence relating to economic sustainability and profitability – the key objectives of any airline. The connectedness of all of these factors mean that commercial aviation will continue to take a holistic approach to management, ensuring that the consequence of each decision are considered across all facets of operation.
In summary, the commercial aviation sector will continue to need to innovate effectively to ensure that they are able to remain operational in light of increasing cost demands, capacity issues, and an ecosystem that requires a more sustainable approach towards transport.
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