The Airline Industry: Passenger Market

Contents
1.0 Introduction...........................................................................................................................................2
2.0 Performance of the Airline Passenger Market (2000-2020)..................................................................4
2.1 Growth Phases...................................................................................................................................4
2.2 Contraction and Stagnation...............................................................................................................5
2.3 Navigating Challenges........................................................................................................................6
3.0 Strategic Growth Approaches in the Airline Industry............................................................................7
3.1 Strategy 1: Low-Cost Carrier Model...................................................................................................8
3.2 Strategy 2: Ancillary Revenues...........................................................................................................9
3.3 Strategy 3: Strategic Alliances and Partnerships..............................................................................11
3.4 Strategy 4: Digital Transformation....................................................................................................13
4.0 Conclusion...........................................................................................................................................14
5.0References............................................................................................................................................15

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1.0 Introduction

The airline industry, a pivotal component of the global transportation sector, has experienced a

dynamic evolution over the past two decades. Characterised by its high sensitivity to

geopolitical, economic, and technological shifts, the industry has navigated through periods of

significant growth, faced challenges of contraction, and, at times, witnessed phases of

stagnation. The turn of the millennium marked the beginning of a transformative era for

airlines, driven by rapid advancements in technology, changes in consumer behaviour, and an

increasingly interconnected world economy. (O’Connell, 2018)

The airline sector can be divided into two main markets: passenger and cargo, each having its

own sub-market. The air cargo services industry comprises businesses that provide aviation

services and utilise aircraft, such as jets and helicopters, for the transportation of goods.

Figure 1. Different Sectors of the Airline Market

The purpose of this report is to dissect the performance of the airline passenger market from

2000 to 2020, a period that encapsulates the highs of unprecedented growth and the lows of

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unforeseen crises. This analysis aims to shed light on the resilience and adaptability of the

sector, exploring how airlines have not only weathered storms but also seized opportunities to

innovate and expand. By examining the strategic manoeuvres employed by passenger airlines,

this report endeavours to understand the underpinnings of market dynamics and the pivotal

decisions that have steered the industry's trajectory.

The scope of this report extends to a detailed examination of the airline passenger market. It

will delve into the multifaceted challenges that have tested the industry. Furthermore, the

report will highlight four exemplary strategies adopted by airlines to foster growth and

sustainability. These strategies will be illustrated through real-world examples of airlines that

have successfully implemented them, providing insights into their effectiveness and

contribution to the airlines' growth narratives.

The passenger market is mainly divided into business and leisure. Which is then further divided

into other sub-sections.

Figure 2. Airline passenger market segments and sub-segments

Source: Baxter, Srisaeng, and Wild (2019)

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2.0 Performance of the Airline Passenger Market (2000-2020)

The airline passenger market has undergone significant transformations over the last two

decades, marked by periods of robust growth, sharp contractions, and phases of stagnation

(Oxley and Jain, 2015). This section explores these dynamics, highlighting the impact of external

factors and the challenges faced by the industry.

2.1 Growth Phases

The early 2000s witnessed a rebound in the airline industry following the downturn caused by

the September 11 attacks in 2001. Technological advancements, particularly in online booking

and revenue management systems, alongside the expansion of low-cost carriers (LCCs), fuelled

a resurgence in passenger volumes (Efthymiou and Christidis, 2023). According to the

International Air Transport Association (IATA), global airline passenger numbers grew from 1.66

billion in 2000 to 4.54 billion in 2019, demonstrating an average annual growth rate of

approximately 5.3% (IATA, 2020).

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Figure 3. Accessibility of air travel
Sources: IATA (2020)

The proliferation of LCCs, such as Ryanair and Southwest Airlines, revolutionised the market by

offering affordable travel options, thereby democratising air travel, and expanding the customer

base. (Efthymiou and Christidis, 2023). Their business model, characterised by operational

efficiencies, single aircraft types, and secondary airport usage, not only reduced costs but also

intensified competition, leading to lower fares and increased accessibility for passengers (Loh,

et al., 2020).

2.2 Contraction and Stagnation

Despite its growth trajectory, the airline industry has been vulnerable to economic downturns

and external shocks. The global financial crisis of 2008-2009 led to a significant contraction in

the industry, with IATA reporting a 2% decline in passenger volumes in 2009 (IATA, Annual

Review, 2010). Airlines faced reduced demand as businesses cut travel budgets and consumers

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curtailed discretionary spending. The industry's challenges were further compounded by

fluctuating fuel prices, which constitute a significant portion of an airline's operating costs. The

oil price spikes of 2008 and subsequent volatility placed considerable financial strain on carriers,

leading to industry-wide efforts to improve fuel efficiency and hedge fuel purchases (CAPA,

2011). The most unprecedented challenge, however, emerged in 2020 with the onset of the

COVID-19 pandemic. Global travel restrictions and a collapse in demand led to a historic

downturn, with passenger numbers plummeting to levels not seen in decades. IATA reported a

staggering 60% drop in global passenger traffic in 2020, highlighting the pandemic's devastating

impact on the industry (IATA, Annual Review, 2021).

Figure 4. Global GDP vs. Global RPKS

Source: IATA (2021)

2.3 Navigating Challenges

In response to these adversities, airlines adopted various strategies to mitigate impacts and

sustain operations. Cost-cutting measures, fleet optimisation, and capacity adjustments became

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imperative for survival (Chang and Shao, 2011). Additionally, airlines accelerated the adoption

of digital technologies to enhance operational efficiency and customer experience, from

contactless check-in and boarding to the implementation of advanced health and safety

protocols (Dichter, et al., 2020). The industry also witnessed a shift towards more sustainable

practices, driven by regulatory pressures and growing environmental consciousness among

passengers. Investments in more fuel-efficient aircraft, biofuels, and carbon-offsetting initiatives

gained prominence as airlines sought to align with global sustainability goals (ATAG, 2020).

Figure 5. Evolution of the average price of air travel

Source: ATAG (2020)

3.0 Strategic Growth Approaches in the Airline Industry

To withstand tough periods and thrive in favourable times, airline companies have adopted a

range of strategies across various business sectors.

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3.1 Strategy 1: Low-Cost Carrier Model

The Low-Cost Carrier (LCC) model has been a transformative strategy in the airline industry,

fundamentally altering market dynamics by offering affordable travel options (Sarker, Hossan,

and Zaman, 2012). This model is characterised by a focus on cost reduction and operational

efficiency. Key practices include operating a single aircraft type to minimise maintenance costs,

using secondary airports with lower fees, and maintaining high aircraft utilisation with quick

turnaround times (Efthymiou and Christidis, 2023). Diaconu (2012) highlights that LCCs often

forgo traditional amenities like free in-flight meals and checked baggage to keep fares low.

Ryanair in Europe and Southwest Airlines in the U.S. have epitomised this model's success,

consistently achieving profitability and market growth. These airlines have not only captured

price-sensitive market segments, but also stimulated new demand by making air travel

accessible to a wider population (Barrett, 2004).

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Figure 6. Low-Cost Carriers’ Worldwide Market Share from 2006 to 2020
Source: Statista (2022)

3.2 Strategy 2: Ancillary Revenues

Ancillary revenues have become more than just an additional stream of income for airlines; they

are now a key factor in enhancing financial stability. To fully grasp the transformative effect of

ancillaries on the airline sector, it's crucial to assess their quantitative importance. (OAG, 2023)

Figure 7. Total Ancillary Revenue in the Airline Industry

Source: OAG (2023)

This strategy involves generating revenue from non-ticket sources, which has become a

significant income stream for many carriers. Initially introduced by long-haul low-cost carriers to

lower base fares, ancillary services were later embraced by traditional airlines for their long-

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haul flights. Ancillary services include charges for baggage, seat selection, priority boarding, in-

flight meals, and Wi-Fi access (Chiambaretto, 2021). Additionally, airlines have tapped into co-

branded credit cards, hotel and car rental partnerships, and frequent flyer programmes to

enhance revenue. United Airlines, for example, has seen substantial growth in its MileagePlus

programme, while Delta Air Lines has benefited from its American Express card partnership.

These strategies not only provide financial cushioning during downturns but also enable airlines

to offer more competitive base fares, appealing to cost-conscious travellers (Ozmec-Ban,et al. ,

2022).

3.3 Strategy 3: Strategic Alliances and Partnerships

An airline alliance is a collaborative agreement among various airlines, allowing them to work

together in marketing, offering, and providing seamless travel across their combined networks.

This collaboration extends benefits to frequent travellers and elite members, creating mutual

advantages for both passengers and the airlines involved (Douglas and Tan, 2017). Such

alliances enhance travel options with partner airlines, simplify the booking process and flight

connections, and offer more ways for customers to earn and use miles and elite status rewards.

Through these alliances, airlines can reach new customers and destinations without the need to

operate flights directly. By pooling their network resources, member airlines can serve a

broader range of destinations than they could on their own (Zou and Chen, 2017). Successful

examples include the partnership between American Airlines and Japan Airlines within the

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OneWorld Alliance, allowing American Airlines to offer numerous flights to Tokyo and connect

passengers to various destinations within Japan Airlines' domestic network.

Migdadi (2022) informs passengers that these alliances offer passengers more booking options

on a single ticket for connecting flights. Frequent flyers can accumulate miles across all member

airlines, with their status within the airline's loyalty programme determining their level of

benefits across the alliance. Benefits include additional luggage allowances, waived fees for

booking and seat selection, and faster airport services such as check-in, security, and boarding.

While the composition of these alliances has evolved, with some airlines joining and others

leaving, their core operations have largely remained the same. They are well-established, with a

widely utilised frequent flyer programme, though recent developments suggest potential future

changes (Payán-Sánchez, Pérez-Valls, and Plaza-Úbeda, 2019). The trend towards offering one-

way tickets and minimal frequent flyer benefits indicates that passengers are increasingly

looking beyond traditional alliance loyalties for their travel needs, a trend that is likely to persist.

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Figure 8. Total number of flights of global airline alliances from 2014 to 2018.
Source: Statista (2023)

3.4 Strategy 4: Digital Transformation

The digital transformation is profoundly affecting multiple sectors, notably the airline industry.

This impact is akin to other significant occurrences that have positively shaped the economy.

Driven by considerations like cost structure, security needs, and competitive forces, the airline

sector is vigorously pursuing digital advancements to improve both customer satisfaction and

financial outcomes (Heiets, et al., 2022). Kuisma (2018) mentions a key feature of many

oligopolies, including the airline industry, as the requirement for substantial capital investments

to build capacity. This leads to significant fixed costs, making it crucial to explore potential cost

savings through various digital solutions early in the capital investment process. This is because

these costs will become challenging to modify later on.

In addition to this, to optimise potential earnings, commercial airlines ought to prioritise

investments in security. This approach not only facilitates a secure transition into the digital age

but also leads to cost reductions stemming from a robust strategy to mitigate risks (Kuisma,

2018). For instance, Lufthansa leverages digital technology to streamline and automate

operational processes, reallocating resources to other critical areas to lower expenses and

enhance profit margins. Another example would be that in 1994, Air Canada took the

unconventional step of outsourcing its entire IT operations to IBM. Through this partnership,

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IBM assisted Air Canada in creating new technology tailored to the airline industry and

enhancing its offerings, including offering passengers’ access to the Internet during flights

(Heiets, et al., 2022).

4.0 Conclusion

The airline industry has undergone significant transformations from 2000 to 2020, navigating

through periods of growth, contraction, and stagnation. This report has highlighted the

resilience and adaptability of the passenger airline sector amidst geopolitical, economic, and

technological shifts. The early 2000s marked a period of recovery and growth, fuelled by

technological advancements and the rise of low-cost carriers (LCCs), which democratised air

travel and expanded the customer base. However, the industry also faced challenges, notably

the global financial crisis of 2008-2009 and the unprecedented impact of the COVID-19

pandemic in 2020, which led to a historic downturn in passenger numbers.

In response to these challenges, airlines adopted various strategies to sustain operations and

foster growth. These included cost-cutting measures, fleet optimisation, digital transformation,

and a focus on sustainability. The report detailed four strategic approaches that have been

pivotal in navigating the industry's complexities: the low-cost carrier model, ancillary revenues,

strategic alliances and partnerships, and digital transformation. Each strategy has contributed to

the industry's resilience, enabling airlines to adapt to changing market dynamics and maintain

financial stability.

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The low-cost carrier model revolutionised the industry by offering affordable travel options,

while ancillary revenues provided a crucial financial cushion. Strategic alliances and

partnerships expanded networks and enhanced customer offerings, and digital transformation

improved operational efficiency and the customer experience. These strategies, illustrated

through real-world examples, underscore the industry's ability to innovate and adapt in the face

of adversity.

In conclusion, the airline passenger market's journey from 2000 to 2020 underscores the

sector's dynamic nature and its capacity to evolve amidst challenges. The strategies adopted by

airlines during this period have not only ensured survival but have also paved the way for future

growth. As the industry looks ahead, it will continue to face uncertainties and opportunities.

However, the lessons learned and the strategic frameworks developed over the past two

decades will undoubtedly serve as a foundation for navigating future trends and challenges. The

airline industry's story is one of resilience, adaptability, and relentless pursuit of innovation,

reflecting its critical role in the global transportation ecosystem.

WORD COUNT:2132

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