Abstract: As deregulation bites, Europe's airlines must decide where their strengths lie - or risk being grounded Europe's airline industry has traditionally been characterized by monolithic national carriers with strong links to their national governments, a lack of competition on routes, prices, and services, and little emphasis on the bottom line. Not surprisingly, these airlines, with a few exceptions, have not even earned their cost of capital. But change is in the air. Deregulation is beginning to open up previously protected markets and to create competition on the basis of price and service. Governments, for a variety of reasons, are starting to give up ownership of their national airlines. Restrictive ownership rules are being dismantled, allowing foreign airlines to buy stakes in formerly national carriers. And Brussels is getting tougher on governments within the European Union providing subsidies to their airlines every time they get out the begging bowl. When deregulation is completed in 1997, any EU airline will be able to fly anywhere within the single market - and to compete in nearly all service activities, such as ground handling, catering, and check-in. Moreover, non-European players are beginning to compete in markets previously reserved for national companies. Most notable among them are carriers from North America, which have now been able to increase their European presence. Ground service providers, such as Ogden in ground handling and Caterair in catering, are also increasing their coverage of European airports. This has meant that traditional sources of profit are being eroded, greatly diminishing the ability of an airline to subsidize its flight operations through revenues from other activities. A new game plan It is not clear how these changes will play out or what shape the European airline industry will adopt some years from now. Looking to the US, with [TABULAR DATA FOR EXHIBIT 1 OMITTED] its 15-year history of deregulation, provides some clues, but no firm conclusions. Since the Airline Deregulation Act of 1978, which allowed new entrants into the industry and permitted airlines to choose the routes they wanted to fly and to set the prices they wanted to charge, US consumers have benefited from real price falls of an average of 20 percent - and up to 35 percent on long-haul routes. If European airlines respond to regulatory changes in the same way as their US counterparts, we are certain to witness a transformation of the industry in at least two ways: increased market orientation; leading to a proliferation of new services, and growing price and cost pressures, making productivity improvements a key factor for success.(*) The financial performance of most US carriers, however, suggests that many of their tactical moves since deregulation have not really improved profitability. The building of large networks on a hub-and-spoke basis, the aggressive marketing of frequent flyer programs, the sophisticated use of yield management techniques and pricing systems, major investments in reservation systems, and even a constant focus on cost reduction - all these have been useful, even essential. But the higher productivity and investments in greater capacity have not been met with a commensurate increase in demand. Some of these tactics may be relevant to particular European airlines, but they are clearly not for all to emulate. What is needed, instead, is a new game plan that will allow these airlines, most of which currently perform all activities from check-in to engine maintenance themselves, to restructure around core activities. This will allow them to optimize the three critical levers of value creation: revenue enhancement, cost reduction, and reduction of asset intensity. Exhibit 1 describes the activities performed by airlines today, as well as what will be required if they were to concede some activities. Enhanced revenues will flow from airlines getting better at managing core competences like pricing, capacity, networks, and schedules. …
Publication Year: 1994
Publication Date: 1994-09-22
Language: en
Type: article
Access and Citation
Cited By Count: 3
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