What are the main challenges facing the

airline industry today?

Challenges facing airline industry are familiar and persistent—Cyclical nature of business,
slowing down of global economy, uncertainty of fuel prices, technology, Environment, and
slow pace of liberalization.

African airlines and Latin American airlines are struggling to survive even in the best of
times—2015, 2016. Asian, European, and Middle Eastern airlines are still below the cost of
capital—shareholders’ expected rate of return on invested capital (ROIC). Its only American
airlines, which have shown robust net profits and ROIC above expectations of shareholders.
There is a good reason for such an outstanding performance after such a long period, which is
reduction in competition because of mergers and acquisition in USA. US Domestic market itself is so
huge that it forms 1/4th of the total global traffic—domestic and international put together. About
70% of US domestic market share goes to only four major US airlines. Foreign airlines cannot
commercially exploit US domestic market. In fact domestic markets are protected all over the world,
except EU States—that too is restricted to EU countries’ airlines only.
Cyclical Nature of Airlines Business: Global airline business typically follows 8–9 years,
business cycle—trough to trough or peak to peak. Global Airline business is already at its
peak and now is the time for it to start contracting.

A number of factors explain this phenomenon. Firstly when the airlines start to make profits,
labour unions become active and labour charges go up, increasing cost of operations.

Secondly profitable airlines start to place orders for new technology aircraft, in order to remain
ahead of competition. Money is borrowed from financial markets and interest cost goes up,
affecting bottom line—shareholder’s return on investment.
Slowing Down of Global Economy: Growth in airline business is linked with the growth of global
economy. When it slows down, so does the airline business. Interest rates in USA are at the lowest
ebb at present. Interest rates might soon start to rise, further slowing down of global economy.

International trade growth which is already slow; will further slow down, affecting growth in airline
industry.
Fuel, Technology and Environment: All three are linked:

 Fuel Prices: Fuel prices have dropped from $140 (2009/10) to just over $40 per
barrel. Fuel is second largest cost in Europe and USA, after labour cost. In Asia it is
other way round. Fuel accounts for 30–40% of the operating cost on the average.
Drop in fuel prices is one of the reasons airline industry has been able to rebound, but
there is no certainty that fuel prices would remain stable.
 Technology: Sustained development of engines and aircraft technology has
progressively reduced fuel consumption to about 35 liters per 100 RTK—35 liters of
fuel spent to carry 100 tons of revenue weight (pax +cargo) over one kilometer, in
comparison to 110 liters about 16 years ago. New technology aircraft like B-787 and
A350 consume 20–30% less fuel than the aircraft they would replace. However, not
all airlines would be able to replace their fleet with modern technology aircraft for the
want of capital. Old technology aircraft, which are quite heavy on fuel would remain
in operations for decades to come.
 Environment: Growth in airline capacity also means more environmental damage—
carbon emission. Old technology aircraft do, relatively, more damage to the
environment than new technology aircraft. Introduction of carbon tax in Europe is the
first step towards pressurizing industry to do something about it—use of alternative
fuels and new technology aircraft.

Airspace and Airport Capacity: Arriving aircraft at busy airports have to wait in the air for
their turn to land. Holding in the air costs upto 12% extra fuel on the average (Ref: IATA).
Runway capacity needs to be enhanced using modern technology such as reducing separation
distances between successive arrivals/departures, rapid exit taxiways at proper distances
along the runways, will increase runways capacity—Airport Capacity.
Separate arrival and departure routes to facilitate Continuous Descend Approach (CDA) and
Continuous Ascent Departures (CAD), will reduce fuel consumption and Carbon emission.
Reduction of horizontal and lateral separation based on RNP (Required Navigation
Performance) and RNAV (Area Navigation) Routes would increase airspace capacity.

Restrictive Bilateral Regimes: Airline industry still remains the most regulated industry in
the world because of a system of bilateralism since 1944. Open skies bilateral Air Services
Agreements have been concluded by most of the States in the world. However, some of the
States are still reluctant to do so, primarily under pressure from their national airlines. These
States have not been able to privatize their loss making national airlines, ostensibly, due to
socio-political reasons. Foreign investments in airlines is also restricted to 49% of
shareholding, in most of the world. Some States like Middle East do not allow any foreign
investment in their airlines or airports.