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Industry Overview

industry overview

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Technological Advances Impact the Industry

Advances in technology continue to alter the safety and economics of the sector. New engine technologies have significantly reduced fuel consumption per passenger mile. The increased proven reliability of jet engines has allowed intra-continental travel to be conducted in aircraft with only two engines instead of the traditional three or four, also reducing fuel, maintenance, and initial investment costs. Computerization of most engine management functions has allowed airlines to cut staffing in the cockpit for even the largest airliners down to two. Rapid advances in navigation technologies (e.g. GPS) and computerized displays have significantly changed the cockpit workload and offer even greater potential in terms of navigation and air traffic control benefits. Changes in technology are affecting both the infrastructure of air transport (e.g. computerization and digitalization of air traffic functions) and the logistics of air carrier operations, be it in terms of advanced reservation systems and paperless ticketing, package tracking for cargo, or parts tracking and maintenance scheduling for equipment.

The graph below shows the historical costs and yields over time per seat mile, and the significant impact of technological advances in the sector.

industry overview

Though there is no lack of demand for air transportation, for many of the World Bank’s client countries the technological advances are slower to come. Many countries do not have complete radar coverage for many of their routes, and their airport infrastructure often needs investment in safety, security, and technology. At the same time, the need for reliable air transport, be it for travel or the transportation of freight, is ever increasing. Often demand is met by state-run airlines with non-optimal fleet choices, and with an infrastructure not having the best cost/revenue matching mechanisms, and a regulatory system not providing adequate oversight.

Economic State of the Industry

The air transport industry took a significant hit after the event of September 11, 2001, with an immediate recorded traffic decline of 5% in the U.S. alone. Other recent hits were the outbreak of the Iraq war and the SARS epidemic. Concurrently, two other longer-term influences have appeared affecting the overall well being of especially established carriers:

  • The deregulation of the 1970’s in the U.S. has significantly altered the known route structures of airlines by allowing free competition and unintervened market forces to determine the quantity of routes to a destination. The airlines responded by building the now familiar hub-and-spokes system. This allowed the startup of low-cost carriers, often offering significantly discounted direct flights to destinations that normally could only be reached by traveling through a hub. Low cost carriers have created a true challenge for the established traditional carriers and are now forcing established carriers such as Delta airlines to rethink their service and pricing strategies. These are not developments limited solely to U.S. markets – in other parts of the world, such as Europe and Southeast Asia, similar trends have emerged. For example, between the years 2000 and 2003 nonstop transcontinental revenues for legacy carries have fallen 34%, from $5.3 billion to $3.5 billion, whereas low-cost carrier revenues for the same routes have jumped 66%, from $0.6 billion to $1 billion (source: Eclat counsulting).
  • Fuel price had reached a historical high level of $147 per barrel in July 2008. The uncertainty of fuel prices has been another shock for a system already suffering from widespread lack of profitability. It is estimated that each additional dollar in the price of a barrel of oil adds $1 billion to the operating costs of the industry in 2005. Though deregulation and the introduction of low cost competitors as discussed above are less a factor with air freight operators, increased fuel costs directly affect the operations of the fleets of Federal Express, UPS, and other air cargo carriers. The spot price for Jet-A fuel hovered around $2.01 per gallon in the summer of 2010, after having spiked near $4.28 per gallon in July 2008.

IATA reports the industry to an operating loss of $10 billion globally in 2008, and the Air Transport Association (ATA) reports cumulative losses for U.S. carriers between 2001 and 2009 of $58 billion. By the same token, the industry is recovering - in 2010 operating profits have returned, with IATA forecasting the industry a full-year profit of $2.5 billion.

Challenges for Air Transport in Developing Countries

The growth in demand in the developing regions of the world often exceeds the economic growth rates of even wealthier countries, not to mention the less advantaged. However, though the basic equipment for air transport (airliners and runways) may be available, stresses to the system in some regions often are expressed in severe operational and safety shortcomings. For example, though Africa's overall accident rate is about the same as that of the U.S., the continent has less than 1/13 of the traffic volume. In addition, airline alliances are carving up the global marketplace, and carriers from lesser developed countries can face difficulties in competing in routes outside their own borders. World airline travel is now dominated by three major alliances (the Star Alliance with 29.3% of the global market in 2009, SkyTeam with 20.6%, and Oneworld with 23.2%), leaving only 26.9% of the market to the remaining non-aligned carriers.

In order to compete in the global marketplace, airlines must be able to have access to key nodes in the transportation network, and often these nodes require safety and security standards on airlines originating from lesser developed nations that cannot afford to meet them. For example, the U.S. gives countries safety audit ratings (referred to as "categories"), where the addition of any flights to the U.S. is dependent on that country's passing the safety audit. In addition, the U.S. Transportation Security Administration (TSA), the branch of the Department of Homeland Security responsible for airline security, certifies entry into the U.S. These standards are adapted elsewhere in the world, and not meeting them could close more than just the U.S. market.

The World Bank actively helps developing countries in their effort in improving both safety and security standards. For example, the Bank has helped countries in the Organization of Eastern Caribbean States improve their airport security through an extensive emergency relief package after airport and port security became an economic necessity following September 11, 2001. The World Bank also actively supports the liberalization of air routes between countries through establishing bilateral or multilateral agreements. For example, the Bank supported the implementation of the Yamoussoukro Decision of 1999, whose purpose is to liberalize air transport access to markets in West and Central Africa.

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