SWOT Analysis of the Airline Industry

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Competition amongst businesses in the modern world is on the rise (Kareska, 2016). Therefore, the airline industry authorities need to focus on implementing and integrating suitable policies to sustain the requirements of the modern world. The stakeholders should review the strategies, identify any issues in operations and address any problems in the management (Kareska, 2016). Despite economic crisis the airline industry has sustained a continuous growth progress. The sector is the best industry for investing because there are only two significant problems that airlines have to deal with regarding increasing profits: the cost of labor and fuel.

Consequently, there are times when the sector only has to deal with one of those issues, making it the best investment platform. The most important factor that the airline industry authorities and stakeholders should prioritize would be introducing change in the management practices (Kareska, 2016; Cummings, & Worley, 2014). If the authorities fail to make specific changes in the management of the sector, then the company may fail to meet the requirements of success and prosperity (Cummings, & Worley, 2014). Every investment bears the risk of loss. However, the chances of making a profit through airline industry investment are high.

SWOT Analysis

The airline industry has over the years been benefiting from lower fuel costs which have significantly boosted earnings. The demand for air travel has been high, which can be attributed to exceptional customer service and industry-primary services. The management also plays a significant role in managing costs. The evaluation of carrier traffic using revenue passenger miles, remains high, increasing by 11% within the March quarter to about 9.49 billion (Hazel, 2018, p.76). There are companies in the airline industry that have implemented policies and techniques to expand their premium service offerings to help in expanding margins (Stalnaker et al., 2016). The price of the stock for airlines such as JetBlue Airways Corporation in 2015 increased significantly, a trend that was credited to the profitability and positive outlook of the stock within the airline industry. Sales in the industry are always projected to rise in the future, while earnings double (Team and Speculations, 2019). The main question for investors would be whether the stock is highly valued at the current market price (Team and Speculations, 2019). Another possible question would be whether the price would continue to rise in future. Addressing some of these questions and issues requires performing a SWOT analysis of the industry evaluating the strengths, weaknesses, opportunities, and threats.

Strength

A major strength of the airline industry is attributed to the product and service offered; air travel. Even though the industry has some downtimes periods, air travel has over the years featured a continuous progressive growth due to population growth and the increased tendency to fly. Another strength associated with the industry would be the safety record as well as the fact that air travel is recognized and accepted as a safe and fast way to travel. Airlines from a business perspective are capable of segmenting the market, even on the same routes. Such abilities allow for the launching of different levels of services and making accompanying pricing decisions.

Opportunity

The growth of the airline market allows for continual expansion opportunities for either leisure or business destinations. Technological advancements in this industry can result in cost savings, such as more fuel-efficient planes to more computerized processes. Technological innovations may also increase revenue because of customer-friendly service improvements such as onboard internet access as well as other value-added products that the customer may be required to pay extra. Merging with other carriers would be an effective approach towards increasing passenger volumes. Carriers would have the opportunity of offering service to destinations using a code-sharing agreement with a partner airline firm by synchronizing schedules (van Vliet, 2011).

Weaknesses

The major weakness in the airline industry is that the earnings are correlated with fuel prices. Therefore, the largest expense in this sector is fuel (Berghöfer, & Lucey, 2014, p.124; Naumann, & Suhl, 2013, p.343). Over the years, the cost of fuel has been subject to price fluctuations. Operating a company in the airline sector would require entering into a variety of derivative instruments to help minimize these expenses. However, such strategies may not offer full protection against higher prices (Naumann, & Suhl, 2013, p.343). The decline in global crude oil prices leads to the profits of airline firms strengthening (Naumann, & Suhl, 2013, p.343). An increase in the price of global crude oil may also lead to the firms recording profits if oil prices recover (Bildirici, & Bakirtas, 2014, p. 134). However, the competitive nature of the industry limits airlines from sufficiently increasing travel charges to compensate for the high cost of fuel. Infrastructure development is a major weakness and problem in the aviation industry. The slow infrastructure development rate in the industry makes it difficult to keep up with the growth rate of the aviation sector. A growing airline should, therefore, prioritize on investing in the infrastructure realize its potential.

Threats

The airline industry has some threats that may affect business operations and led to declined growth. The economic downturn may affect the growth of the industry because it would alter the leisure and business travel patterns. Airline companies face competition from other brands. For instance, Air Asia faces competition from other brands including Air India, And Virgin Airlines. The management of costs of the airlines may be a major threat that most companies have difficulties in managing the fluctuations in costs of fuel as well as maintaining the vast fleet of aircraft (Adelaida, 2018).

Risks Associated with the Airline Industry

The airline industry may be a demanding and challenging area to invest in, because of the amount of capital expenditures. Conversely, the airline industry also has an upside potential because it operates in a realm that features continuous growth and is essential to the middle-class population growth.

High Oil Prices

High oil prices are a major risk in the airline industry that any investor should consider when making investment decisions (Doganis, 2005, p. 11). The price of oil significantly affects the airline sector due to the dependent nature and amount of fuel used. For that reason, the cost of each trip would increase due to high fuel prices. For instance, it is projected that an increase in the cost of oil barrel by $1 would translate to an additional $1 billion a year in the global airline industry (Doganis, 2005, p. 11). This would be a significant amount of risk for any investor given that it is an external factor that is not within the control of a distinct airline company. The use and adoption of hedging strategies would be insufficient to compensate for the vulnerability of the airline company during the seasons of high oil prices. Consequently, the use of hedging techniques may negatively affect the profitability aspect of the business operations over the short-term and maybe an expensive mode of deferring risks.

Competition from low-cost carriers

Another possible risk in investing in the airline industry would be competition from low-cost carriers. The development of such types of carriers in the airline industry has had a significant impact on the sector (Acar, and Selcuk, 2015, p. 642). The low-cost carriers are classified as no-frills air companies that provide similar services but at a significantly lower cost to the customer. The industry faces the risk of price-cutting by competitors which has become a major problem compared to other industries in the economy. Many travelers tend to be price sensitive attributed to the correspondences of the carriers and the little product variation. Consequently, the low-cost carriers firms are also at risk to competition, for that reason, many companies within the airline industry may attempt to destabilize each other to realize and take advantage of the market share (Acar, and Selcuk, 2015, p. 642).

Vulnerable to economic recessions

The nature of business and operations of the airline industry makes it susceptible to economic recessions. Therefore, any decline in the global economy could have a negative impact on air travel. For instance in a study conducted by the international journal of commerce, it was reported that during the global financial crisis in 2008, the premium travel declined by 25%, while the economy declined by 9% (Goyal, and Negi, 2014, p. 297). The number of both holiday and business trips have been reported to decline during economic crisis periods, a trend that may a significant impact on the productivity and profitability of an airline company (Goyal, and Negi, 2014, p. 297).

Even though the airline industry is one of the fast-growing industries in the world, the corporations involved are vulnerable to major risks (Wittmer, 2011). Most of the associated risks are external and beyond the control of management. Therefore, it is crucial for investors to be conscious of the risks involved before making any investments in the sector and before making any investment decisions (Wittmer, 2011).

Proposal

Asia has been reported as one of the biggest aviation markets in the world by the Boeing’s Current Market Outlook. It was recorded that the aviation market in Asia at last count had a billion travelers travel to, from or within the region yearly. Also, more than 100 million new passengers are expected to result in an expansion of the market for the conceivable future. For instance in South-East Asia, the market had a compounded annual growth rate of about 10% within the last five years featuring an increasing middle class, which implies a continuous growth in the demand for air travel. Asia has emerged as one of the commercial aviation’s most active growth regions in the aviation market. Such status is attributed to the increase and rise in capacity by up to 80% since 2009. Consequently, facilitating this growth requires investments in airport infrastructure within this region. The government in the area should consider planning and acting to make it possible for the economies capture the growth initiated by the increased air travel demand.

Asian aviation market has more new plans on order compared to other markets in the world. The airports in this region have been labeled as some of the fastest-growing in the world, implying an excellent opportunity for investors. The region also has the most popular aircraft journey in the world.

Asia Pacific Airlines carry most passengers (Adelaida, 2018)

According to the figure above, Asia has been labeled as the world’s dominant region for air travel. For instance, in 2016, of all the airline passengers in the world, 35% flew on Asian carriers (Adelaida, 2018). Therefore, investing in the Asian airline market is a profitable risk given the status of the market and the growing market share. Chinese travelers have been documented to expand the Asian market passenger list every year. Many travelers in the Asian aviation market means busier airports and opportunities for building new ones. The Asian aviation market is eight of the ten fastest growing airports in the world according to a report published by the airport's council international.

In a recent routes Asia event, the projected growth of Asia’s airline industry is assured. However, there are emerging concerns that the governments and airport authorities may not keep up with the growth rate due to inadequate investment.

Why invest in airline industry

The first jet airliner flew in 1949, since then the sector has recorded positive growth that is unmatched to any other major form of transport. In addition, the growth and achievements of the industry facilitate economic progress. The increased demand for air services leads to the increased impact of air transportation on the global economy, which facilitates the movement of people and high-value products across the markets in the world. Furthermore, the airline industry plays a decisive role in either the leisure or work of various individuals across the globe. For that reason, the industry is stated to improve the quality of life as well as improving the standards of living. Smaller airlines have over the years recorded good performance providing service between leisure destinations in Asia. The acquisition of more advanced aircrafts such as AirTran has gained solid presence in Asia and a new business-class service. Such acquisition led to the expansion of the Asian major market presence, creating an opportunity for various routes and city pairings. Therefore, the integration of AirTran Southwest is set to realize the full potential and benefits of such revenue from the newly added routes and subsidized costs resulting from the increased scale. For instance the industry’s cost structure would allow a profit margin of about 2.98% within one year (Adelaida, 2018).

The capacity of the industry features a continuous growth and increasing status. Several leisure carriers are developing and diversifying their route networks rapidly and gaining from the rise in air traffic. The most prominent of such carriers is AirAsia. The airline has for years been able to capture market share from legacy airlines. In addition, the airline has recently expensed to become the largest airline in Asia (Adelaida, 2018).

The most appealing investment would be the United Continental, with a tradeoff at a forward P/E of 6.0. The stock of other major international carrier, is a good investment scheme that an investor should consider for their portfolio. The growing leisure air travel market would work to the advantage of the investors. The reason for the promising scheme would be because that more consumers are preferring point-to-point short-haul flights and airlines such as AirAsia provide such services.

The rising per-capita income and the affordability nature of air travel in relation to the rise of low-cost carriers is a major growth factor in the emerging markets in Asia. Favorable policies such as ASEAN have made it easy for travelers to acquire visas which has led to the growth of air traffic in Asia. Therefore, the increased growth and improved capacity of air travel in the airline industry in Asia makes it a perfect venture to invest because of the limited risks and high profit margin.

In summary, Air transport is classified as one of the most important businesses in the world. The technical achievements, development and service accomplishments of the industry, makes it a most major contributor to the progress of the contemporary society. The airline industry has multiple benefits and associated risks for investors, however, the continuous growth and advancements of air travel make it a better investment scheme compared to other industries. The future of airline distribution is, to a great level, which is the commercial future of the airline industry. Many airline companies are working towards becoming more operational in how they sell, that is to deliver services in a way that travelers will find the value they seek and that the airlines turn out be more successful businesses. Airline distribution will in future, probably by 2021 evolve from its current passive, and technology-driven state to become a more, flexible, active and passenger-centered environment. In future, the airlines industry is set to serve a more geographically diverse base of travelers. Such progress and advancements will led to the growth of emerging markets and developing economies therefore increasing the passenger base.

References

Adelaida S. (2018). Asian aviation sector, World's Growth Engine [online] seasia.com. Available at: https://seasia.co/2018/02/06/asian-aviation-sector-world-s-growth-engine [Accessed 2 Jan. 2019].

Acar, A. Zafer, and Selcuk Karabulak. "Competition between full service network carriers and low cost carriers in Turkish airline market." Procedia-Social and Behavioral Sciences 207 (2015): 642-651.

Berghöfer, B. and Lucey, B., 2014. Fuel hedging, operational hedging and risk exposure—Evidence from the global airline industry. International Review of Financial Analysis, 34, pp.124-139.

Bildirici, M.E. and Bakirtas, T., 2014. The relationship among oil, natural gas and coal consumption and economic growth in BRICTS (Brazil, Russian, India, China, Turkey and South Africa) countries. Energy, 65, pp.134-144.

Cummings, T.G. and Worley, C.G., 2014. Organization development and change. Cengage learning.

Doganis, R., 2005. Airline business in the 21st century. Routledge.p. 11.

Goyal, R. and Negi, D., 2014. Impact of Global Economic Crisis on Airline Industry. IRACST–International Journal of Commerce, Business and Management (IJCBM), ISSN, pp.2319-2828.

Hazel, R., 2018. Airline capacity discipline in the US domestic market. Journal of Air Transport Management, 66, pp.76-86.

Kareska, K., 2016. Challenges in modern management and modern business that Macedonian organizations face in gaining competitive advantage. Journal of Economics, 1(2).

Naumann, M. and Suhl, L., 2013. How does fuel price uncertainty affect strategic airline planning?. Operational Research, 13(3), pp.343-362.

Stalnaker, T., Usman, K. and Taylor, A., 2016. Airline economic analysis.

Team, T. and Speculations, G. (2019). 2015 Earnings Review: JetBlue's Earnings More Than Double As Fuel Costs Remain Low. [online] Forbes.com. Available at: https://www.forbes.com/sites/greatspeculations/2016/02/01/2015-earnings-review-jetblues-earnings-more-than-double-as-fuel-costs-remain-low/ [Accessed 2 Jan. 2019].

van Vliet, N.S.C., 2011. Air cargo alliances: walking on a thin line: a study on the impact of air cargo alliances (Master's thesis, Open Universiteit Nederland).

Wittmer, A., 2011. Aviation Systems: Management Summary. In Aviation Systems (pp. 1-3). Springer, Berlin, Heidelberg.

January 19, 2024
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