Sunday, December 27, 2009

How Airline industry is combatting recession?

The International Air Transport Association estimates that the world’s airline industry will lose a combined $11 billion this year and $5.6 billion next year. Interestingly, while all Airlines have been dropping routes, shedding employees and scrapping aircraft orders, those from developed and emerging (especially Asian) economies have been responding in contrasting ways to the crisis.

Carriers in the developed world, especially the US, have been feverishly cutting costs and finding out new ways to charge fliers for in-flight services - charging for toilet use, headphones, food, pillows, additional cabin bag, even use barstools instead of regular seats - even to the extent of diluting service standards. Tapping into such "ancillary income" has become central their business models.

In contrast, as NYT reports, many Asian carriers have been investing on improving service standards, especially for the business class travellers. These include more diversity in in-flight entertainment, more comfort and luxury both at the airport lounges and inside, greater variety in food and drinks and so on.

Asian airlines’ obsession with service shows through in the quality rankings of Skytrax, a consulting firm based in London - five of the six airlines in Skytrax’s five-star category are based in the Asia-Pacific region, as are nearly half of the 27 carriers that hold four stars, only a few four-star carriers are North American and fewer than 10 are European.

The difference in approaches among arilines are an example of how cultural factors and specific market structures are critical towards determining business strategies. As the Times reports, Asian airline passengers expect top service because it is part of the region’s cultural makeup and because no-frills budget carriers are not as established here yet. People are yet to experience the lows of no-frills carriers.

Commercially, more than the US and European carriers, a larger share of the margins and revenues in Asia come from the high-end travellers, and none can afford to be the first to cut corners when it comes to service levels. Further, the top end of the market is the fastest growing segment of airline market in many countries, in terms of revenues and profitability, and there is naturally intense competition to capture new and retain old customers in these segments.

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