How the Macroeconomic Environment of the Airline Industry Affects the Strategic Decision of Boing Vs Airbus

Executive Summary

This paper discusses the external economic factors affecting the strategic decision of airline industry and how this decision in turn, affect the market forecast of the aircraft manufacturing industry. Various business issues affect airlines operation either directly and indirectly, and these issues affect the strategic decision of the airline industry. The present economic crisis, instability in aviation fuel price, and environmental factors (such as the recent volcanic ashes and snow) has further shrunk business in the airline industry and thereby increasing competitive rivalry. Although the future projected growth by the airline industry look promising, factors affecting airline businesses can make it daunting. Strategic decisions however, will help the airlines to maximize this positive forecast. To make these decisions, it is vital for the origination to understand the macro-economic environment affecting the airline industry.

Various framework and models have been developed to help organizations study and understand the macro-economic environment affecting their business. One example is of such framework is PESTEL (Political, Economical, Social, Technological, Environmental and Legal), used by firms to study external economic factors affecting airlines and how they make strategic decisions in order to be able to withstand the influence these factors exert on their business. Another model developed by Porter (Porter five forces model) also serve as a veritable tool that help the airlines industry to identify the different external forces such as threat of new entry, buyer’s bargaining power, supplier’s bargaining power, threat of substitute and competitive rivalry that exert immense pressure on the airline industry.

The decision taken by airline industry based on analysis of the external economic factors, directly or indirectly affect the airline manufacturing industry. Presently, the airline manufacturing industry is a duopoly comprising of two players: Boeing and Airbus. These aircraft company has been neck-deep in competition with each over who control the highest market share. PESTEL and Porter’s five forces analysis also help the aircraft manufacturer to understand the impact the airline industry plays on their survival and what strategic decisions they will make in order to stay competitive. Currently, an analysis of the external environment and the future forecast in the airline industry has made both Boeing and Airbus to make a strategic differentiation, each targeting a niche in the airline industry. For example, While Boeing foresees a growth in the next 20 years in direct point-to-point travel between cities, Airbus foresees a growth in mass transportation of passenger between major hubs.

These differences in forecast have led both companies to develop aircrafts that have different carrying capacity and range. While Boeing built the low cost B787 aircraft with great speed and to reach a farther range, Airbus built the A380 that has the capacity to carry more than double the number of passengers B787 can carry but with a lesser range.

Part A: External Economic Factors Affecting Airline Industry

Introduction

Few inventions have affected on a large scale how people live and experience the world as did the airline industry. The airline industry remains a big and growing industry such that today, air travel has become commonplace as it is becoming more and more affordable to various income classes of the society. Air travel has also changed the way we live and do business as it reduces travel time. It has also changed our view of distance, making it possible for us to do business at places once considered remote. Airline industry is the major engine powering the globalization of businesses and services.

Prior to 1970’s, the airline industry was mainly owned and controlled by the governments in different countries. There was no free market competition as travelers have to make do with the services and prices available to them from the few airlines. But with the deregulation of the airline industry that swept across the world after 1970, entry barriers were lowered allowing new start-up of many airline companies, thus engendering competition in the airlines industry. This has led to competitions in various fronts, especially in prices and services provided onboard the flight. This competition has led to formulation of various business modules and the re-strategizing of the already existing and new start-up companies, in order for them to survive the new business environment.

The operating environment of the airline industry continues to evolve, thereby presenting a significant challenge for the survival of the industry. Different models and frameworks have been formulated for analyzing the operating environment of various industries. In analyzing the operating environment, it is vital to indentify the different factors that might affect the organization cost, supply and demand. PEST (Political, Economical, Social and Technological) is one of the framework used for analyzing the macro-environment affecting organizations in a particular sector. It categorizes the environment influencing a business sector into political, economical, social and technological. Sometimes, additional factors such as environmental and legal and added to form a PESTEL (Political, Economical, Social, Technological, Environmental and Legal), but these can also be incorporated in the others. Also Porter’s five forces model has proved a veritable tool in the analysis of the operating environment of the airline industry.

There are two major players Boeing and Airbus in the aircraft manufacturing industry, and they compete stiffly to control the market. The PESTEL framework and Porter’s five forces model can help the airline manufacture to study the external environment and to take strategic decision that will help them to compete favorably.

This paper will discuss in detail using PESTEL framework and Porter’s five forces model, the challenges the airline industry faces and how this challenges affects the aircraft manufacturing industry and their strategic decision.

The aim of this essay is to carry out a comprehensive analysis of the operating environment of the airline industry using the PEST framework and identify what factors affects the way airlines do business.

Current Business Issues and Trends in Airline Industry

The global airline industry has grown significantly consisting of over 2,000 carriers worldwide, operating over 23,000 aircraft, and servicing over 3,700 airports. On the average annually, world airlines flew approximately about twenty eight million (28 million) scheduled flights carrying over 2 billion passengers (IATA, 2006). With this immense growth, numerous complex challenges presently beset the airline industry. Competitive pressure from low-cost carriers, the transparency of pricing facilitated by the internet and consumer’s loss of confidence in the reliability of air transportation system have all impacted negatively on airlines revenues (Anon, 2009). Since 2006, the cost of fueling the aircraft has on a regular basis emerged the largest industry expense and has surpassed the cost of labor for the first time (Anon, 2008).

The progress recorded post 9/11 has improved safety on the air to a certain degree as passengers and their luggage are now screened for security reasons. This process has created a lull in air travel business as passengers are wary of the additional delay caused by the extra security measures. This has led to decrease in air travel as passengers perception of this ‘hassle factor’ and the uncertainty of the amount of delay that will result from the extra security measures has been a cause for concern. The extra security measures have resulted in increased operating cost and induced more security-related flight delay and disruptions (Anon, 2009, Ho 2009).

Due to the volatile nature of air travel and the recent happenings since 9/11, airlines are suffering from increased cost of insurance and their access to cheap fund are becoming increasing difficult due to the economic downturn, also compounded by the decrease in air traffic volumes (Ho, 2009).

Airlines are struggling to survive these negative trends, with several carriers experiencing financial difficulties and some becoming bankrupt. These increase pressures have resulted in mergers, alliances, acquisitions and industrial consolidation by airlines in order to reduce operating cost and thus enhance profitability (Ho, 2009).

Understanding of the External Environment

The external environment consists of external influences that affect the firm’s decision making process and performance. “These external environments are key factors which are outside the direct control of the business”. These factors such as the economy, social change and government policy affect the survival of the firm significantly (Gillespie, 2007). Understanding the macro-environment raise a very vital issue: given the vast number, range and uncertainty of external influence, how can management understand, analyze and monitor environmental conditions? The starting point is to use some kind of framework that helps in organizing information. Narayanan V and Fahey L (2001) asserted that the environmental issues influencing a firm’s performance can be classified by source or by proximity. The source can further be classified into such factors as political, economic, social and technological (PEST analysis) whereas the proximity factor is the “micro-environment” or “task environment” which are factors internal to firm and are distinguishable from the wider influences that forms the macro-environment.

Analysis of the External Environment of Airline Industry – Using PESTEL Framework

The external environment of airline industry is very crucial to the survival of the various airlines as it exert enormous impact on the airline industry. The external environment of the airline industry can be described as very unstable as there are regular fluctuations in the macro-environments. Recent event happening in the macro-environment has affected the airline industry significantly. Government regulations in most cases have been unstable and restrictive. The industry is often plagued by the outbreak of diseases, war, terrorism and recession. These risks often affect the operability and the survival of most firms in the industry (Dempsey, 2008).

In order to carry out a comprehensive analysis of the airline operating environment, the PEST framework is going to be used. PEST is an acronym for Political, Economic, Social and Technological, which are environmental factors influencing a business sector. Sometimes, additional factors such as environmental and legal are added to form PESTEL. In this section, a detail analysis of these environmental factors affecting the airline industry will be carried out.

Political: Because of its importance to the economic growth of many countries, and in order for nation to be able to participate in globalization, governments, throughout history, has promoted the development of the airline industry by providing infrastructure, research and development, subsidies, protective regulation and outright ownership of airlines. For instance, prior to 1978, the US government strictly regulated commercial airlines by controlling airline’s route entry and exit, passenger’s fares, airline rate of returns, mergers and acquisition (Dempsey, 2008). It was very difficult if not impossible for entry of new airlines as the regulation hindered competition.

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