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Introduction
Airline remains a large and growing industry. It facilitates economic growth, international investment, world trade and tourism. Travel for both business and leisure is expanding worldwide.

Traditional Airlines, also called flag-carriers enjoyed monopoly market for many years. With more economic crises, these mostly become loss-making airlines. Government concern over their own finances and recognition of the privatization has led to the transfer of ownership of airlines from the state to the private sector (The Economist, 2004).

The airline industry economic crises led to many aircrafts, pilots and engineers being available at cheaper rate, and also space left by traditional airline. The United States were the first to allow low cost carriers in 1978. Europe deregulation followed in April 1997, allowing other member state ‘open skies’ and low cost airlines, resulted in many more new airlines getting off the ground (The Economist, 2004).

This report looks at the effect on the airline industry after various start-ups of Low cost airlines around the world and especially in context of United Kingdom. It examines the implications of increased market presence of low cost airlines on traditional airlines and suggests what traditional airlines need to do to preserve and expand market presences. Lastly, the report evaluates the factor of cost accounting on the airline industry.

Demand and Supply in Airline Industry:

Demand is a quantity of a good or service that a consumer would choose to buy at any possible price. It is simplified using a demand curve, which illustrates the relationship between price and quantity demanded. The demand curve shows the inverse relationship between quantity demanded and the price of a service or good.

The Law of demand states that, ‘ceteris paribus, as the price of a product falls, more will be demanded’ (Begg & Ward, 2003). Looking into the airline industry, in the last decade the main cause of the increase in air travel use is the price. The expansion of industry, many new low cost airlines is a prime example of demand curve based on price factor.

Bringing Europe together
Cheap air flights are bringing European together. Two biggest low cost carriers, Ryanair and EasyJet fly around Europe and nearly every destination and as low as £50 for a flight. Ryanair flies 70 destinations from Stansted and EasyJet flies to 25 cities from Luton. This has done more to integrate Europe than any number of diplomats and ministers.
Source: Low-cost founding fathers, The Economist, January 27th 2005

Other factors that also effect demand are prices of rival services that might be outside airline industry as rail or road services and within industry as well, low cost airline provision. Consumer income and affordability directly influence demand, as UK consumer’s income has risen during the period of economic growth; there was more demand in air travel. Taste and preferences also increase and decrease demand and can be effectively influenced by advertising. New fleet additions, taking aircraft off unpopular destinations, attractive holiday packages and their effective advertisement also effect demand in airline industry. Traveler expectation about future price changes, whether it will reduce or rise will also influence to purchase or not.

Supply curves trace how much the firm in the market will supply at any given price. A change in price of input is the main factor that can increase or decreases supply. Other factors which cause change in price thus supply in airline industry are;

 Change in cost of production; technology, aircraft and accessories
 Changes in profitability substitutes products or goods supply jointly
 Nature, 9/11, SARS, Terrorism, Iraq war
 Expectation of future prices.

Airline’s industry demand and supply is closely tied to economic growth and trade. During the last two decades, the industry suffered not only from recession but travel was further depressed by the gulf war, 9/11, SARS, dotcom slowdown and Iraq war (The Economist, 2005).

Strong Market presence of Low Cost Airlines

Traditional airlines like British Airways (BA) enjoyed many years selling tickets at much higher prices and offering additional facilities to attract customer who can spend more. They provided more services with drinks and meals on board, late checking, rerouting if you miss your flights and many more.

Low cost airlines, increasing everyday, are attacking traditional airlines. They had already seized control of the domestic market in America, Europe and looking in Asia. They are controlling pricing in the market. Low cost business model is a success, as single-type fleet of planes, fast turn-rounds, use of cheap secondary airports, low cost workforce and no frills enables low fares (The Economist, 2005).

Each schedule flight must incur fixed cost; aircraft value, fuel, staff and airport taxes weather aircraft is full or flying empty. Low cost airlines like EasyJet and Ryanair, used model to minimize their variable cost with price reduction and consequently increasing load factor, more people on board (Begg & Ward, 2003).

US Airline Industry
On September 14th Delta Air Lines and Northwest Airlines, America’s third and fourth Largest airlines filed for bankruptcy. With United and US Airways already operating under chapter 11 bankruptcy regulations, at least half of America’s airlines industry has now been declared bankrupt. Over the last four years, Amercia’s airlines have lost $32 billion. These firms will keep flying on empty, thanks to court protection from their creditors. But a once proud industry is officially on it knees.
Source: Flying on empty, The Economist, September 17th 2005

On the other side, traditional carriers focus on strong brands and well defined services, attracting business passengers with higher fare. In this way they increase yield, more price paid per customers per kilometer and try to cover fixed cost of a flight. The success of low- cost airline phenomenon, it is learnt that load factor determines the success of airline more than yield.

One of the reasons for hardest time in America’s Airline industry is low cost airlines. Jetblue, AirTran and Southwest grabbed nearly half of industry share from traditional carriers, leaving no room in domestic flights. Traditional airlines like Delta, Northwest and United are looking at international routes for their survival, where yields are rising steadily. But as they add capacity across the Atlantic and other parts of world, there will be more competition worldwide (The Economist, 2005).

Challenges of Traditional Airlines

Traditional airlines seem to be defensive with the growing number of low-cost airline. Although, the traditional airlines or ‘flag carriers’ enjoy strong nationalist sentiment from aviation authorities, other competitor airlines will therefore have to face limitations on where they can fly and limited open airports, but they are looking at ways to preserve their market share.

Airline industry is of monopoly in terms of input; where firm purchases it labour, capital and raw material. It is perfectly competitive output market; where it sells it product. It can’t afford to squeeze the perfectly competitive firm, as cost will be high and revenues will be low (Begg & Ward, 2003).

Emirates airlines a success story
estimated will have more long haul capacity than BA or Lufthansa by around 2010, has ordered nearly 45 of Airbus’s super jumbos, capable of carrying 555 passengers, with operating costs 15-20% lower than day’s Boeing. Emirates enjoys a world class cheap-to-use airports, low operating cost, tax-free economy and cheap labour offered passengers to change planes or stop over in Dubai.
Source: A Surprising Boom, The Economist, November 12th 2005

Low cost airline like EasyJet and Ryanair incur less variable cost, they begin a price war. It is already snatching market share from traditional airlines like BA. As BA focus on a move to different parts of market and differentiating its services, in order to distance themselves from the competition.

To preserve and expand market share by traditional airlines in the industry, they need to make further alliances with other airlines. Airlines help each other, share clients, leave market for one another and move output market toward high revenues. They may also deal with airport landing collectively and get more discount on purchase of aircraft jointly which will result in cut off of cost of input. Traditional airlines networks need more linkages, marketing agreements with provision of franchise and equity transfer.

Traditional airlines need to focus more on international routes and leave domestic market for low cost carrier, need large and medium sized aircraft that can fly anywhere in the world non-stop. It will cut operation costs and offer time saving for traveler.

In long term, traditional airlines has to drop prices to lure back both holiday-makers and business passengers. They can retain clientage by offering corporate customers discounts and offering flights to new international routes.

Cost Accounting in Airline Industry

The success of low cost airlines led the industry to re-shape itself. To cover the fixed cost of a flight and to cut down variable cost to a minimum and generate profit is cost accounting. Whether airlines struggling to increase load factor or looking for increase in yield, cost accounting is critical.

Cutting Costs; Saving Money
British Airways said it would slash 35 per cent of management posts by March 2008 in a campaign to save £50m a year. In an announcement on Wednesday, the airline said 50 per cent of senior managers would go, scything their ranks from 414 to 207, while the number of middle managers will be cut by 30 per cent, from 1,301 to 911. This brings the total number of cuts to 597.
Source: British Airways to make management cuts, Financial Time, November 30th 2005

In airline industry there might be two different prices and products can be offered. Cheap economy tickets with no frills to the students, and expensive business class ticket to a businessman with more comfort and luxuries. Low cost airlines are operating in the price sensitive market; its demand is price elastic. In order to boost revenues it needs to lower prices. Traditional airlines are offering more to business class and its demand is less price sensitive, or more price inelastic (Begg & Ward, 2003).

As already most of traditional airlines are restructuring for their survival with deep job and cost cuts. Cut off in wages, no pension, outsourcing services, evening getting rid of redundant planes.

One of the big reason for US airline industry to lacking behind is high labour costs accounting for nearly 40% of total operating expenses as compared to 20% in Asia and 30% in Europe (The Economist, 2005).

Lesson Learnt

Airline Industry Boom 2005
The most conclusive indication of industry boom is aircraft orders that is stretching Boeing and Airbus production plants to the limit. According to estimates Boeing will finish with 1,000 orders, while Airbus will net nearly 900 as compared both share manufacturing 800 orders in last years.
Source: Lining up for Profits, The Economist, November 12th 2005

After terrorism, war, SARS and the post dotcom slowdown and last blow was increase in jet fuel prices which led by the end of this year the cumulative loss of $43 billion since 2001. A major share of this, nearly $32 billion was suffered by America’s airlines, but in the rest of the world, the industry is growing strongly. India, China and the Middle East emerging as a global hub (The Economist, 2005).

From economics point of view it is difficult to say which one traditional or low cost airlines are doing better, as both have different strategies and had targeted different customers but we can see from their progress they are getting business enough to meet both ends; income and expenses.

The traditional airlines have learnt lessons from the low cost airlines. It already led them to adopting the low-cost carriers’ internet-selling and yield management techniques to offer a range of flexible fares. At off-peak periods on short-haul routes, these airlines are sometimes as cheap as the low cost and are attracting people with wider range of flights and services (The Economist, 2003).

The competition has created environment where passengers are now getting more choices and better prices than ever before. More new passenger can afford to travel by airplane than exotic traveling by train or road. Tourism and other related industries are also glowing and air industry is providing a bridge to move toward globalization dream.

The worst outcome of airline industry expansion with several new low cost airlines startup is increase in pollution. The environmentalists have warned that it might be a prime contributor to global warming (The Economist, 2005).

The outlook for the air travel industry is one of strong growth. Forecast suggests that the number of passenger will be double by 2010. For airline, the future hold many challenges, successful airlines will be those that continue to tackle their costs and improve their products thereby securing a strong presence in the key world airlines market.

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