Microeconomics Issues In Australian Airline Industry And Their Impacts And Responses

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Introduction and Background of an Airline Industry in Australia:

The Australian Aviation Industry currently has a number of airlines that operate within the country and throughout the world to deal with Microeconomics Issues. As Australia is a thriving economy and an island, the importance of the importance of airlines has grown very rapidly. Mainly three kinds of airlines operate in this country— domestic trunk route airlines, regional airlines and international airlines. In the domestic trunk route airlines, the major players include Qantas, Impulse Airlines and Virgin Blue. The domestic airlines earn the revenue from the business sector and the domestic and inbound tourism.  The international airlines in Australia carry both passengers and cargo to and from various parts of the world. The number of international airlines in Australia is 49. Above 90% visitors of this country come by air, as the country is an island (Painter, 2001). The major airlines that are in operation in Australia are West Australian Airways, Qantas, Eastern Australia Airlines, Virgin Blue, Skytrans Airlines, Australian Air Express, Air Link and Maroomba Airlines.

Microeconomics

Issues in the Australian Airlines Industry—

As put forward by Favotto et al (2007), The Australian Airline Industry has undergone many significant changes to its operating environment and its policy over the past decade. In the past years, the turmoil included the absorption of Impulse Airlines into Qantas, entry of Virgin Blue in the industry, Collapse of the Ansett Group etc. In the recent years, many new factors have worsened the condition of this industry. The new factors include decline in the international tourism, increased terrorist activities, rising price, competition, falling number of customers, the decline in international tourism etc. As put forward by Hooper and others (2009), terrorist attacks in the United States in 2001, Iraq in 2003 are the reasons behind the downturn in the domestic and international aviation industry. The Australian aviation industry witnessed the transfer of all the major airports of the country from the Commonwealth bank to private organisational behavior under long-term leases in the past decade. Macintosh and Downie (2006) opine that turmoil in the Australian aviation industry is not new and it has developed a strong political flavour. In 2001, at the time of Federal Election Campaign, the Victorian Labor Government and the Federal Opposition became strongly aligned with the Ansett-Tesna interests. Sir Billy Snedden, the former leader of the Liberal Party reflected that the aviation industry in Australia was politically volatile and had been capable of arousing public controversy and discussion. Though it was commented in 1981, it is still relevant in the present context. Unstable growth in this industry is one of the main reasons behind the entrance of the new players and collapse of some of the existing players. High capital cost has resulted in high entry costs. This has also heightened the market power of incumbent airlines.

2. The Major Microeconomics Issues in Australian Airline Industry:

Bray (2010) mentions that airlines are volatile businesses as there are a number of risk factors associated with this business. The major risk factors include natural disasters, terrorist attacks, pandemics etc. Each of the risk has practically happened in the Australian aviation industry in the past decade and this has negatively impacted international tourism market. In addition to these risk factors, always there has been a chance of increasing the cost of fuel. Major airlines have many strategies for managing short to medium term fuel cost. Longer-term price increases are passed to the customers though increased ticket pricing. This increase in the cost of air travel has a significant impact on reduced customer demands.

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Decline in International Tourismdecline in the international tourism is one of the major concerns of the Australian aviation industry. There are ,any drivers behind the decline of international tourism. The international crisis of 2009 is one of the significant drivers of the decline of the international tourism. As revealed on (Australia, 2014), during January 2013, the number of visitor from China was 58,700. It suggests a decline of 24% from the last year. The number of visitors from Taiwan and Hong Kong has also declined severely from the last year. 10,500 visitors from Hong Kong during January 2013, suggests a decline of 32.3% and 7,300 visitors from Taiwan suggests 9.9% decline. Constant rise in the global visitor expenditure is the other reason that causes decline in the international tourism. There was a 5% increase in the international visitor expenditure in the last year. In September 2013, it has reached A$ 28.4 billion (Sullivan, 2008). In Australia, the rate of domestic travel has also declined to a significant extent. The higher Australian dollar has made foreign tourism more attractive to the Australians than the domestic tourism. This has depressed the Australian domestic tourism segment that makes around 67% of the entire tourism expenditure in Australia (Forsyth, 2013). Decline in the domestic tourism is affecting the domestic airlines hugely.

Rising Costs—due to the increase in the airline’s fuel surcharges and depreciation of the Australian dollar, Qantas has increased the prices of both domestic and international tickets.

Increased Terrorist Activities:

In the recent years, terrorist activities have increased largely throughout the world. Though, in some specific countries the rate of terrorist activities is higher, people in the other countries are not completely safe from these terrorist activities. Wheatcroft and Lipman (2013) opine that increased terrorist activities have not only impacted the national tourism of the terror-stricken countries, but also the international tourism as a whole. Though, terrorist activities have never been a major concern in Australia. People across the globe are avoiding international tourism for this reason. A mishap like plane hijacking may occur in any airlines in any country. In 2010, the number of terrorist activities rose to 11,604. It suggests 5% rise in the terrorist activities from the previous year. Terrorist attacks and other terrorist activities such as murders, kidnappings and injuries have increased by 43% in 2013. The events of plane hijacking are the main factor that threats tourists across the  world.

Falling Number of Customers of Qantas—the largest and one of the oldest airlines in the world is Qantas. This was established in 1920. In the recent years, this company has experienced decreased number of customer. In accordance with a report, there was a fall in passenger number by 0.6%. On the other hand, the capacity increased by 0.8% and demand decreased by 5.4% in March of this year.  In accordance with Kain and Webb (2003), both Qantas and Virgin have destroyed the capital of the shareholders. In the last decade, Qantas was 71% down, while Virgin was 85% down. John Borghetti, the CEO of Virgin has put significant positive contribution in the transformation of the organisation. The clearly marked improvement of this organisation encouraged many investments.  On the other hand, the CEO of Qantas, Alan Joyce took many controversial decisions, which generated a lot of public opinion against the national airline.

Competition—the factor competition always has been a significant factor that negatively affected the Australian airline industry. In the year, 1990, the domestic airline market of Australia was deregulated. After a month, a completely new player in this industry, Compass Airlines started carrying passengers in competition with two major airlines—Australian and Ansett. The series of price wars among these organisations finally ended when in December 1991, Compass Airlines was grounded by its creditors. In 1992, Southern Cross Airlines started providing service to the passengers under the revived Compass logo. Though, initially, the pricing of the tickets was reasonable, within some months, this organisation was forced to match the discounts offered by the other major players in the industry in order to sustain in the market. This competition has resulted in the collapse of Southern Cross Airlines (Durkin, 2009). Mergers and takeover activities are the other outcomes of such tough competition in the airline industry of Australia. East-West Airlines was acquired by Ansett Airlines in 1987.

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Price wars among the major players of this industry have resulted in the collapse of many major airlines in Australia. In order survive in the market, some of the organisations were forced to match the discounts provided by the competitors. Many of the organisations did this by forgetting their capability. In 1991, Ansett Airlines provided 47-61% discounts that were matched within days by Australian and Compass. As a result of the price wars, all the major airlines reported significant losses for the first six months of 1991.

Currency EffectsThough high dollars is making Australia more attractive destination for the international visitors, it is also making foreign destinations more attractive to the domestic visitors. Capital city airports that are the international gateways is having a natural hedge against the currency effects through their exposure to both outbound and inbound tourism markets (Braybrook et al. 2011). The regional airports of Australia have not been affected by the currency effects to a great extent.

Technology Issues—in every industry, technology advances with time. Like every other industry, technological advances affect the cost structures of airlines. Mobile boarding passes has transformed the way of passenger processing. In addition to this, screening technologies at airports and increases in security has also impacted the overall cost. Many of these technological changes are co-funded or funded by the government or airlines organisations, the airports is at stake due to the effects of the experiences of the passengers. According to Edkins and Coakes (2003), the development of aircraft technology has also impacted the aviation industry of Australia. The trend to the more fuel efficient and larger aircrafts impacts the ability of the airports to cater for a larger number of arrivals at a single time.

The extensive developmental activity is occurring in the major airports of Australia. In addition to this, many new airports are established in Australia. This is also causing change in the price structures of the airlines.

3. The Effects upon Businesses:

The Microeconomics issues provide huge range of effects on the Australian aviation industry. Due to utmost importance of Microeconomics issues, the aviation industry earns little bit of advantage and disadvantage from the both perspectives (Spiess and others, 2013).

Lower and average air fares:

The Australian aviation industry needs to generate lower and average air fares. As a result, the industry falls in an economic crisis in this way. Initially, Qantas affects with the Microeconomics issues that reduce their profit margin. As a result, the company reduces their business structure to escape from the economic crisis.

Reducing international tourist:

The security reason in all over world reduces the international tourists. Rapidly increasing of terrorism activities reduces the number of international tourists. As a result, the aviation industry faces huge challenges. Parsons et al (2009) stated that, the international tourists prefer security standards as a prior choice, while current aviation industry is unable to provide an effective commitment to them.

Pricing competition:

The microeconomic develops huge range of competition among the aviation company. As stated by (Joy, 2013), to earn better market structure, the company provides different types of offer and discounts to the customer. As a result, they face wide range of pricing competition that affects their business development process.

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Increasing security service cost:

The aviation industry in Australia faces lots of challenges regarding terrorist activities. Lower pricing strategy increases the number of passengers. As a result, the company needs to maintain their security level, as terrorism activity happens in crowd place. Hence, the industry needs to provide effective security service that indicates to reduce the profit margin.

However, those issues implement wide range of challenges to the business process of Australian aviation industry. As a result, growth rate of the industry is not attractive in current days.

In the recent years, some of the major airports have raised issues that concern the political pressure regarding airport noise, increasing community and the potential introduction of curfews. Urban encroachment in the vicinity of major airports is also another problem as stated by (Calverd and Tubbs, 2010).

4. The Effects upon Customers:

The Microeconomics issues provide wide range of advantage to the customer.

Efficient carriers:

The customer earns more efficient carriers in this way. Fundamentally, increasing pricing competition helps the customer to choose different types of Airline Company for their travelling. As a result, they gain a scope to purchase lower price tickets (Australian Business Traveller, 2013). Most important thing is that, the customer earns available airline system as per their desire.

Gaining effective service quality:

The available airline company and pricing competition involves developing better service process to attract the customer. As a result, the customer earns huge advantages regarding better service quality. As customer satisfaction is the prior choice to the airline company within tough competition, the company provides efficient Microeconomics service and security to the customer (NewsComAu, 2014).

Panic among the customer:

The terrorists are involved in developing their activities in a crowd place. As currently, Australian aviation industry earns wide range of customer, the terrorists choose it in the current days. As a result, the customer falls in a panic regarding the security system of the Australian airlines. The Conversation, (2013) opined that, the airport authority finds out some illegal activity among the common passenger, who is having with blasting chemicals. In this way, the passengers are fallen in a panic situation.

However, the Microeconomics issues help to develop the customer effectiveness that helps to make their purchasing the service decisions effectively. Although panic regarding terrorist activity is still to them, the authority tries to improve that.

5. Conclusion:

It can be concluded from this Microeconomics report that aviation industry in Australia is facing great danger in the recent years. Many factors have contributed to this. There has been a clearly marked decline in the international tourism after the terrorist attacks of 2001 in the United States. The terrible terrorist activities spreading the message that man is no more safe in any of the regions in this world. The decline in the international tourism has impacted the internal tourism of Australia. The country being an island, depends mainly on airline industry for the transportation. Most of the foreign visitors of this country come Australia by air. Therefore, it can be assumed that international tourism and airline industry in Australia are complementary to each other. Decline in any one of this negatively affect the other. In addition to this, the aviation industry of Australia has undergone many significant changes since 1990. In 2000, in the domestic trunk routes, there were four airlines, but now there are only two airlines in this route. With the entrance of many new players in the industry, the competition is getting tougher day by day. Tough competition results in price wars. In order to match the discounts provided by one player, the other organisations are being forced to provide attractive discounts to draw passengers. As, many of the organisations are going against their ability to provide discounts on ticketing, it is resulting in collapses of those organisations. The technological issue is the other factor behind the price rise in this sector. Technological advances are facilitating both the customers and the organisations in this sector, but the usage of advanced technology in this industry has raised the overall cost. Some organisational behavior increase the pricing of the tickets due to this.

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