Airlines responded to falling in passenger number?

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Abstract

How have airlines responded to falling in passenger number?

Aviation businesses have been heavy affected by the world events such as current economic crisis, fuel prices. These problems are external but also there are internal problems such politics and airline safety. This make me feel interested in exploring the situation that might happen within the company. Therefore I chose two commercial airlines; Thai Airways and Air France-KLM. Both of the airlines, I have chosen are from the different alliances; Star Alliance and Skyteam. Both of the airlines have faced falling of number of passenger over the recent years, which cause the airlines heavy loss and that leads me to the following question “How have airlines respond to falling in passenger number?”

A numbers of passenger travelling by air fell significantly over the recent years. The world economic crisis is one of the main problems that has caused the fallen in passenger numbers over the years. Also the peaked fuel price for the last few years is another reason behind this but recently the aviation business could become worse, after the introduction of swine flu or known as H1N1, the disease which has caused many deaths is another up-to-date reason behind the falling in passenger's number.

To gain as much as information to investigate this research, I type up the research questionnaire (attached in appendices) asking the airlines a specific questions and sent off to the airlines. The kind of questions that were asked in the questionnaire were about their market strategies and tactics, how would they respond to passenger fallen and what would they expected to happen in the next 18 months; will the situation be better or could it be worst.

Thai Airways Fact

Thai Airways or known as “THAI” is Thailand flag national carrier which serves 71 destinations worldwide. THAI has its main hub at Suvarnabhumi Airport. Thai Airways is also one of the founder members of Star Alliance in 1997. The airline has 88 fleets in operation and 11 in order that includes 6 world largest aircrafts; A380-800 and 5 more Airbus A330-300. Some of THAI aircrafts have been divided into 3 classes; Royal First, Royal Silk (Business Class), Royal Economy but in Airbus A340-500, First Class is being replace by Premium Economy. Some divided into 2 classes; Royal Silk and Royal Economy. THAI has its own flyer programme called “Royal Orchids” which offers extra bonus to millage points when buys ticket from the airline or other airlines associate with “Star Alliance” networks. It also gives lot of benefit to The Company's customers in many ways. The airline has lots of sharecodes with other airlines to assist them on the route that is not being operated by Thai Airways which gives lots of options to customers. Thai Airways has one subsidiary airline called ‘Nok Air', the low-cost was setup to protect the growth in domestic market as there are many competitors in domestic flights while Thai Airways concentrate on the international flights. But also the airline has more that not airlines subsidiaries such as hotels, spas and restaurants.

Finance and passenger analysis

Before the airlines reached this stage when the world events such as high fuel prices and global economic downturn occurred, the company has a very secure financial record for more than 40 years and have proven the capability of competition with the world-class airlines but at the moment the airline will have faced various problems causing by the world events, these lead to decline in passenger numebrs. Thai Airways has faced the decrease in passenger since late 2007, particularly in 2008 during fuel price and the political unrest. During the first quarter of 2008 when the fuel price reached the peaked at its higher ever (about $147 per barrels) has caused Thai Airways to have higher operating cost. Most of affect was on the long-haul flights where 50% of the airline expense was on fuel, so the airline has to adjusted fares to overcome the high fuel price problem that lead to decline in passenger numbers. On the second half of 2008, the global economic downturn from the US financial sector meltdown, people losing their jobs etc, has lowered the demand in travel as people tend to save money to cope with the situation. So during the recession, the passengers continued to decline despite the fuel price going down in late July 2008. Moreover the airline has faced the political unrest inside the country that lead to the closure of the airports; Suvarnabhumi Airports and Phuket Airport. The closure of the airports has lead to suspension in all the inbound and outbound flights; the length was nearly a week or so. As a result, it has feared tourists from visiting Thailand at that time. From this affect, it has reflected the reduction of passengers travelling to Thailand even though the airports were back on operation and there were slowly increased in passenger on Thai Airways flights during the high season after the political unrest. As a result, it leads to 17% decrease in their load factor from 2008 until late 2008. This became the first loss even, approximately 21 billion baht (£380million), or about 26% of the revenue to Thai Airways. Later on the year, further 10% of the passengers fallen from the global economic downturn, in total 27% of Thai Airways went missing. Compared to 2007 when the airline was making profit throughout the year. Since the introduction of American Express non-stop flights to New York, the airline has made significant losses in every flight due to high fuel price. Later day, the airline's plan was to sell the 4 airplanes and bring in the cash to cover its loss but as the weak in the aircraft market during the economic crisis, the sales value wasn't meet what THAI expected the value to be even though there were some offers made by other airlines to purchase the aircrafts. Because of the weak market, the 4 aircrafts still remind with Thai Airways and now are in operation on various routes as they can generate some cash. Although there are slowly improve in the passenger travelling abroad but in April 2009, it has become worse as the H1N1 has speared all over the world. Most of the airlines including Thai Airways were affected and several airlines have stop operating. As the result, it leads to 8% decrease. Therefore THAI came up with new market strategies and policies 2009. This will help THAI during this financial storm while retaining and expanding customer base.

Ansoff Matrix

I chose the Ansoff matrix to show what the airline has done to counter the decline in passenger number. An Ansoff Matrix is a tool that helps businesses to decide on the products and markets growth strategy. This tool suggests that businesses try to grow would depend on whether it markets new or existing products in new or existing markets. Also when the firms want to have new markets and new products, Ansoff matrix will show a rough level of risk.

Way to achieve the objective of increase passengers

  • Reduction of Sales Commissions is to reduce the payment reward to sales staff. Sales commission usually rewards workers by how much goods they sell. If they can sell a lot of goods (eg tickets), the airline will have to reward them. This results in:
    • With reduction of agent commissions to zero, it will be their level of service and market positioning that determines their profitability. Zero commission will result in enormous savings for the airline.” - This may however have an effect on motivation.
  • Sales Distribution Channels is to get the product to the right people at the right time. IF the airline gets it right, it will increase their sales. Therefore, these are the ways that the airline considered. This strategy is connected with the marketing mix as the airline plans to sell the product to customers.
    • The airline uses a terms called ‘MbO or Management by objectives' as they translate into goals and target to achieve the objectives. As a result, the sales offices have been given a sales target. Abroad sales are set at 15% while domestic sales are set at 20%. To increase the sales, promotions are updates regularly. This will affects worker motivation because the workforces have target to achieve so they will have to concentrate to get the targets are being set. Overload works will reduce workforce motivation.
    • The airline offers various non-tax products onboard therefore selling these products such as sunglasses, men and women perfumes, THAI Executive products, and accessorises products. This will eventually help increasing the sales.
    • Domestic passengers get 5% discount on every class in domestic flights.
    • Increase the sales through the conjunction of Star Alliance network and THAI other partner airlines and also modification and upgrade the fleets to be able to compete with other airlines.
    • Internet sales are targeted to be improving from currently 3% to 8% by 2010 as the airline publishes the super deal to try to get passenger to purchase the ticket online.

    THAI also brings in the promotion throughout the season to try to get the customers back and sometimes during special events, the company will be offering promotion to attract the customers to visit the events. These promotions include seasonal deals and special event discount. The promotion often be publish on internets and in newspapers.

  • Revenue Management is the process that trying to get more information about human behaviour to get maximise revenue or profits. In this case, it helps the airline to decide what aircrafts to flies in certain service because unsold seats cannot generate revenues.
    • The airline use the revenue management to gather and process more flight information, forecasting demand and arranged booking classes with precise variables fares in real time to help increasing their revenue for every flights.
  • Capacity and Demand Analysis is involve in analysing the level of the capacity and to see when would the demand increase or decrease. It helps the airlines to plan the flight schedules for each season and to explore new destinations.
    • Adjust flight frequencies to match with the demands. In markets where there is opportunity, such as India and Japan, frequencies have been increased. On the other hand, where demand is declining, flights frequencies have been reduced. This result to better use of aircrafts and better cabin load factor.
    • Suspended non-profitable flights to suit the current market situation. Re-launch when demand increase.
    • More concentration being put into selling products such as tickets or anything that within the Star Alliance network. It will not just benefit Thai Airways but all airlines in the alliance network will benefit too as sales increased.
    • New destinations and new markets with strong growth potential are being developed and considered. An area such as Middle East and Central Asia show excellent potential for THAI and Thailand as a destination and network sales.
    • Recently, the company has announced that they will approach 4 new potential destinations by the 2009; Oslo, Riyadh and Abu Dhabi and by 2010, the airline would launch to Manchester,Great Britain, Berlin,Germany, Aman,Oman , Degu,South Korea and Sapporo,Japan.

    Furthermore, apart from above, the airline is also plan the extension plan as reserve to resolve the problems within the company. This results to:

    • Reduction in flight frequencies and the airline uses its position to develop and increase sales
    • Modification and upgrade the fleets to be able to compete with other airlines.
    • Slow down in all investments in such as purchasing new aircrafts, re-launch suspended flight, re-launch into new market etc but keeps the plans when the situation gets better so that the plan can be edited to suit to the situation.
    • In the organizational structure, people in higher position such as president, directors etc have been given a privilege each month such as 50% discount of airline ticket on first class or even free first class tickets. Therefore, to meet the situation, the privilege will be stricter than before. This will reduce the expenses of the airline.
    • Reduction for unnecessary need such as salaries, bonuses and overnight stay on international flights. A cut down in workforce would be the last option if there isn't a way to solve the problems. The airline will have 100% working efficient but will slow down for new applicants.
    • Increase the quality of management in all areas-which will help in investment.

    Thai Airways does not only offer the great value but also offers an extensive coverage of more frequencies and range of service without any charges. These are in-flight meals and beverage, luggage allowances, advanced seat upon reservations, and Lounge Access and upgrade the seat for both Silver and Gold cards, available for the passengers.

    Thai Airways has the advantage after their success in winning a number of trade and consumer awards from various categories in recent year. This confirms that our service from the heart attitude is also bringing THAI the advantage in the airline industry.

    All these strategies are not only the key to get THAI through the situation but also bring Thai Airways back on target for the 4th Quarter of 2009 and for the next 18 months. THAI is expect to use all of these strategies and will remind using this as a long term as well.

    Air France-KLM fact

    Air France originally operates by itself until 2004 when they announced the merger with KLM to form Air France-KLM in 2004. The airlines have become the larger to operating-revenue in the world. Air France-KLM is also one of the founders of the “Skyteam”, the world second largest alliance after Star Alliance. Air France operates most their flights based at Charles de Gaulle Airports. Air France operates to 170 destinations worldwide with 250 aircrafts with service and 12 on order. The aircrafts have been configure into different features depend on the distance. Normally short-haul will have only economy class while the medium-long haul flights will be a combination of First, Business, Premium Economy, and Economy.

    While KLM is Holland national flag carrier, the airline operates to 61 destinations worldwide as the airline being competed by other airlines and has it base at Amsterdam's. It has 114 aircrafts in operation and the company is currently ordering any new fleets. The airline only has 2 sections on its aircrafts which is Business class and Economy class.

    Air France has combined their flyer program with KLM known as “flying blue”. It was introduce in 2005 when the airline started the merger. The programme allows passengers to access to lounges that associate with the Skyteam members and passengers are allow to collect and spend their millage on flights and service after buying the Air France-KLM tickets or other 34 airlines.

    Finance and passenger analysis

    Air France-KLM is one the European airlines that makes profit during the 3rd quarter of 2008 when the global economic crisis has come in although the airline has made some loss during the 3rd quarter up until 31st of December, especially during May 2008 when the oil price reaches it record of $146 per barrel, but the airline reminds profitable. This is because the airline maintain the service during the time, offered the passengers promotion as the result, the airline has performed well during late 2008.

    In 2009 the airline has lost up to 5.5% of the load factor, which stood at 75.5% in March 2009. In the 1st quarter of 2009, the airline has announced that the loss during the recession is more than expected as the business section of their flight and the cargo fall because of lack of sales, it leads to £364 million loss, more than a quarter of the loss figure came from hedging fuels. When compared to last year, they made £149million profits while this year (2009), the company already lose £364million as the revenue fall by 20%, and it includes the loss of 19% of the passengers and 41% of their freighter. The airline has grounded the cargo flights as the low sales of freighter was one of the major losses in 2009. And if the situation hasn't improved, Air France would sell 4 of their cargo aircrafts away to get the money into the company. After the March 2009, the passengers are still declining by approx 7.5% due to the disease H1N1 and the crash of Air France flight AF447 from Rio de Janeiro to Paris, passengers were concern about the safety of Air France so this has drag KLM down as well because the airlines are merged. The continuous of declining the passenger number still aren't improving.

    Therefore Air France-KLM has come to the strategies that the airline hope that it would help them to improve the current situation. The situation in case for the airlines

    Ansoff Matrix

    Ansoff Matrix is a tool to show a rough level of risk of their products and markets.

    The way to achieve the objective of increasing passenger numbers.

  • Sales Distribution Channels - as I mentioned above, it means to get the products to the right people and the right time as it will generate an increase in sales.
    • All sales are being set a target. Sales should meet the targets.
    • Internet sales are doing fine at this stage. More of the deals/promotions are being update regularly, which increase the online sales by 10%
  • Capacity and Demand Strategies - The strategies will able the airline to analyse the capacity and demand. These analyses allow the airline to plan the flight timetables ahead for each season.
    • Air France-KLM has an advantage as the airline has cover the so many demanding routes worldwide. But sometimes the demand of the route go down, depend on the season, the airline should lower their flights frequencies to be able to have better cabin load factor and better use of aircrafts. But the demand increases, the airline must adjust more flight frequencies to the routes with suitable aircrafts to be operated. Suspended non-profitable flights to avoid making a loss and re-launch when the market is stabilise so there is demand of the routes.
    • Explore new areas and concentrate on selling the flights with the Skyteam Network and partner network.
    • New Destination and potential markets for Air France-KLM is being developed as China and North American are the main potential markets for Air France-KLM. Both airlines operate to several destinations such Peking and Shanghai in China but it would be worthwhile to explore more market within Chinese Market as it is growing fast.
  • Relationship - building relationship with some countries that the airline fly to. The airline build relationship through the tourist authority, when the relationship is strong then the authority will help to promote the airline. Therefore the airline will be promote by the authority
  • One of the ways that Air France-KLM uses worldwide is the build relationship with the tourist authority in some countries such as Japan, China, and Thailand etc that the company flies to. This will boost the sales within the countries and it will benefit both airlines and countries as it would bring more tourists. E.g. Air France build relationship with Thailand tourist authority, this relationship has become highly successful for Air France on their flights inbound and outbound from Thailand.

  • Investment on stakeholder - this means that the airline has the percentage to be involve as part of the owner therefore when the sales generate. The stakeholder has right to be involve in what they hold e.g. 25% of Alitalia staked by Air France-KLM
    • Air France-KLM has taken the stake from many airlines, all of 8 airlines recently with Alitalia, when the company took 25% of the Italian airline and previously in 2007, the airline took over 26% of Kenya Airways, and Kenya Airways has become the airlines to associate with the Skyteam. This is also the way to build relationship with the airlines and strengthen the sales across the alliance as both of the airlines are in the same alliance network and this strategy can break Air France-KLM through the fourth largest market in the world which is Italy and could extent to the operation to countries nearby. The purpose for this strategy is to give the best possible services between Europe and the rest of the world.

    Furthermore, because of falling in passengers numbers, the airline makes loss so to resolve the situation, the airline has axed more than 2,500 of their workers to cover the expense cost. As the reduction of passengers, the airline has adjusted the aircrafts and flight frequencies to suit the demand on every route especially long-haul when the flights being serve daily, it has been reduce in it frequencies but also increase flight when the routes become profitable. Apart from this, the airline has slow down the investment in different areas and waits to see the situation as well as begin to plan for the future. The future plan would include the fleets plan, investment plan, flights plan, cost plan etc, the airline uses the current situation as the base, and the plan will overcome the problems. It is uncertain that the airline will plan this after passing the economic recession period.

    Conclusion

    In conclusion, the airlines are facing seriously financial situation as well as decline in passenger numbers but with the plan of improvement, both of airlines seem to have slightly improvement. Both airlines have different approach to their objectives.

    For Thai Airways, the way the airline uses to respond the decrease in passenger numbers was to promote various deals and tend to keep all it workforces to be able to prevent missing workplace and also will decrease some workforces motivation as well. So in their plan, they tend to use promotion as primary plan but also focus on reduction in unnecessary needs and flight schedules. On the other hand, Air France-KLM has more reputation than Thai Airways which results that most of their promotions are well responded, this doesn't customers will purchase the tickets straight away but also due to the lacking of cargo service. Air France-KLM didn't try to find away to cope in the economic recession therefore the airline has fired about 2,500 of their workers.

    But overall, which airlines are better? I come to conclude that both of the airlines are highly reputation airlines. But in terms of management and development, Air France-KLM obviously comes first therefore Air France-KLM stands to better position than Thai Airways.

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