The recent economic downturn has sparked off unprecedented move in the airline industry. The global financial crisis and the increasing cost of fuel in the world market are some of the reasons that are forcing the corporate management in the airline industries to consider mergers, which are seen as a way of circumventing the challenges of increased costs and dwindling customer base. Several airlines have expressed the interest to merge with their partners in an attempt to cut on the costs of operations. Some including Air France, KLM, Lufthansa, and Austrian have already succeeded in forming mergers. Still, others are facing difficulties in their quest for mergers as regulation bodies express opposition for unwarranted mergers. This research paper discusses the impact of economic downturn in the airline industry. The paper also discusses how economic downturn has contributed to the increasing cases of mergers in the airline industry.
Airline mergers have become a common phenomenon in the airline industry with international and local alliances permeating the industry. Such mergers are aimed at improving the efficiency and effectiveness of different airlines to provide travel services at affordable rates, as well as to remain profitable and competitive. The proponents and supporters of airline mergers point out the need to cut on operation costs as the main reason for merging. This is in lieu of the recent economic downturn that saw some of the well-established businesses go under. Some airlines such as Tiger Airlines also almost went down with the financial crisis were it not for the change in the management strategies that saved the company from collapsing.
Nowadays, the economic downturn is considered the main reason for mergers. Experts in the field have noted that the emergence of strong economies like China and India is also causing jitters in the airline industry. For example, in Europe and America, many of the long-established airlines are feeling the threat of dominance from more aggressive airlines from China (Iatrou & Oretti, 2007). The airline industry in Europe is, thus, seducing the US industry under the antitrust immunity to loosen its regulations that prohibit or make it difficult for American Airlines to merge with those from other countries. This move is directed at establishing a competitive buffer zone for the assertive airlines from China and Pacific Asia, including Singapore and the United Arab Emirates. This paper discusses the intricacies that the recent economic downturn has caused to the airline industry and how this factor is contributing to the rampant and ambitious airline mergers witnessed in the industry today.
The Economic Downturn and the Airline Industry
The financial reports of many airlines reflect the current economic environment. The analysis of these financial reports indicates that many airlines have been influenced by the economic downturn. A 2009 report by Booz & Company that analyzed financial data from 37 major airlines using their liquidity and capital leverage to determine their ability to sustain their operations, amid global financial crisis, revealed that many airlines were doing badly (Iatrou &Oretti, 2007).
An interesting finding in this analysis was that low cost carriers (LCC) had better chances of posting good financial ratings. It means that the effects of economic downturn in the airline industry are directly proportional to the size of the airline (Boyd Group International, 2012). A logical assumption in this case is that large airline carriers tend to operate big aircrafts together with many routes. This, therefore, leads to higher costs in terms of operations that such a company is going to incur in order to keep all its aircrafts in the air. Low cost carriers have been able, to a certain extent, to circumvent the effects of global financial crisis by operating short routes, which are characterized by the low operating costs. In addition, LCC provide an option of air charges that most passengers can afford, making it profitable even in times when the number of passengers is dropping.
According to Boyd Group International (2012), the airline industry is one of the most sensitive businesses that require careful thinking and strategic planning for an airline to flourish. This is because of the vulnerability and susceptibility of the industry to the issues of fare prices, fuel cost, safety regulations, and even economic changes. As such, managers of airlines need to have incisive thinking capacity if they are to survive in this murky and volatile business. The current airline industry suffers and continues to bear the effects of the economic downturn that started in 2007 with the global financial crisis. An important factor in the airline industry is the sensitiveness of the industry to economic changes in the world. This is because of the inherent dependence that the airline industry has in different economic sectors. This, therefore, means that a slight change in any of the sectors that the industry depends on is likely to produce a great negative impact on its profitability and operations. Coupled with increased competition in the industry, the economic downturn has changed the way airlines operates and interacts with their customers and their competitors. The need to remain profitable has seen airlines increase their fares, despite the dwindling number of passengers on their roots.
The recent economic downturn was preceded by the 2007-2008 global financial crises in the United States. The financial crisis had numerous devastating effects on the economic building blocks with some businesses completely shutting down their doors (Edwards, 2012). The period saw the collapse of big financial institutions and bank bailouts from the governments. Stock markets around the world experienced a lull in the number of stocks that could be traded, and this affected almost every economic sector in the developed and developing countries. The airline industry was equally hit by the financial crisis, if not more than the financial institutions where the crisis started. This is because of the multi-dependence of the industry on other sectors like oil and passenger loads. Edwards (2012) further argues that, since the economic downturn was affecting every sector of the economy, the logical implication for the airline industry was that it was going to bear double brunt for the financial crisis as it consolidates effects of the crisis from different sectors. On the one hand, the passenger traffic dropped to the lowest level in ages as people could not be able to travel as they used to before the financial crisis.
On the other hand, Holloway (2008) indicated that the prices of fuel were escalating making it impossible for the airlines to meet the operational costs for transporting a few passengers from one destination to the other. Furthermore, some airlines are listed on the major stocks in the United States and the United Kingdom, and therefore, the effects on the New York Stock Exchange and the London Stock Exchange were passed down to the companies listed in those stocks. This means that airlines continued to suffer losses as prices of their stocks tumbled down. The International Air Transport Association (IATA) estimated a 3 percent turn down in the worldwide passenger traffic and $2.5 billion in the industry losses in December 2008 (Holloway, 2008).
The economic downturn has continued since that year. Several contributing factors have continued to affect the profits that airlines make. Some of the factors include unfair competition in which some airlines receive subsidies from their governments while others do not have such subsidies. For instance, airlines of the UAE and Asia have been known to receive subsidies, therefore making them more profitable in terms of operations. These are just among the issues that affect the running and management of airlines in the aftermath of the financial crisis (Hume, 2012).
According to the studies conducted in the 1990s, mergers and alliances in the airline industry were thought to increase the productivity of the respective airlines. However, with heightened and stiff competition in the airline industry coupled with the unfavorable business environment, it is not clearly known whether mergers and alliances between airlines can increase the revenue that the airlines get (Hume, 2012). The issue of interline fares thus provides an opportunity for the elimination of double marginalization characterized by the individual introduction of markup costs the end up determining the overall fares that airlines charge on their routes.
Hume (2012) further notes that the airline industry is sensitive to most of the economic factors that contribute to the escalation of the economic downturn effects on the industry. Some of these factors include the environment concerns that have continued to cut down on the operations of many airlines around the world. Studies indicate that airlines contribute almost 2% of world carbon emission that are harmful to the environment (Holloway, 2008). The ensuing implications of such effects are that airlines must consolidate efforts to ensure that they are preserving the environment. Such requirements continue to affect the operations. The economic implications of regulations that concern environmental preservation are that airlines must spend a certain amount of their income on preserving the environment. The difficult economic times that many airlines are undergoing in most parts of the world will definitely influence their ability to operate competitive business. Airlines depend on some variables like the available seat kilometer to make profits on the operations. In cases where the available seat kilometer falls below the required level, the airline will suffer because it will not be able to meet the operational costs (Iatrou & Oretti, 2007).
Regulation in the Airline Industry and how it Impacts the Airlines Economically
The airline industry is one of the heavily regulated industries in the world. Most countries where airlines operate have stringent regulations that have been changing over time (Kleymann & Seristo, 2004). The industry is subject to a variety of regulations that are initiated by governments, non-governmental organizations, and interest groups concerned over issues, such as safety, security, national defense or even economics. Because of the regulations that most airline industry is subjected to, there is a need to have strategies by the airline operators to identify suitable ways through which they can minimize the unsold capacity with the view of reducing the costs of incurring expenses in such areas. Many initiatives have already been introduced to ensure that airlines do not suffer immensely from the myriad regulations that the industry faces. One of such strategies has been the formation of mergers to enable the companies to be efficient in their efforts to affect such measures as those aimed at cutting down the cost by closing unprofitable routes and using low capacity aircrafts. The airlines also team up with manufacturers to produce fuel-efficient aircrafts that reduce on the costs related to fuel consumption. A reason for the need to use fuel-efficient aircrafts is that more than 50% of costs incurred by an airline are capacity production costs, which include fuel costs and route charges (Schaefer, 2010). To come up a technology that will minimize the fuel that an aircraft can use is a welcome idea in the industry that has already been crippled by other problems (Schaefer, 2010).
Mergers in the Airline Industry
Milmo (2012) argues that mergers in the airline industry have been occurring since the commercialization of air transport. Each year different airline join hands to do business either as one entity or as different entities that share operations. Passengers and the public have had little understanding on the benefits and complexities that are accrued by a merger. However, experts in the airline industry have always identified the need to leverage on the financial standing of the companies involved in the merger as the main reason. Historically, the air transport is a low profit margin industry. This is partly because of the connectivity of the industry to the global economy, in which a small change in the global economy can produce great changes in the airline industry.
Milmo (2012) further notes that the global financial crisis influenced the operations of airlines across the world as financial situations of many airlines become worse. The number of passengers has reduced tremendously because of the worsening economic conditions, social change, terrorists’ threats, and the political uncertainties in many countries. This has led to the overcapacity in the airline industry characterized by the empty seats available in the industry that are needed by the passengers to fly in a given destination. Many factors have contributed to the overcapacity situation and the need to improve financial standings of the airlines in the air transport industry. The global financial crisis of the 2007 coincided with the major ordering of aircrafts. Many airlines had done orders for new aircrafts that were delivered at the beginning of 2008. With a slump in the economic standings of many countries, the number of passengers dropped drastically leading to the overcapacity in the airline industry. The United States airline industry was only recovering from the 9/11 terrorists attack and, thus, consolidation of airline management, with possible job cuts. This move was meant to absorb the weaker airlines to ensure that there were fewer implications to the economies of the countries where those airlines operated.
Mergers in the airline industry are influenced by a number o factors apart from the need to improve the financial situation of the airlines that are merging. As indicated by Tarry (2012), mainstream airlines like the American Airlines, Air France, British Airways, among others have been facing increasing competition from the new comers in the industry. As such, mergers are always known to increase the competitiveness of airlines even as the economic downturn continues to bite on the different profitability of airlines as passenger availability falls below the expected numbers. The prevailing financial circumstances in the market are forcing airlines to contemplate to merging with one another as a way of improving the financial standings. Similarly, Tarry (2012) indicates that some airlines that have merged have helped to bring back integration in the industry that is faced with challenges that can easily lead to its collapse if the integration among the players is not embraced. In addition, some mergers are driven by the prevailing technological innovations in the industry that have definitely meant that some airlines must merge with the others in order to leverage their standing as business players in a harsh and volatile business environment. The need to de-regulate the industry has also prompted the management of some airlines to join forces in improving their operations and activities.
How the Economic Downturn Influence Mergers in the Airline Industry
There have been varied opinions across the experts and economists on the role that mergers play in the airline industry. Some of these opinions have indicated that mergers between the airlines companies do not play any significant role in securing the financial standings of the merging airlines. Indeed, as argued by Uwagwuna (2011), mergers that come about because of high fares and big losses only help to compound the problem when two airlines with high fares and big losses merge. The analogy given is that of two drunkards who are helping each other on their way home. However, Uwagwuna (2011) contents that this contravenes some of the successful mergers that have been witnessed in the industry. For instance, the merger between Swissair and Lufthansa in 2005 has turned out as one of the most successful mergers in the recent past. The move has helped to strengthen the competitiveness of the two airlines that were initially struggling to meet their targets. In fact, the economic downturn that hit other airlines did not adversely affect the two-merged airline, and this is partly because their costs and fares were harmonized to have the most convenient fare charges in the industry.
Warren (2008) observed that mergers in the airline industry are unprecedented in the history of the industry. More airlines are showing interest in consolidating their operations in order to improve the profitability in the environment where conditions are not favorable. The industry has been influenced by the economic downturn, thus looking for ways that can reduce the costs of operating an airline. For instance, British Airways, one of the most well-established passenger and cargo airline in the world, has been contemplating on the merger with Iberia Airlines, a big sized airline that operates in Spain. British Airlines itself emerged because of the merger between British Overseas Airways Corporation and British European Airways.
Wojahn (2012), on his part, argues that airlines are struggling with the cost hikes that are way above their revenues, thus necessitating the need to seek other ways in order to reduce the deficit between the two costs. On top of the harsh economic conditions and heightened regulation in the industry, airlines continue to face the challenges of industrialization and globalization characterized by the competition from other emerging low cost carriers. The historical mergers and restructuring that is going on in the airline industry are due to the challenging economic environment that the airlines are finding themselves in.
In addition, Wojahn (2012) indicates that some airlines like British Airlines face problems in the pension schemes, making them to have a need to merge in with other airlines in order to reduce the amount of time that such airlines require to recover from the effects of the global financial crisis and the global recession. Analysts in the industry estimate that a longer period is needed to be able to come out of the economic challenges that followed the economic downturn. However, a way to circumvent this period is to embrace mergers with other airlines, and this has the potential to make reductions on the costs of doing business in the airline industry. Expectedly, this will reduce the charges that airlines undergo in routes besides the costs of fuel and those related to the environment.
Consequently, Birol (2012) concurs that the economic downturn has stripped the airline industry off its powers to meet the expenses of the companies. Staff salaries have remained high, and the shareholders are not getting any dividend from the companies. As a way of reducing the costs, airlines consider merging with others so that they can cut on the costs of remunerations to the staff. For instance, if an airline is merging with another that operates in a different country; it means that that airline will not have staff in that country because the staff of the merging airline will be assigned duties to handle the affairs of that airline in the other destination.
However, Birol (2012) believes that this still has economic challenges because airlines must have the money to pay for early retirement for the existing staff if it decides to merge with another airline. However, it is only a short-term expense, and given the concept of value of money, merging airlines are likely to cut on the costs for the long-term plans. Birol (2012) further argues that the essence of mergers in the airline industry has been necessitated by the need to reduce fare and minimize on the losses that the companies may be experiencing. The merger is supposed to create a strong airline that is able to compete well in the 21st century. The implications of these mergers are that job cuts and labor concessions which are meted to the staff of such airlines. The economic downturn, therefore, forces the airline industry players to readjust and restructure their operations in order to remain competitive and relevant in the industry. It is also a way of ensuring that the airline operates at least with profit margin even as costs of operations remain high.
Recent Mergers in the Airline Industry
The airline industry has fought for survival through various means including mergers, acquisition, and purchases. Some of these mergers have created the world largest airline in terms of market capitalization. According to Glenn Tilton, the non-executive chairperson of the world’s largest airline mergers, United Continental, create “a strong platform for sustainable, long-term value for shareholders, opportunities for employees, and more and better scheduled services and destinations for customers” (Barnhart, 2011). However, the analysts of airline mergers warn that such a move in the industry is likely to lead to concerted increase in the air tickets submerging the quest that the industry have had for a long time of providing affordable air tickets for passengers (Belobaba, Odoni & Barnhart, 2009). An impediment for further mergers in the industry has been the stringent regulations and requirements that airlines wishing to merge have had to fulfill before merging.
The move to merge by some mainstream airlines is meant to improve the overall performance of airlines in terms of the revenue, while offering low fares to the customers. Indications of such an achievement have been blurred by the devastating effects that the economic downturn has had on the industry (Barnhart, 2011). According to industry experts, airlines need to make an evaluation of their business models to survive and not just resort to merging. The big mergers in the airline industry are likely to form a precedent in the industry, and this may not be good for the passengers who have relied on the increased competition for the reduced fares (Cento, 2008).
Even though mergers of airlines have always been thought to be done in the interest of the passengers, the resultant effects have been that passengers are forced to meet the increased costs because the merged airlines can hike prices to meet the expenses that were incurred during the process of merging (Archibald, 2007). Most of the deals in the mergers include objectives like targeting premium travels, and it is likely to leave lower-end travelers because they cannot afford to pay the price for a premium ticket.
According to the International Air Transport Association (IATA), the increase in the airline mergers is a result of the current data in the industry where an average price of the economy and premium fares for airlines are showing signs of improvement (Iatrou & Oretti, 2007). Competition in the industry remains high despite the mergers. It is particularly clear in the US and European markets where there have been no major casualties from the economic downturn and where airlines are currently posting strong financial results. It is despite the fact that air tickets are still below because of the surplus in the capacity that forced airlines to cut down on fares in order to entice declining numbers of passengers (Tourism Future International, 2012).
The global airline industry has been on the losing end since that start of the economic downturn in 2007. The amount of money lost in revenues has been reducing each year, even as more airlines look for partners to merge. Given the current financial reports of already merged airlines, it is economical to argue that merging plays an essential role in safeguarding the operations of the airline industry (Barnhart, 2011). However, there is a need to have a clear understanding from the stakeholders, employees, and passengers on how mergers are going to affect them. Passengers are particularly interested in how mergers will affect the air tickets. Employees in the airlines also want to know their fate because merging can sometimes lead to losing jobs. In particular, most airlines staffs in the US have been vehemently opposed to mergers with the European airlines citing loss of jobs as their main concerns. The executives of these airlines, on their part, are concerned over the need to compete effectively with emerging airlines in China and Asia, thus complicating the process of merging.
Effects of Mergers on the Airline Industry
Airlines have been merging since the early 20th centuries. The reasons driving mergers in the industry have been changing with time (Cooper, 2011). Airlines no longer merge as a way of eliminating an upcoming competitor, but recent mergers in the industry are driven by the need to have heightened efforts to overcome the economic challenges caused by the financial crisis. Understanding the implications and the effects that a merger is going to have on the business is important in deciding whether a company does want to merger with another one or not. The effects of a merger in the airline industries have been varied in nature. However, there are successful as well as failed mergers in the industry, and each situation presents a case study in comprehending how mergers can affect the industry as the whole.
According to Barnhart (2011), mergers in the airline industry have varied effects to different stakeholders. For the industry itself, mergers reduce delays and congestion in the airports. This is because they result in downsizing of the fleet that the merged company operates. However, there has been opposing views among the executives of airline companies over the effects of mergers in the industry. Some executives believe that merging should be encouraged in the airline industry as it helps to consolidate efforts to provide cheaper and efficient services in air transport. According to Leo Mullin, the Chairman of Delta Airlines, mergers are likely to hurt consumers since it does not help in fighting anti-competitive effects, but only help in establishing duopoly in the industry. Still others like Gordon Bethune, who heads Continental Airlines, argued that mergers do, “harm the competition, increase airport delays, and reduce customer service” (as cited in Cooper, 2011).
According to Cooper (2011), the airline industry “has experienced a dramatic decline in the quality of service, a dramatic increase in prices, and now stands on the verge of a merger wave that will make matters worse.” He argues that the recent move in the industry is a sign that the airline companies are reaping their own disorganization in its policy; therefore, policymakers in the industry will need to change the structure in order to clear up the challenges that are driving mergers. As such, Coopers (2011) views the current move in the industry as means of organizing an essential service into the private cartels that will squeeze passengers through price hikes. It will end up causing chaos in the industry, as passengers will have little options when it comes to travelling by air because competition will not be available.
Furthermore, mergers in the airline industry are going to make passenger to fall under the control of one airline together with making difficult for new entrants into the market. In the process, the industry lacks the capacity to attract passengers as people who want to travel will first evaluate the costs associated with the air travel before deciding whether they want to travel or not. This is because of the inconvenience and the impossibility of the inter-airline travel that in the process gives greater control power over the passenger. The cycle then complicates the ability of smaller and emerging airlines to effectively compete for the traffic. Cooper (2011) argues that this will create a situation where, “travelers are locked-in to the national networks with fewer and fewer choices,” thus making them to suffer the “typical effects of the abuse of market power, higher prices, and lower quality.”
In the middle of the scramble for mergers, there is a consumer of air products and services. Archibald (2007) observed that, even though economic downturn has had devastating effects on the airline industry, the unprecedented move by major airlines is likely to inhibit competition in the industry at the expense of the end consumer. This is because the economic savings from the hub cannot be quantified in terms that a passenger can identify. Consumers have endured higher prices and poor quality of services while hoping that, with the current signs in the improvement of economy, airlines are going to reduce the prices and improve on the service delivery. Nevertheless, Cooper (2011) argues that it is unlikely going to occur given the fact that the mergers in the industry are reducing the competition in the industry. This will give the market leaders liberty to decide regarding the prices that they want to charge their customers with the claim that demand is higher than supply.
According to Chengery (2012), the economic and subjective evidence for supporting mergers is driven by the trend in the prices and costs that an airline incurs in the process of doing business. The tickets prices are revealed by the consumer price index that has been on the upward trend without abating, especially when major components of costs are considered. An illustration is the drop of almost 50% in fuel prices and 20% in the cost of capital since the 1980s (Hume, 2012). This reduction is not reflected in the fare prices, but instead the fare has dramatically increased over the same period. There is a blatant abuse of fare price in the airline industry with differences between airlines within the same destination being as wide as $700 with dramatic changes. The emerging evident is the prices charged before and after are determined by the market forces (Cooper, 2011).
Merging as a Measure to Save a Struggling Industry
Hume (2012) contents that the airline industry is indeed faced with a myriad of challenges that goes beyond the mere reduction in the number of available passengers. One of the focuses of the industry to save itself from a total closure has been to embrace the mergers. In fact, the current pace is only kept because of the regulatory requirement imposed on the airlines that wish to merger. In all these cases, economic difficulties have been pointed out as the main driving force behind the mergers as company executives cite the need to remain in the business through all means. Invariably, there are other efforts within the confines of the airline industry that can be exploited to ensure that the industry survives the economic downturn.
Furthermore, Hume (2012) argues that, in recognition of the adverse problems emanating from mergers in the airline industry, there has been an emergence of a series of reasons to try to cover the underlying problem ailing the industry. The claim that mergers are essential panaceas when it comes to saving a struggling industry like in the airline does not reflect the realities in the industry. Hume (2012) observes that airlines tend to use corporate bankruptcy as a reason to abuse the chaotic market in the airline industry. The importance of policymakers is to enhance the competitiveness of the industry by formulating policies that guide how business is done in the industry.
There is also increased effort in the airline industry to restore the competitiveness of the industry through exchanges and to carve outs. However, these measures do little to restore the confidence that the industry had had before the economic downturn, because its pledges not to raise fare for a certain period can always be circumvented by the private cartels in the industry (Iatrou & Oretti, 2007). For instance, discounting the number of available seats in the industry for a single destination will result in the increased charges to the passenger. The only remaining thing is that mergers have a permanent effect on the airline industry, especially when it is placed in the hands of private investors who must make profit at all costs, regardless of the effects that such move is going to have on the overall performance in the industry.
With the current economic evidences concerning the competitive problems in the industry at the structural, conduct, and performance levels, the hope for passengers is that this will go back to the question of whether mergers serve their interests (Tourism Future International, 2012). The cause for the public alarm is and will always be whether mergers help in curbing the anti-competitive practices that are always passed down the passenger. By all standards, the current wave in the airline industry concerning mergers and acquisitions do not address the interests of the passengers, but are simply a way of cushioning the airlines against bankruptcy and solvency. The implications of further mergers in the industry will only aggravate the delicate situation where competitiveness in the industry is already threatened by the economic downturn. In retrospect, the number of passengers will start going down, as people will not be travelling as frequently as they would like (Iatrou & Oretti, 2007).
The Future of Airline Mergers in the Wake of the Economic Downturn
The current wave in the airline industry casts a great deal of uncertainty. However, a proper understanding of the implications of mergers to an individual airline is important in bisecting the future of mergers in the industry. The economic downturn is ending. Even though it might have a positive effect on the airline industry, the recent mergers in the industry is likely to complicate the operations of airlines as more potential passengers become wary of the costs associated with air travel (Kleymann & Seristo, 2004).
The current situation also creates a case that will be used to determine the direction that the airline industry will take in future. That is, with success, more mergers are likely going to be seen in future. Equally, the economic forecasts in some emerging economies like China are going to affect the outlook in the airline industry. Schaefer (2010) argues that since these economies are concentrated in one region, the routes to these regions are likely going to be concentrated by the merged airlines as they aim at increasing their market share and in process inhibit the growth of new entrants in the market. In addition,Boyd Group International (2012) argue that the future of mergers in the industry will mostly be determined by the number of passengers, the cost of fuel, and other costs associated in the running of the an airline company with international presence. The regulatory bodies in the industry are also likely to relax their stringent requirements for mergers even as more airlines express their need to merge with others(Chengery, 2012).
The future is also probably to witness a regaining of the competitive position of the traditional airline carriers that are swallowing up other airlines in the name of mergers. Since competition is being eliminated through mergers and alliances, and the economic recovery is in progress. The traditional carriers are likely to regain their positions as leaders in air travel and, therefore, restore the glory that is associated with the air transport (Tarry, 2012). The increase in the number of airlines has led to the decrease in the quality of services and increase in fare charges, but with the recent collaborations and mergers, the airline industry is going to witness a dramatic change in the way services are provided even though there are fewer signs that prices are likely to reduce(Chengery, 2012).
The future is also probably to witness a reduction in demand of low cost carriers, as passengers will be demanding for quality services amid the high prices that the big carriers charge them. The same views are also held by the Tourism Future International (2012) which argues that the low cost carriers might not be able to keep up with the passenger demands in the industry since the leverage on service delivery as a way of offsetting the low charges. Similarly, there is likelihood in the opening up of the restricted areas like in Europe and the United States as competition among the major carriers will be focused on the new economies.
The merging of major airlines creates the biggest airlines in the world. It will lead to the decline of champions in the industry since more mergers are going to produce more competitive and formidable airlines that are going to compete on the higher scale than the existing champions do. According to Tourism Future International (2012), the local and global competition for passengers is going to focus not on the name that an airline carries but on the quality of service and the amount that the company is charging the customer. There is a shift in the mindset of businesses toward a stronger market orientation. The competition among airline will therefore, become tighter as carriers in Europe and the Middle East struggle for customers. The Middle Eastern companies have indicated a strong entry in the European market due to the cost position, high client recognition, and the innovative products and services that they are offering to their customers.
Tourism Future International (2012) observes that, on overall, the future of the airline industry projects both positive and negative outlook. It contents that, with the current wave in the airline industry and the economic recovery that many countries are indicating around the world, it is almost impossible to predict the exact effect that merger are going to have on the industry. However, a forecast in the industry will help those airlines that are contemplating mergers as the way forward since it has become rather popular thing to be implemented in the industry.
In conclusion, it is evident that the economic downturn has had considerable effects on the airline industry. The industry is vulnerable to a number of economic factors. With the recent economic downturn, the airline industry was affected greatly because of its dependence on a number of economic sectors that were also affected by the downturn. However, the effects were compounded in the airline industry partly because the industry is delicate and is affected with a slight change in any of the sectors that it relies on. The mergers in the industry are expected to cushion the industry by consolidating the efforts of the service provision. However, according to the analysis of experts, mergers have their own positive and negative effects. As such, a proper analysis and regulation are required to ensure that the mergers do not end up hurting the industry. This means that there is a need to implement mergers carefully so that the airline industry does not suffer in future from the slack in the number of passengers. This is because more passengers are likely to shun away from travelling because the prices are high and unaffordable to an average traveler.