Chris Tufton, Contributor
THE OFFICIAL launch of Air Jamaica's Atlantic non-stop service from Manchester, England, to Jamaica, was a stylish affair.
Approximately 500 Jamaicans from Greater Manchester and the surrounding areas of Leeds and Birmingham gathered at the Old Trafford, Manchester United football complex to enjoy a meal, and dance to Byron Lee and the Dragonaires.
Guests also listened to the airline's Chairman Gordon 'Butch' Stewart speak, in his usual eloquent and frank style, of the achievements of the airline and reasons for establishing the Manchester route. For the invitees there was clearly a sense of pride and appreciation, for the organisers a sense of achievement.
Strategically, Air Jamaica is an important asset to the country, primarily because of our dependence on tourism, an industry influenced not just by accommodation and attractions, but also transportation. But managing a small commercial airline is tough business and even with operational efficiencies, viability dictates that critical passenger mass is achieved, a fact that management clearly recognises, with its ongoing expansion in the Caribbean, North America and the England. In fact any appraisal of Air Jamaica's performance must include an examination of international trends within the commercial aviation industry.
These trends should help to determine if Air Jamaica, since private management, has performed creditably.
Globally, the commercial airline industry has seen increasing passenger numbers but with accompanying thin margins. In terms of overall revenues the industry accounts for over US$300 billion over the last few years, growing by an average of three per cent per annum since the end of the Second World War, with projections indicating a more than doubling of that amount by 2020. However, in terms of net margins, results from a survey of the world's top 150 airlines indicates declining profitability with a 1.1 per cent return in the year 2000, and projections by industry analysts of further declines over the next five years. A number of industry changes have accounted for this.
Prior to the end of the 1970s most airlines were state-owned with guaranteed market protection. This began to change at the end of this decade with a trend towards deregulating the industry in areas of ownership, routes, capacity, frequency, and fares. The United States began a process of privatisation of its national carriers in 1978 and this approach is now characteristic of the industry globally. Initially, market deregulation facilitated a number of start up companies, however, this trend soon shifted to industry consolidation as a number of industry players were unable to survive the increasing competition. In the United States for example, industry consolidation has resulted in 81 per cent of the U.S. market being carried by seven U.S. carriers in 2001.
Current indications suggest that there is increasing pressure on the airlines and government regulators to sanction further consolidation in the interest of cost savings. In Europe, the pressure for consolidation is the same, with seven carriers accounting for approximately 50 per cent of that market in 2001. In Asia the larger markets such as Japan and China are also moving towards deregulation along the model adopted by the U.S. This trend towards deregulation has led to intense competition, eventually facilitating consolidation, which in turn has led to a number of structural changes in the industry.
Strategic alliances
The formation of strategic alliances is a key feature of the industry. Schedule airlines have tended towards this approach to reduce operating costs while improving the convenience and flexibility to passengers. In 2001, there were four main international alliances; Oneworld, the Star Alliance, the Qualifier Group and an alliance between the Dutch carrier KLM and the U.S.'s Northwest Airlines.
These are essentially code-sharing arrangements that allow passengers to complete destinations travelling on member airlines, with the convenience of conducting booking arrangements through a single participating airline. Star Alliance, formed in May 1997, was the first. Today, this group of airlines carries over 200 million customers annually to more than 112 countries, using a fleet of over 2000 airplanes and serving over 760 destinations.
Totally, the global alliances control over 75 per cent of the international schedule passenger market, providing these groups with the power to attract and influence customer demands.
Airline consolidation and influence is also evident through bookings and reservation systems. These electronic reservation systems carry real time information on air routes, availability and fares, but additionally areas such as hotels and car rentals. These systems are expensive to set up but can yield considerable benefits to the investor. For example, American Airlines owns the most widely used SABRE system, and among the benefits is a fee charged for its use by competing airlines. The ownership and control of such a system has provided increased levels of control and means of profitability for this airline, even to the point of being the main income earner for the company.
A further feature of deregulation within the airline industry is the establishment of low-cost 'no frills' airlines. The general strategy of these airlines is to charge low prices but offer limited in-flight service to take advantage of increasing demand by both business and leisure travellers for lower transportation costs. Low-cost carriers like Europe's Ryanair, Easy Jet and Go; Canada's WestJet; and the U.S.'s Southwest and JetBlue, have experienced some of the fastest passenger growth in the industry; as much as 18 per cent per annum.
The success of this concept is so far evident. Low-cost carriers have taken up to 20 per cent of the market in the United Kingdom, and within Europe, these airlines have captured at least four per cent of intra-European passengers. All indications suggest that this trend is likely to continue with companies like EasyJet and Ryanair planning to establish small continental hubs in a number of additional European destinations.
The power to influence
Further consolidation within the industry is taking place through the merging of chartered airlines and tour operators. This trend is facilitating the creation of fewer, larger players in this area, with the power to influence travel costs and destination choice. Within the UK market for example, acquisitions by First Choice and Thomas Cook and the later merger between Thomas Cook and Carlson's in 1998, resulted in over 70 per cent of the all-inclusive tour market in that country, controlled by four operators.
It seems apparent that with thin margins and industry deregulation, the thrust will be towards further consolidation in an attempt to achieve increased efficiencies and international competitiveness. Here, strategic direction seems to dictate that size is the feature that determines control through economies of scale achieved from linkages with all the functional areas within the industry including, routes, booking infrastructure, and access to convenient scheduling. Here, bigger seems to suggest better, as it allows for greater access and control.
On the other hand, consumer thrift is creating a growing segment for low-cost 'no frills' transportation, particularly for shorter journeys but also on longer journeys using chartered flights. And as consumers become more aware of this option and access to international travel increases, this segment is likely to continue to grow.
Within this context, smaller airlines like Air Jamaica are challenged to differentiate themselves on service in order to win customer loyalty. This is clearly the idea behind the champagne flights and new and colourful airplanes. Similarly the thrust towards increasing passenger numbers through route expansion and the creation of a hub in Montego Bay are important strategic initiatives.
The airline must also create strategic linkages with other carriers and controllers of supporting infrastructure in order to satisfy the flexibility and convenience demanded by customers.
All being said, in a climate that does not favour small airlines, the measures so far implemented by Air Jamaica demonstrate an understanding of this hostile climate and this seems to be accounted for in the company's strategic vision.
Chris Tufton writes from England. Comments at ctufton@man.mbs.ac.uk
Regular columinist Dawn Ritch returns next Sunday.
