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CHAPTER 4 MACRO ISSUES AFFECTING THE BUSINESS ENVIRONMENT IN WHICH THE AIR TRANSPORT INDUSTRY OPERATES
INTRODUCTION
The literature review thus far has shown that the airline industry is complex with many factors affecting its operation. As with any other industry, the commercial air transport industry is affected by events and changes in the global and local external environment. One of the key points to be highlighted in this chapter is that an airline’s success, and indeed the industry’s success as a whole, is strongly determined by the state of affairs in the external environments within a region, a country, a continent, and the globe as a whole. Given that it is a volatile industry that experiences cyclical peaks and troughs, any airline that does not manage its cost metrics will quickly be faced with operational and financial difficulties, as alluded to by Kelleher in the opening quote.
The focus of this chapter moves from the structure and theoretical economics of the airline industry discussed in the previous chapters to the current business environment in which the industry operates. To do this, the chapter is divided into four distinct topics that cover the business environment in which the air transport industry operates. A discussion of just the air transport industry is insufficient as it only considers the events that occurred within the industry and fails to properly contextualise the greater issues in the broader environment that have shaped the circumstances that prevail within the industry itself. The chapter starts with a review of the global economic situation, which includes trends in GDP, inflation, oil, trade, employment, and exchange rate fluctuations. Each of these have a significant impact on the air transport industry. The second topic to be reviewed is the South African economic classification and demographics in order to establish the position of the South African consumer and their ability to engage in air travel. The third topic to be reviewed is the state of the travel and tourism industry (T&T). In this regard, a brief overview is given of the overall global tourism environment followed by a discussion on the South African tourism industry (foreign and domestic). An understanding of the state of travel and tourism is essential in understanding the levels of demand and supply in the air transport industry, and thus essential for future strategic planning by the airlines. Finally, an overview is given on global opportunities and risks that exist in the external environment that need to be heeded by the airlines.
KEY MACRO-ECONOMIC INDICATORS
The turmoil in the world economy starting with the financial crisis in 2008 to the current sluggish growth in 2016 is well known and has presented many challenges for governments and companies on a global scale. Additionally, there have been number of other significant occurrences in the global environment, like the terror attacks in Europe and conflict in Syria, that have had a defined effect on the global economy. Clearly these issues will also have an impact on the air transport industry. It is therefore logical to outline key issues in the macro-environment to highlight some of the events that have affected the air transport industry. In reading the forecast figures given throughout this section, it is important to note that the global economic situation is extremely fluid, with changes appearing on a daily basis that affect the forecasts made by the various economic agencies like the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and the World Bank. The forecast figures used are those available at the time of writing and do not reflect any subsequent adjustments.
Gross Domestic Product
As stated in the introduction to section of this study, this section reviews the broader trends in global and South African GDP growth, which serve to highlight the economic environment in which the air transport industry operates. Specific reference is made to the ‘emerging economies’ and their performance in the context of the ‘developed economies’. The key focus of the section however, is on the South African economy, with specific reference to overall GDP growth and growth within the various sectors of the economy. This macro discussion on GDP serves to provide greater context for the discussion on the contribution of aviation to global and South African GDP (see sections 2.3.1 and 5.4.3), and the discussion on the link between air travel demand and GDP (see section 3.2.1).
This financial crisis at the end of 2007 evolved into a global recession in 2008, which persisted to the latter part of 2010. The speed of recovery from this recession has been very slow when compared to previous recessions. In 2012, Rowe (2012:9) stated that this slower rate of recovery is not surprising because recessions that arise out of a financial crisis are deeper and the recovery from them takes longer than the recovery from recessions that were not caused by financial collapse.
the real GDP for three main global economic groupings from 1990 to 2020f. A visual inspection of the line plots represented in figure 4.1 clearly shows that each grouping, with some minor exceptions at a particular point in time, follows roughly the same pattern as the other lines. The key difference is the depth of the downturns and the height of the upswings. From figure 4.1 it can be seen that the years 1990–1993, 1998, 2001–2002, and 2008–2010 indicate where recessions were experienced. The years 2010–2012 indicate an extension to the 2008–2010 recession; a ‘double-dip recession’, for many of the economies. The figure also clearly highlights the slow pace of recovery with only slightly increased growth rates being forecast to 2020. What is noticeable is that shortly before the 2008–2010 recession there was a period between 2003 and 2007 where an extremely high rate of GDP growth was experienced on a global scale.
Exchange rate fluctuations
Exchange rate fluctuations are influenced by a number of factors and have a significant influence on the commercial air transport industry. Many of the costs within the air transport industry, especially jet fuel and aircraft purchasing, are denominated in US dollars because it is a global industry with many global suppliers throughout the value chain. Fluctuating currencies can mean that a decrease in a cost (fuel for example), can be negated by a weakening against the US Dollar (Carlson Wagonlit Travel, 2016:5).
With reference to figure 4.12, the curves of the South African Rand against the US Dollar, the Euro, and the British Pound follow a very similar path even though they are at different price levels (South African Reserve Bank, 2017b). Noticeable is how the US Dollar and Euro exchange rates against the Rand drew closer together whilst the British Pound rate grew further apart. It is only in the last few months of 2016 that the differences between the exchange rates between the Rand and the three currencies grew smaller. The Rand experienced significant volatility against the three currencies at about August 2015 and this continued to the latter part of 2016. The currency then strengthened until another sharp decline in April 2017. Whilst the overall trend for 2016 was a downward one, there is still significant volatility in the exchange rate which reflects a large number of events and turmoil occurring in the South African and global economy.
Focussing on 2016, figure 4.12 clearly highlights that this was a tumultuous year for the Rand with the currency repeatedly strengthening and weakening against the three identified currencies. This period was characterised by a number of significant events in the domestic and foreign environment. An article on Fin24 (Le Cordeur, 2016) provided a summary of the events affecting the South African Rand during this period. Amongst others, the events included the replacements of the minister of finance, US rate hikes, emerging market concerns, growth outlook revisions, pressure on the Dollar, the fallout from the Brexit vote in Great Britain, and political infighting in South Africa. Even the presidential elections in the USA saw the Rand fall by almost 5% against the US Dollar on the news of Donald Trump’s victory before a slight recovery later in the day (Mahlangu, 2016). Two days later, an article in the Business Day newspaper noted that the Rand again plummeted against the US Dollar due to concerns over Donald Trump’s ‘possible’ policies and their impact on emerging economies (Mittner, 2016).
SOUTH AFRICAN ECONOMIC CLASSIFICATION AND DEMOGRAPHICS
The focus of this section is to give context to South Africa as a country and outline some of the key characteristics that define the country in which the local airlines have to operate. Each of the issues addressed have an influence on the nature of the industry and the level of demand for commercial air travel services.
South African economic classification
South Africa is a multi-cultured society with 11 official languages. It operates on a constitutional multiparty, three-tiered (local, provincial, national) democracy with an independent judiciary (South African Government, 2016). The country has a business environment that is generally open to conducting business, but suffers from a lack of public sector capacity, with divisions within the ruling party presenting potential risks to the country. The country still has huge problems related to poverty, inequality, and crime.
The IMF acknowledges the economic and social progress made by South Africa since 1995 but highlight key problems like infrastructure bottlenecks, insufficient skills, and political in-fighting as preventing the country from achieving growth and reducing inequality and unemployment (IMF, 2016e:6). Whilst the South African private business environment is one of the better in Africa (3rd), it only ranks 74th out of 190 economies in terms of ‘ease of conducting business’ in the annual ‘Doing Business 2017’ report by the World Bank (World Bank, 2016b:8). This report ranks South Africa 139th out of 190 countries in terms of ‘trading across borders’ (time and costs associated with the process of importing or exporting goods). Labour laws are perceived to be restrictive and a deterrent to many potential investors. An important issue for business in South Africa is Broad-Based Black Economic Empowerment (B-BBEE) which has its aim of monitoring and evaluating black economic empowerment as a means of ensuring equality and wealth distribution within the country (Department of Trade and Industry, 2018). Poverty is a key issue to be addressed in the country. In 2015, the percentage of individuals that benefited from.
some form of social grant stood at 30.1% (approximately 16 million people). The percentage of households that received some form of social benefit payment stood at 45.5% (Statistics South Africa, 2016e:28). Whilst the number of people living in extreme poverty has been reduced by 3.6 million people, South Africa remains a country with one of the largest income gaps between the rich and the poor. The South African poverty rate (US $1.9/day PPP3) was reported as 15.7% in 2015 and is forecast to increase to 15.9% in 2016 and 16.0% in 2017 (World Bank, 2016c:2). The Gini coefficient4 for South Africa is 0.634 (63.4%), with 2011 figures showing that the income share of the top 10% of the population is 51.3%, whilst that of the lowest 20% stands at only 2.5% (IMF, 2016e:46).
ACKNOWLEDGMENTS
ABSTRACT
DECLARATION
TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
LIST OF APPENDICES
FREQUENTLY USED ABBREVIATIONS
GLOSSARY OF TERMS
CHAPTER 1 – INTRODUCTION TO THE STUDY
1.1 INTRODUCTION
1.2 BACKGROUND TO STUDY
1.3 PROBLEM STATEMENT
1.4 RESEARCH QUESTIONS
1.5 RESEARCH OBJECTIVES
1.6 RESEARCH METHODOLOGY
1.7 THEORETICAL ASPECTS UNDERPINNING THE STUDY
1.8 CHAPTER OUTLINE
1.9 SUMMARY
CHAPTER 2 – THE STRUCTURE OF THE GLOBAL AND DOMESTIC AIRLINE INDUSTRY
2.1 INTRODUCTION
2.2 INDUSTRY STRUCTURE OVERVIEW
2.3 GLOBAL IMPACTS OF THE AIR TRANSPORTATION INDUSTRY
2.4 OVERVIEW OF GLOBAL AND SOUTH AFRICAN AIRLINES
2.5 MAIN AIRPORTS
2.6 SUMMARY
CHAPTER 3 – DEMAND, SUPPLY, COSTS, AND PRICING IN THE COMMERCIAL AIR
TRANSPORT INDUSTRY
3.1 INTRODUCTION
3.2 THE LINK BETWEEN AIR TRAVEL DEMAND AND GDP
3.3 DEMAND IN THE AIR TRANSPORT INDUSTRY
3.4 SUPPLY IN THE AIR TRANSPORT INDUSTRY
3.5 AIRLINE COSTS
3.6 ISSUES OF PRICING AND DISCRIMINATION
3.7 SUMMARY
CHAPTER 4 – MACRO ISSUES AFFECTING THE BUSINESS ENVIRONMENT IN WHICH THE
AIR TRANSPORT INDUSTRY OPERATES
4.1 INTRODUCTION
4.2 KEY MACRO-ECONOMIC INDICATORS
4.3 SOUTH AFRICAN ECONOMIC CLASSIFICATION AND DEMOGRAPHICS
4.4 THE TRAVEL AND TOURISM INDUSTRY
4.5 GROWTH OPPORTUNITIES AND GLOBAL RISKS
4.6 SUMMARY
CHAPTER 5 – THE BUSINESS ENVIRONMENT OF THE AIR TRANSPORT INDUSTRY
5.1 INTRODUCTION
5.2 THE STATE OF THE GLOBAL AIR TRANSPORT INDUSTRY
5.3 THE CURRENT SITUATION IN THE AFRICAN CONTEXT
5.4 THE SOUTH AFRICAN DOMESTIC COMMERCIAL AIR TRANSPORT
INDUSTRY
5.5 SUMMARY
CHAPTER 6 – THE LOW-COST AND FULL-SERVICE CARRIER BUSINESS STRATEGY
6.1 INTRODUCTION
6.2 STRATEGIC DIRECTION
6.3 AIRLINE STRATEGY
6.4 CHANGING CUSTOMER NEEDS
6.5 SUMMARY
CHAPTER 7 – RESEARCH METHODOLOGY
7.1 INTRODUCTION
7.2 MARKETING RESEARCH
7.3 THE MARKETING RESEARCH PROCESS
7.4 ETHICAL APPROACH TO RESEARCH
7.5 SUMMARY
CHAPTER 8 – ANALYSIS OF SURVEY FINDINGS
8.1 INTRODUCTION
8.2 DESCRIPTIVE FINDINGS OF THE SURVEY
8.3 INFERENTIAL ANALYSIS
8.4 SUMMARY
CHAPTER 9 – CONCLUSIONS AND RECOMMENDATIONS
9.1 INTRODUCTION
9.2 CONCLUSIONS AND RECONCILIATION WITH STATED RESEARCH OBJECTIVES
9.3 RECOMMENDATIONS
9.4 LIMITATIONS
9.5 PROPOSED FUTURE RESEARCH
9.6 CONCLUSION
GET THE COMPLETE PROJECT
A BUSINESS ANALYSIS OF THE SOUTH AFRICAN DOMESTIC COMMERCIAL AIR TRANSPORT MARKET
