Financial Performance and Other Related Issues
The global airline industry provides flight services in all corners of the Earth and it has been an important part of the economic development. In terms of the impact that the airline industry has on the global economy and related industries, such as tourism and the aircraft manufacturing, it can be seen as a great economic force. Therefore, much attention is given to the airline industry when it comes to policy makers or even the media. According to Henckels, during its development, the industry was seen as a hub for technological advancements, including the development of jet planes for commercial use in the 50s and wide-body jumbo jets in the 70s (3). Today, the world’s airline industry provides service to more than 3700 airports (Henckels 3). More than 2000 airline companies that own more than 23,000 aircraft serve these airports. Over the past three decades, the average growth rate of the global air travel has amounted to 5% annually (Henckels 3). This growth varies each year due to fluctuations in the economies of different parts of the world. Therefore, the provided information proves that the airline industry is an important part of the global economy.
In this industry, finance is a vast topic, dealing with the security that different airlines have regarding the required economic resources to continue their operations in the short and long terms. Thus, financial performance in the airline industry is an important and valuable aspect because it ensures that the airlines remain competitive. Specifically, it is crucial to focus on financial management together with the general economic environment for the airline to ensure that its operations are efficient and well managed. According to Myre, financial performance in the airline is important, especially when it is used to measure its profits, liquidity, and solvency (8). The metrics used to evaluate these factors are critical since the financial situation of each airline shows its long-term survival. Again, the financial performance of each airline is important in the evaluation of how it is performing in comparison to other airlines. To be able to understand the position of a specific airline regarding its ability to make profits and achieve its short and long-term obligations, the financial performance should be conducted. Consequently, the financial performance is a vital part of the airline industry that shows the direction that a specific airline is taking.
As has been observed, financial performance is critical in ensuring that a certain airline remains competitive. The safe and efficient management of an airline is a complex cognitive task that involves many people who cooperate in close coordination. Therefore, different airlines implement various financial strategies to remain in the business. The first financial strategy used by airlines is the financial performance review and analysis. Through the finance department, airlines conduct evaluations to identify problem areas in the institutions that hold up funds, processes that reduce the productivity of the staff, and areas that have an impact on the institutions. From the reviews, the airline can have a clear financial picture. Additionally, the financial department of the airline gives recommendations based on its study that aims at improving the financial performance of the airline. Another strategy that airlines employ to track their financial performance is integrating financial performance and management systems into business operations. The finance department then uses these financial performance systems in conducting analysis to identify areas with the highest revenues and the highest expenditures. From this analysis, recommendations can be drawn.
Revenue management is applied in different sectos of the airline industry. The principle was mainly implemented when airlines started dividing aircraft seats into various products depending on restrictions that the airlines had outlined. An example is a $1000 ticket for a first class seat, which can be booked with no restrictions at any point of time, and a $200 ticket for an economy class seat, which should be booked three weeks in advance and has penalties for making changes after the purchase of the ticket (Boyd 4). According to Boyd, revenue management is “the science of maximizing profits through market demand forecasting and the mathematical optimization of pricing and inventory” (5). The airline industry has been one of the industries that have benefited from revenue management. With respect to the airline inventory, revenue management shows the analytical capabilities that help to make revenue-maximizing decisions concerning the inventory that should be sold and prices. Therefore, revenue management forecasts the demand and an ability to pay, as well as establishes an optimal mix for all fares. The airline’s revenue success is shown through fare product mix: whenever it is needed, fare classes can be closed so that the airline can save seats for clients who will come and who have the ability to pay more. Therefore, revenue management is an important principle in ensuring revenue for airlines.
Additionally, through revenue management, the financial cost control and forecasting can be made by the airline. Forecasts play an important role in ensuring that corrective action is taken due to expected behavior in the market. In today’s airline industry, there is a need to repair any damage that might have been caused to the balance sheet of a specific airline in the soonest time possible (Fiig). This has led to the shift from the long-term to short-term marketing strategies and strict cost control. For the airline to be able to control the cost, the cost ought to be known (Baker 1). It is the work of the finance department to capture and map the airline’s invoices. The airline operating cost is divided into direct and indirect costs. Direct operating costs are the expenditure incurred directly during the operation of a specific aircraft whereas indirect operating costs refer to the expenditure that is not directly related to its operation. Thus, forecasting and cost control are important aspects that outline the behavior of the market and control the expenditure of a specific aircraft in the airline respectively.
The airline industry was seen to develop steadily in the past. In the past decade, it experienced a global growth due to the availability of large aircraft, such as the Boeing 747, which has made traveling more affordable and convenient, allowing people to travel to new destinations (“The Airline Industry”). Air transport is also a significant industry on its own, contributing much to the economic development (Fedosova 5). The airline industry was seen to develop steadily in the past. In the 90s, the airline industry was not as profitable due to the Gulf War and the global economic recession (MIT). This situation served as a lesson to all airlines and, as a result, they currently have to consider a radical change to ensure that they survive and prosper in the industry. Most airlines have been on the forefront regarding aggressive cost cuts to decrease their capacity growth and give the airlines higher load factors. Other airlines are going a long way in ensuring customer satisfaction by offering services to clients both on the ground and in the air. Some of these services include offering ticketless travel, entertainment services, and even providing more comfortable seats to the customers. All these services are strategies to retain customers in the market that is currently very competitive.
Operations management in airlines is an important aspect in ensuring the efficiency of the industry. It to the administration of different business processes to form the greatest level of efficiency that is possible within an institution (Schniederjans and Cao 6). In this case, operations management in the airline industry aims at ensuring that the airline cuts its cost and uses the available resources accordingly to maximize its profits. Therefore, operations management is an important aspect of financial performance because the resources are used as efficiently as possible to ensure profits in the airline (Tsikriktsis 506).
Another issue that is closely tied to financial performance is the economic trends. The economy is what predicts if people have the necessary capital to purchase airline tickets to travel around the world. Thus, whenever there is an economic recession, the buying ability of customers subside; hence, the financial performance of the airlines reduces. It is, therefore, critical that the airlines take into consideration the fluctuating global economy, devise strategies that aim at improving their financial performance, and eventually ensure their prosperity and survival in the market. Consequently, operations management and the global economic trends are among the factors that the finance department of the airline should observe to ensure that the financial performance of the airline is maximized to ensure the airline continues to be profitable.
In conclusion, the airline industry is an important industry as far as the global economy is concerned. It has eased the travel of people from one end of the world to another, making it a ‘global village.’ An important aspect of the airline industry is the financial sector, which plays an important role in outlining the airlines’ financial performance, thus ensuring the survival and prosperity of each airline in the industry. Additionally, technological innovation lies at the center of the future of the industry. Through innovation, the airlines can be able to learn about the desires of different customers and take necessary measures to keep their customers in the competitive market. Operations management and economic trends are some of the aspects that are closely related to financial performance. Good operations management means that the airline receives the profits. On the other hand, the airline should study the economic trends to ensure its prosperity and survival.