Aviation Governance

Abstract

Globalisation has led to a strongly growing demand in international air transport. This growth was furtherfuelled by the deregulation of the airline sector. Politicians, business leaders, but also individual and institutional customers needed a deeper understanding of the aviation sector. An increasing number of textbooks about the airline sector offer insights into the industry's economics and its management. This book targets industry managers as well as policymakers and institutional customers of the sector, and in particular students in the field of transport and tourism. It provides an overview on the aviation sector with a special focus on value creation and strategies based on industrial economics. The consequent application of a system view makes it unique in its field. The book draws on the rich tradition of integrated management approaches and the use of system models in management research and teaching in tourism at the University of St. Gallen. The system view and the use of system models help to understand interrelated and interdependent developments, like the consequences of technical progress on regulation and demand.The authors were fortunate enough to be able to draw on research results of many years at the Institute for Public Services and Tourism and the Center of Aviation Competence at the University of St. Gallen. Therefore, the authors would like to thank all colleagues who contributed to this book by discussions, research contributions, and administrative support, and especially the co-authors Philipp Boksberger, Bert Urfer, Robert Weinert and Jan Vespermann. Special thanks go to our assistants Catherine Baudenbacher, MarlisVernier, Nicole Denk and Margareta Brugger and the language editors Michael Tschapka and Christine Kern who helped to finish this book.The ongoing liberalisation of markets, rapid technological changes, and the establishment of new businesses in air transportation constantly raise new questions for theory and practice. Current and future developments in aviation are thereby shaped by the industry actors and structures, in short, the aviation system. The textbook �Aviation Systems� addresses these questions by providing a detailed picture of major management aspects in the field of air transportation. Directed at students, researchers and practitioners alike, the book deals with the three major actor groups in aviation: the air transportation industry itself (supply side), the customers (demand side), and the regulatory bodies and organisations (institutional side). The book follows a superior system approach in the field of aviation economy and creates the big picture of the aviation industry. The following figure shows the aviation system as a fundamental framework underlying the chapters of this book.Chapter 1: Fundamentals and structure of aviation systemsThe book starts with an overview on the fundamental industry structures, the industry�s importance, its size and historical development. The author introduces the air transportation industry as a highly dynamic and complex industry, characterised by high cyclicality and a great vulnerability to external shocks and volatile commodity prices.While on several levels of the value chain the industry is characterised by duopolistic (aircraft manufacturers) or oligopolistic (airports) market structures, on other levels of the value chain companies act on a polypolistic market and face fierce competition (airlines). Main stages of the aviation value chain, however, face the problem of a high fixed cost structure characterised by specific and capital intensive investments in long-term assets. This creates high exit barriers, but simultaneously it regularly leads to price wars and oversupply. As a consequence, the industry�s profitability is very low despite its high historical growth rates of about 5 per cent annually.Chapter 2: The environment of aviationThe economic relevance of aviation comprehends direct, indirect, induced, and catalytic effects. Apart from its economic relevance, air transportation leads to social benefits by contributing to global welfare, improved living standards, and by supporting and increasing cultural understanding and multicultural cooperation. The authors also show within this chapter that these benefits come at the cost of negative ecological impacts. The textbook gives an overview on major negative externalities of aviation, both on the local and the global level.Chapters 3 - 5: The supply side of aviationThe third chapter covers the supply side of aviation. It presents the path from the aviation value chain to the aviation system as well as the theoretical basics of network management and its application to air transportation. By introducing major strategies for network management � such as the hub-and-spoke system vs. the point-to-point system � the authors analyse the prerequisites for the operation of these systems and their usage by application of different business models that exist in aviation. The major business models in aviation are also introduced: the traditional flag-carriers, regional carriers, low-cost airlines, charter airlines and business aviation. While these are business models that shape the �airside� of aviation, the chapter also gives an introduction to the �landside� of air transportation, including airports and the respective ground infrastructure.Chapter 6 - 8: The demand side of aviationThe demand side of the aviation industry can be classified into people flying for business purposes and leisure travellers. Business travellers usually seek quality services and demand frequent flights to a wide range of destinations, and they are willing to pay a premium for these benefits. Leisure travellers, by contrast, often seek the lowest available price, but are less concerned with service offerings, flight frequency or the number of destinations served. Generally, it can be observed that the heterogeneity of passengers is increasing. The authors also assess the customer value of air transport by elaborating on the attributes that together form the value of an individual passenger. In this context, passenger behaviour and risk management are explicitly described.Chapter 9 - 11: Steering and controlling the systemSteering aspects (e.g. influence of regulatory institutions; aviation law) as well as on controlling aspects in aviation (e.g. corporate governance, risk management), is analysed in detail to show how the aviation industry is shaped by its institutional surroundings. Regulations cover all elements of the air transportation value chain, from the construction of aircraft to customer contacts specifying how contract conditions of tickets are shaped.The book distinguishes between public and private institutions on the one side, as well as between national and supranational institutions on the other side. While public organisations generally serve as norm-setting and monitoring institutions, private organisations often serve as a platform for member exchange and advocacy and are not allowed to set binding norms and rules. Important institutions, such as ICAO and IATA, are introduced and their specific roles and competencies are discussed. It is also shown how the industry is shaped by the norms and regulations set by these bodies. In this respect the fifth chapter elaborates on how international institutions influence competition structures in air transportation, and thus may cause potential distortions among states and individual companies, such as airlines and airports.