INTRODUCTION
An industry is a group of firms doing the same business. Successful business does not depend
only on good management, leadership and communication. Industries have a number of
variables that are beyond their control. These variables normally affect the smooth running of
these industries. These uncontrollable variables are also known as the external factors. It is
very important to recognise those factors as it will give the industry with an opportunity for
contingency planning. Even though the variables cannot be controlled, they will help for
planning and anticipation. An industry is influenced by the environment in which it operates
and the success of the industry will depend on its ability to adapt to its environment. The
changes in external environment have a significant impact on the survival and success of the
industry. This assignment will cover the external factors that affect an industry, how the
industry is responding and whether it has been successful or not.
LITERATURE REVIEW
Duncan, (1972) viewed the external factors as the factors outside the industry that are taken
into consideration by an industry in its decision making. These factors are highly dependent on
the complexity and dynamism of the environment. The external environment refers to the
relevant social and physical factors outside the typical boundaries of an industry which affect
managerial decision-making.
Pearson II, Robinson and Mital, (2008) viewed the industry’s external environment as factors
beyond the control of the industry that influences its choice of direction and action,
organizational structure and internal processes. These factors which comprises the external
environment can be divided into three interrelated subcategories: factors in the remote
environment, factors in the industry environment, and factors in the operating environment.
The remote environment comprises of factors that originate beyond and usually irrespective of
any single firm’s operating situation and include, economic, social, political, technological and
ecological factors. That environment presents firms with opportunities, threats, and constraints.
Thus, external business environment has been classified as being stable when it does show any
changes, unstable when it shows relative changes, and dynamic when it shows changes
continuously (Aguilar, 1967). However, perceptions of the organizations about the type of the
external business environment to a large extent depend on their size and industry in which it
operates.
Worthington and Britton, (2003) pointed out that when examining the business environment, a
useful distinction can be made between those external factors which tend to have a more
immediate effect on the day to day operations of a firm and those which tend to have a more
general influence. The immediate or operational environment for most firms includes suppliers,
competitors, labour market, financial institutions and customers, and may also include trading
organization, trade unions and possibly a parent company. In the contrast, the general or
contextual environment comprises more macro environmental factors such as economic,
political, socio-cultural, technological and legal influences on business which affect a wide
variety of businesses and which can emanate not only from local and national sources but also
from international and supranational developments.
EXTERNAL FACTORS AFFECTING THE AIRLINE INDUSTRY
The airline industry has contributed to the globalization of the world economy. It has been
connecting many buyers and sellers over the world. It also a good mean of transport for goods
across nations. It breaks the barrier of distance and time. Taking the United States for example,
the travel growth forecast shows an increase of 5.1% for 2019. The industry’s future looks
bright. Travel expenditure in the U.S. is expected to grow by 4.3%. The number of business
and leisure trips is expected to increase. This is supported by economic growth.
PESTEL FRAMEWORK TO ANALYSE THE EXTERNAL ENVIRONMENT
OF THE AIRLINE INDUSTRY
The Political, Economic, Social, Technological, Environmental, and Legal (PESTEL)
framework covers the six external factors that impact on the airline industry. This framework
provides a broad perspective on opportunities and threats that surround the industry. These
factors are beyond the control of the industry.
1. Political Factors
Political factors can generally vary between nations. However, the aviation industry is global
and spans the entire globe. There are many government regulations such as safety, passenger
security, and several other issues. Air transport provides several important benefits both
socially and economically. As such, a large number of governments have focused on generating
value by partnering with the airlines companies. The regulatory environment has been relaxed
in several markets leading to increased partnership. It can be beneficial for both governments
and companies as well as passengers. However, globally the businesses and corporate travellers
are also enjoying the benefits. Industrial regulation in a harmonized manner profits the entire
world. Increased government regulation affects the industry negatively. It is obvious that
government regulation or political factors play an important role in determining the growth and
proliferation of the airlines industry. Over time one thing has gotten absolutely clear; growth
of the airlines has benefited governments, businesses and individual passengers. This produces
economic benefits and in turn benefits the entire society. So, there is a need to strengthen the
partnership between the government and the industry. Organizations like International Civil
Aviation Organization are working to deepen this relationship.
Moreover, the Airline Deregulation Act of 1978 removed all regulations governing the airline
routes, airfares, entry, and exit of commercial airlines. Earlier, this was controlled by the Civil
Aeronautics Board (CAB). Airfares and all other factors would be determined by the market
forces of demand and supply. After the deregulation, passengers benefited from additional
routes through the hubs. Competition also increased. This lowered airfares. However, the entry
of low-cost carriers brought airfares down even more. This have had a great impact on the
airline industry.
2. Economic Factors
When referring to the uncontrollable factors in the airline industry, it is in reference to the
macro environment also. External factors, such as unpredictable economic cycles of a nation
or natural disasters, are among the factors those working within the industry have no control
over, yet often have the greatest impact. When economies go down, the hospitality industry
which also include the airline industry are also affected because of a drop in discretionary
spending. Tourism may go by the wayside during times of extreme economic difficulty, leaving
industries within the hospitality industry, such as the hotel business, dependent upon the
continued patronage of the business community. The industry has seen several downturns.
Airlines companies were impacted deeply by the recent recession and slow economic growth
thereafter. The air travel markets saw a low in the early 2009. Both premium and economy
travel saw a decline. However, it was premium travel that was more badly affected. Both
travellers and the industry were forced to adopt cost cutting measures. The recession did not
just influence the profits but also employment. Most airlines were forced to reduce prices and
to retrench. Many thousands of jobs were lost.
The economic recession left behind a few positive effects also. The crisis changed the
companies’ style of business. Prices were reduced and service standards raised. The boom in
low cost carriers has made air travel cheaper for the masses. Overall, the impact has been
positive. Now that the economic recession is past, the industry must grow consistently. The
aviation industry is not immune to economic pressures. It has from time to time been forced to
adjust per changing economic conditions. However, a lot of growth is expected in the coming
years from maturing economies like Asia. The latent demand for air travel in Chinese markets
has increased. This provides opportunities as well as challenges. Obviously, the importance of
economic factors in case of the airlines industry cannot be overlooked.
3. Social And Demographic Factors
There are several industries that profit from the airlines industry. In particular, it is the
hospitality industry globally which depends heavily on transports. The industry impacts and is
impacted by social forces. Airlines companies stimulated the demand for air travel by reducing
prices. They created employment. The result has been an improvement in their social image.
The mutually beneficial relationship between the airlines industry and the society should be
seen in this context. However, social trends have a major impact on the aviation industry in
other ways too. People are seeing the industry in a new light. It is now seen as a carrier for
the masses. The social perception of air travel has changed. It is being seen as safer and
convenient. Moreover, as the people’s awareness of technology increased they were drawn
towards air travel in larger numbers. The number of high class travellers also increased. There
are a large number of social changes that have proved positive for the airlines industry. This
explains the relationship between the society and the industry. Social factors as a result acquire
a major value in the context of the aviation industry. Events like disasters and wars also have
an impact on the airlines industry.
4. Technological Factors
The importance of technology can be understood from the heavy use of technology in aviation.
Both the travellers and the companies identified the role of IT and technology in this sector.
Technology means speed but also convenience and safety. Whether it is air traffic or passenger
safety, the role of technology is critical. The world wide web has also brought higher profits
and revenues. Most of the bookings take place online. Even the aircrafts are enabled by best in
class technology. Best in class technology means lighter aircrafts that provide both fuel
economy and speed. However, it also means convenient interiors and a safer journey. In terms
of safety too, they are more reliable and efficient. Whether it is a commercial passenger carrier
or a freights carrier, technology affects profits. As technological changes continue, airlines
continue to gain by increased safety of air travel. Both Boeing and Airbus are focused on the
use of innovative technology to make air travel safer and economic.
Technological advancement has been the driving factor for improving airlines’ operational
efficiency. Airlines have been able to reduce costs and improve operations by using advanced
aircraft engine technology, IT solutions, and mobile technology. The technology has
created better connectivity and enhanced passengers’ travel experience.
5. Environmental Factors
The global aviation industry consumes over 200 million tons of fuel per year. The rising
demand for air transport and the rising crude oil prices could impact the industry’s carbon
emissions. The environmental impact could also influence sustainability. The main
environmental impacts due to the hospitality industry are CO2 emissions, CFC emissions,
noise, smoke, smells, health of staff, waste energy, waste water, waste food, waste disposal,
agricultural ecology, purchasing policies, transportation policies, sale of souvenirs made from
endangered species, location of hotels in fragile locations. According to the Annual report of
the world travel and tourism environmental review "there is a recognition that environmental
issues will become much more prominent as a factor which influences consumers, regulators,
pressure groups and destinations and that the tourism industry will need to show increasing
concern for these issues. The WTTC have developed a strategy, known as the "GREEN
GLOBE", in order to promote environmental management among hotel and travel
environment. These vary from waste management to the development of eco-airline and the
classification of airlines on the basis of environmental impact.
As a result, these companies invest more in fuel efficient and environment friendly carriers.
The efforts to reduce emissions had started back in the 1960s. The earliest efforts were focused
at reducing the smoke from the engines. The earlier air-crafts emitted visible smoke that was
dangerous. The industry invests in research and development so as to bring more efficient and
environment friendly air-crafts. It is focused on reducing its emissions and carbon footprint.
Billions are spent by these companies on R&D.
6. Legal Factors
Legal factors can also effect industries with trust legislation, employment, trade union
legislation, taxation, the environment e.g. pollution control and waste management, insurance,
transport, health and safety, consumer protection (Melanie Allen, 2001)
An uncontrollable variable that companies within the airline industry are largely affected by is
changes in law. The regulatory environment in the hospitality industry can change from time
to time and this can have an effect on the way that hotels, airlines and restaurants all go about
conducting business. For instance, a change in the tax laws that raise the price of gas will affect
tourism and costs for the hospitality industry as well. Another example would be changes to
the wage structures.
The airline industry is widely impacted by regulations and restrictions related to international
trade, tax policy, and competition. This industry will also be influenced by issues like war,
terrorism, and the outbreak of diseases. In 2014 there was the outbreak of Ebola and most
countries had a lot of controls which form part of legal factors. As a result, they require
government intervention. The airline industry was highly affected by these laws and
regulations.
CONCLUSION
So, this PESTEL analysis for airline industry has highlighted six important factors that are
affecting its external macro environment. By keeping these factors in mind, we have come to
the conclusion that the increased costs of doing business, strict rules and regulations imposed
by regulators, competition from low-cost airliners, changes in passenger profile, in addition to
the recent airline related deaths, all have affected the viability and profitability of the global
airline industry badly. It will require a lot of patience and hard work for the industry to find its
way back to the right track.
To maximize the benefit of the PESTLE Analysis it should be used on a regular basis within
an organization to enable the identification of any trends. The impact of a certain external factor
may have more severe consequences for a particular division or department and the PESTLE
technique can help clarify why change is needed and identify potential options. As with all
techniques there are advantages and disadvantages to using it to help plan organizational
strategy.
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