1 Ph.D. Thesis COST EFFECTIVE LOW COST CARRIER (LCC) PAKISTAN AVIATION MANAGEMENT BY UNIFIED AIRCRAFT POLICY Dewan Abdullah Farooqui Department of Business Administration, Research Scholar, Greenwich University Karachi Contact: [email protected] Mobile: +92300-8225651 Supervisor: Prof. Dr. Hiro Takahashi at Greenwich University 2 Abstract The study conducted for this thesis analyzes the aviation industry from the global perspective in general and from the Pakistan perspective in particular. The initial part of the research comprises of the in-depth study and the historical analysis of the global aviation scenario i.e. how the aviation industry has become a major and fastest source of transportation globally since the inception of regular air services in the earlier 20th century till to-date. Later part of this research focuses on the cost effective Low Cost Carrier (LCC) aviation model in Pakistan. To achieve the cost saving management, unified aircraft operation policy was proposed. To select right aircraft for Pakistan’s domestic and regional markets, multiple evaluation factors were considered for better matching of physical requirements. The unified aircraft fleet is a biggest factor to reduce the total operating cost. Moreover, the research on cost effective management by employing Enterprise Resource Planning (ERP) LCC based aviation business in Pakistan was also undertaken. An elaborated analysis of the operations and functioning of ERP in LCCs’ different business divisions with real-life analysis was conducted. It was concluded that ERP modified for unified aircraft policy will give the significant improvements of the value of operation compared to the Traditional Management, General ERP, and combination of both of them. Eventually, this research shows the potential of 8.7% increase in profits from original management policy. 3 CHAPTER 1: BACKGROUND 1.1 Aviation Market Prior to the liberalization of the aviation policies in the decades of the 1960s and the 1970s, air travel in the US and the Western Europe was limited only to the privileged and high-end customers; they were the only ones who could afford and spend a substantial amount of money. Those decades are still marked as the golden period for the airlines as their profit margins were soaring and the aviation business was protected by the stringent regulatory environment safeguarding the interest of very few state-run and mega-airlines. Those were the times when fuel cost was not at all a major concern and airlines were enjoying strict regulatory protections. The entry barriers and protections under the regulatory regimes were preventing the entry of new competition in the market e.g. in the form of limited issuance of airlines operating licenses and the route-permits were dedicated only to the specific airlines based on the bilateral agreements. In the mid 1970s, liberalization of the industry and open sky policies initiated by the Government of the United States (U.S.) marked the beginning of the end of the golden period of the aviation business. Many mega-carriers particularly in the U.S such as Pan Am, TWA, Braniff, and Eastern airlines etc. could not sustain the tsunami of the causes and effects of the post liberalization period. Regardless of the brutalities of the liberalization of the aviation policies that caused the debacle of many mega-carriers and the considerable shrinking of airlines' profit- margins; globally all types and stratum of the consumers felt its larger benefits overwhelmingly. The free-competition environment gave way to the entry of highly efficient new airlines that brought the fare down to the level that it made possible for the masses to avail and afford air transportation 4 with ease and convenience. A new breed of carriers came into existence, which relied heavily on enticing customers solely on the basis of value-proposition. The Asian aviation market in the last two decades grew manifolds mainly due to the rapid economic growth in the Asian Pacific countries namely Asian Tigers and also due to the large size of population scattered in the vast Asian countries marked with poor land-transport infrastructure. The passenger market in Pakistan is in the early stages of the mass customization and the growth in its aviation market suggests that there is an organic and modest growth in the last few decades. The air traveling public in Pakistan is still consisting of a very small proportion of the total population. The lack of service efficiencies and market stimulations due to the presence of few incumbent-carriers in a highly oligopolistic environment gives a bleak picture of Pakistan aviation market. There seems to be a wide demand and supply gap in the air passenger market. The Pakistan domestic market is under-served and frequency- starved. The objective of the research is primarily aimed at finding the most suitable fleet of aircraft that provides maximum economic gains that strengthens the domestic and regional network within and from Pakistan. 5 1.2 Research Design and Methodology The thesis will utilize numerous different approaches in order to give justifiable proposal. These approaches are highlighted below: The descriptive approach will be taken initially for the comprehension of the global aviation industry. This approach aims primarily at gathering knowledge (i.e. descriptions and explanations) about the global aviation industry. The intricacies and the complexities associated with the air travel industry marks the aviation business as one of the most volatile businesses. Later, normative approach will be taken to define how the airline business should be conducted in the peculiar Pakistani environment, which means that it will be necessary to define the subjective point of view that shall be used. If required, applied research will be engaged in order to support subjective views backed with scientific support and research to arrive at practical solutions. Additionally, empirical research approach will also be taken to observe and measure phenomena and occurrences in order to derive knowledge from actual experiences rather than from theory or belief. Following are the salient features of the Research Methodology. 1. Investigate the demand of domestic and international routes and flight frequencies with- in and from Pakistan. 2. Make a mark sheet to evaluate right aircraft. 3. Select the most adequate aircraft model for Pakistan aviation business. 4. Propose Unified Aircraft Policy for Pakistan LCC business. 5. Propose modified ERP function for Unified Aircraft Policy. 6. Evaluate the impact of operation expenses by each case of aircraft model. 7. Evaluate the availability of flight frequencies by accuracy model. 6 8. Evaluate ERP functions in comparison to traditional aviation management. 9. Estimate the expected cost reduction by proposing Unified Aircraft Policy. 1.3 Specific Aims and Objectives The specific aim and objective of the report is to propose Pakistan’s specific Low Cost Aviation Model by adopting unified aircraft policy and modified ERP functions. 1.4 Constraints The statistical data sourcing and collection pertaining to airlines and airport operations in Pakistan is either unavailable or available in limited and unrefined form. At times, the data available in the country is outdated as compared to the availability of data in the developed world. However, the above constraint can be surmounted as global aviation data is available from the international sources and governing bodies such as International Air Transport Association (IATA), International Commission on Aviation (ICAO), Federal Aviation Agency (FAA), European Aviation Safety Authority (EASA), and also from the major aircraft manufacturers such as Airbus, ATR, Boeing, Bombardier and Embraer. Aviation related periodicals and magazines, bulletins, and aviation-consulting agencies are also good sources for secondary data collection. 7 CHAPTER 2: THE HISTORY OF GLOBAL AIR TRAVEL 2.1 The Nascence of Flying Man has always been seeking possibilities of soaring through the skies like birds right from the beginning of the known history. The tales and myths from the ancient civilizations from varied periods and regions depict humanoid characters, gods, iconic objects and figures having mystical flying capabilities. The Renaissance period is marked by the Leonardo da Vinci’s most famous invention ‘the Flying Machine’ displayed the power of human imagination inspired from the nature and enthusiasm for the potential of flight. Long before the Wright Brothers, a Turkic man by the name HezarfenAhmatCelebi in 1638 AD made a successful attempt of flying almost 1.5 km and became the first ever human being to fly on his own. (Jones, 1998) Even though the developments in aviation seem multifaceted and complex but astonishingly the absolute progress took place in just a little more than hundred years i.e. from the early twentieth century. It was the passion and perseverance of the two brothers Orville and Wilbur Wright that brought a significant development, which altered the landscape of the contemporary world. Their dedication and hard work earned them a title of being pioneers of modern aviation. Neil Armstrong’s iconic words “That’s one small step for a man, one giant leap for mankind” are in fact more appropriate to the momentous flight in 1902 made by the Wright Brothers on their newly designed glider. It wasn't until December 17, 1903 that their airplane, named The Flyer made the first controlled and powered flight in history lasted only twelve seconds