The Global financial crisis and the LCC Paradox – The Air Arabia Advantage Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

The Global financial crisis and the LCC Paradox – The Air Arabia Advantage Case Study Solution

“To investigate the factors that made Air Arabia profitable in the times of financial Crisis”

Research Objectives

To investigate the impact of global crisis on the airline industry.
To gauge the factors and the strategies air Arabia used in order to become profitable in the times of financial crisis.
To determine the airlines that was most affected by the global recession in order to compare it with Air Arabia and further to compare the underlying reasons behind the growth of Air Arabia and loss faced by the most affected airline.
To analyze the impact of global crisis on the prices of fuel and how does that affect the airline industry.

Research Justification

There have been numerous works done on the reasons that’s why global crisis started and its effect on numerous industries specifically housing industry, the banking sector, investment market and other financial markets. Some research has also been done on its impact on the airline industry, but it can be seen that there has been no proper research done on Air Arabia specifically. Air Arabia stays amongst the few companies around the globe that remained profitable even in the time of global recession. Thus, this research provides a detail overview of the underlying reasons due to which Air Arabia remained profitable. Other companies can learn from it and can implement the same strategies used by Air Arabia in order to achieve immunity to the economic downturns.

Limitations

The time is limited to carry the particular research, such is a limitation, as the extensive amount of time will allow to determine the other underlying factors more effectively and succinctly.
In addition, the limited data on the particular topic along with the fact, the restriction to access the real data of the airline pose a limitation to the research.
Apart from this, the limited implementation of the statistical and financial tools due to limited understanding poises the limitation to the research
Research Scope

Followings are the research scope of the Study:

It will help the other researchers to understand the factors that affected the airline industry during the financial criteria and may help to drive better recommendation plan.
This will help the economists to understand and gauge the different factors that are connected to economic performance and the airline profitability, making them gauge the impact and the repercussion, leading to better planning.
In addition, this will help the airline companies to identify the strengths and other strong strategy that have made the Air Arabia successfully, which in turn may help them to re-strategize the plans for future.

7.Definition of the key Terms

Recession:

Recession refers to a downturn in the economy. It is a period in which the general economy of a certain area declines. Recession is associated with decline in employment rate, the housing market and that in the stock market. Apart of this, the inflation rises, overall GDP of the respective country also decreases, wages decline and retail sales also realize a drop. In simple words, recession can be defined as the contraction of GDP for consecutive 6 month time or a longer time period. Recession is not as severe as depression and usually lasts for a year. (recession, 2018)

Global Recession:

As the term refers, global recession is the period of recession around the globe in various countries at the same time. As per the definition of International Monetary Fund (IMF), global recession can be defined as declination in the GDP per capita across the globe. Also, IMF states that the decrease in per capita GDP takes place with the weakening of trade, employment, and other such factors. (Global Recession , 2018)

Economic Downturn

An economic downturn also refers to the decrease in the Gross Domestic Product, The time when an economic downturn occurs is usually just before the recession begins. This includes the increase in the gap of the outputs produced and decline in the growth of economy. And, this results because of increase in unemployment, decrease in inflation, increase in the borrowings and low investment by the government and low expenditures by the consumers within a country.

Gross Domestic Product:

The value of all the finished goods produced and services provided in a country in a specific time frame is known as GDP. Most of the countries calculate GDP on annual basis, but it can also be calculated semi-annually and on quarterly basis. It includes the consumption by both the public and private sector, investment projects, import and export of a country, and construction related costs. In simple words, GDP can be defined as the overall income of a country.

Low Cost Carriers

When the aviation industry is discussed, it can be seen that the airlines are sub-categorized according to their types. In general, the airlines are divided into the following types: Cargo Flights, Regional Airlines, Full Service Airlines, Charter Airlines and General Aviation and Low Cost Carriers.

Taking about low cost carriers, it can be defined as the type of airline that offers air transport service to its customers at cheaper rates in comparison to other airlines. One thing to be noted here is that the airline itself is not what makes it the low cost carrier, but it is the model that these airlines use and that makes them the low cost carrier. Thus, based on this idea, a low cost carrier can be defined as the airline that uses a model whose goal is to reduce costs whereas possible. Once, the airline is able to reduce any such costs, they are able to offer their air transport service to the customers at cheaper rates.

Chapter: 2- Literature review

The particular chapter deals with the Literature review, which includes the studies of the researches in the past, explaining the factors that have made the basis of the given research. The particular chapter discuss the factors such as recession, oil pricing, factors leading to recession and others.

LLC Model

The LLC refer to the low cost carriers that offers no frill flights to passengers at the lowest fares. Basically, the LLCs are characterized by the low ticket cost, regular fleet size, and maximum aircraft utilization, along with the use of secondary Airports and lastly the point to point route structure with non-stop flights and no frills service.

According to (Global Recession , 2018), the LLCs have become the full service airlines to create the customers with the lowest fares and allowing them to consume the service, leading to huge profit generation through volume of sales; making the huge Airlines to adopt the LLC model along with other premium model.

The real economy is greatly affected by the risk in the financial market due to the role of financial market risk in the economic project financing, not only this; it also impact on the expectations of agent. Surprisingly, the low and high volatility of channels as contributors to the global financial crises have been identified by early theoretical literature. According to traditional finance theory that the high volatility is associated with uncertainty about investment payoffs in future, hence uncertainty about macroeconomic variable including consumption and investment. (Apostolides, 2001) Argued that the most fundamental factor to drive the economic performance is investment, whereas risk greatly affect investment. The modern literature, on the other extreme, have reached to the similar conclusion, and emphasized that value of investing increases when future payoffs volatility increases (Dixit and Pindyck, 1994). It is notified that the high volatility may resulted in adverse crises or outcome.

In addition to this, the financial authorities have empathized on the high volatility channels in both micro prudential and macro prudential regulations, through the usage of high volatility as an indicator of the pending crises. This, in turn, has motivated the official interventions, where the banking sectors had been required to increase capital and reduce their risk-taking. The risk cycle presence had been observed by Hayek (1960) as separate from business cycle, thereby, risk-taking is highly encouraged by low risk. The instability hypothesis of (Torres, 2005) has suggested that the presence of low-risk environment might lead to a crises, because it acts as incentive which in turn increase the risk-taking (Rich, 2013) this would most likely create channels for low volatility in order to increase the likelihood of eventual crises and market chaos.

In the most recent paper, the volatility paradox has been identified by (Vueling, 2011), where probability of the systemic event is paradoxically increased by low-risk. Likewise, the general equilibrium framework has been used by (Schiinder, 2005) for the purpose of analyzing that how perception of risk lasts impacts on the risk-taking of investor and perception of volatility, whereby the small variation in the volatility might results and leads to a rapid movement in the price related with the global financial crisis, afterwards affecting volatility. One of the core relation between the crisis and low volatility is associated to the managers’ behaviors of risk-taking. The low risk expectation tends to encourage the asset managers to invest large position in risker asset for reaching yields. In an addition, the Sharpe and value-at-risk ratio are massively and most commonly used by the financial institution’s risk manager for the purpose of controlling the trader’s risk taking.

On the other hand, it was proved much harder to critically evaluate the significant relationship between the real economy, financial market volatility and the global economic crises. This dissertation also illustrates the empirical literature that studies the crises determinants. One of the example is the (Crotty, 2009), which has been considering the influential factors affecting the likelihood of banking crises 65 countries, from the period of 1980 to 1994. Through constructing the data set of currency crisis and banking spanning 120 years, it has been documented by (Vueling, 2011)that the probability of the financial crisis is greatly affected by the capital control. In recent times, many authors have been using the data base being proposed by (Schiinder, 2005), that focuses on the relevant variables and banking crises.

The essence of this study is the identification of the unexpected volatility. The empirical results have been providing the support for the theoretical predictions through demonstrating the low and high volatility channel presence and reinforcing the current literature proposed on the crises determinants. It has been also demonstrated by study that the over the prolonged period of time, the low volatility leads to the higher risk-taking whereby supporting the hypothesis of Minsky............

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