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Airline industry Essay

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 The airline industry plays a very significant role in as far as the US economy is concerned. It makes the movement of people as well as the flow of goods from one place to the next easy. The airline industry has had a significant effect on tourism as well as the agricultural sectors. Business personnel can easily move from one region to the next thus steering the country’s economic growth and development. In this age where foreign direct investment has become the norm of the day, the role of airline industry has intensified. The airline industry also allows the accessibility of otherwise unreachable places for instance the remote regions and thus plays a social function. The focus of this paper is to offer an economic profile of the US airline industry where important economic aspects such as the shifts and price elasticity of supply and demand, the positive and negative externalities involved, wage inequalities as well as monetary and fiscal policies involved will be discussed.

 In their distinguished book, ‘Economics’, Campbell and Stanley note that price elasticity of demand measures the sensitivity of consumers to the price changes. Demand is said to be elastic when the price elasticity coefficient of demand is greater than one and inelastic when the coefficient is zero. However, there are factors that determine the price elasticity of demand and they include availability of substitutes. (McConnell C and Brue S, 2005). Applying this to the airline industry one can argue that increment in the prices of air travel tickets will see people opt for other means of transportation for instance rail or road which are substitutes to air travel. People’s level of income when contrasted to increment in the prices of air travel tickets also plays a vital role in determining the price elasticity of demand. The higher the price of a good relative to the level of the consumer’s income, the greater or higher will the price elasticity of demand. Rational consumers will buy more of a product or service when the prices are low as opposed to when the prices are high. Price elasticity will however remain stable in some instances for instance when urgent travels are needed or are very necessary the prices may not affect the demand for the air travel. (McConnell C and Brue S, 2005).For instance a doctor traveling to rescue a sick person may not be heavily affected by the prevailing prices as the need to travel will be a necessity rather than a luxury. This would however be different for people traveling for fun or exploration as they may postpone their flights due to price increment.

 Price elasticity of supply also adopts a similar perspective as the price elasticity of demand. Supply is said to be inelastic when producers are relatively insensitive to price changes and elastic when producers are relatively sensitive to price changes. Price elasticity of supply will therefore depend on how easily and quickly producers can shift the various resources at their disposal to maximize production. Prices of oil have a major role to play in influencing the price elasticity of demand and supply in the airline industry. High oil prices trigger high costs of air travel and consequently lower the demand. It also affects the supply in the sense that lesser flights will be recorded.  (McConnell C and Brue S, 2005).

 The demand for air tickets is affected by various factors for instance the price of the tickets as well as the prevailing economic conditions. Tough economic times where people’s purchasing power has been compromised by a recession would definitely register low demand for air tickets thus negatively affecting the industry. Economic growth which is characterized by higher employment and income levels precipitates a higher demand for air travel tickets. Other factors like security also play a vital impact in influencing demand for air tickets. A clear example is the 911 terror attack that imposed much fear to many would be travelers. Since the deregulation of the airline industry about four decades ago, competition in the industry increased triggering the reduction in prices of air travel tickets. The initially monopolistic gains that have been shared reduced as more players joined the market. (Morrison S and Winston C, 1995).

 The law of supply has it that as prices of air tickets rise, the producers will be willing to produce more so as to gain more profits which are the difference between revenues and costs incurred. The supply curve for the air tickets is consequently upward sloping. And changes in prices will be reflected along that line. Supply of air tickets is affected by factors such as the jet fuel, aircrafts and maintenance, labor as well as landing fees. Increment in the costs of any of these factors leads to increased costs of production which is passed on to consumers in high price air tickets. (Morrison S and Winston C, 1995). Technology also plays a vital role in influencing the supply of air travel tickets. Modern and better technologies are responsible for a shift in the supply curve of the air tickets. The supply of air transport is also affected by competitive factors where the introduction of new airline companies competes for the market share. Tragic events for instance the 911 attack have an effect in shifting the demand curve for air travel tickets. On the other hand the deregulation of the airline industry triggered a shift in the supply in the airline industry. The demand for air transport faces much or constant fluctuation and it up to the varying managements to adopt appropriate measures where idle capacity can be utilized in peak seasons or some capacity be pulled off in some routes in off peak seasons.

As Bijan, Tom and Ken in ‘Introduction to Air Transport Economics’ noted the airline industry is faced by much volatility such as the terror attack as well as global economic crisis that sees many airline companies bankrupt, lay off many employees as well as cut off their salaries. The airline industry is associated with both negative as well as positive externalities. Rising jet fuels have a negative effect on the industry. (Vasigh B, Tacker T and Fleming K, 2008).  Political instability as well as the low cost carriers and persistent competition all work to reduce the chances of the airline industry from thriving. The effectiveness of the airline industry in terms of its performance is largely determined by other sectors for instance how well advertisement was made, how stable politically nations are as well as their economic stability. When tourism and agriculture for instance in horticulture thrives in a given nation the airline industry will register growth. The airline industry is much related with the tourism industry and improvement in the air craft technology as well as the communication sectors play a significant role in improving the tourism sector. Other sectors associated with air transport are hospitality sector where accommodation, catering, recreational facilities, travel related services as well as cultural activities. (Vasigh B, Tacker T and Fleming K, 2008).

 Monetary as well as fiscal policies have an impact on the airline industry. Fiscal policies such as the imposition of taxes to the airline industries have a negative effect on the industry. Taxes are a cost incurred by a company and it lowers its profitability levels. Statistics have it that taxes have risen from a mere 4% in the early 1970’s to as high as 14%. High taxation on this industry may be of dire effects on other sectors for instance tourism and agriculture and ought to be adjusted to desirable levels. (Button K, 2005). Through public expenditure which is a fiscal tool, governments can boost tourism and consequently be of a positive impact to the airline industry. Monetary policy tools at the disposal of FED or the Federal Reserve Bank can also affect the airline industry. FED which has the power to regulate the flow of money supply in an economy through various means can influence the airline industry by ensuring that there is adequate supply of money in an economy. The main objectives of the FED are to ensure sustainable economic growth while ensuring that the inflation rates are stable or relatively low. (www.federalreserve.gov). In cases of economic recessions where there is low income and high unemployment rates the airline industry will record low demand and consequently low profits. This can be changed by the adoption of FED monetary tools such as lowering of the reserve requirement ratio for the banks to empower them offer credit to both individuals as well as businesses. With ease in the availability of credit investment would be encouraged and the need for air transport would also increase especially as individuals and firms invest in far away places. Other monetary policies that would help realize this goal would be the reduction of interest rates as well as the open market operations. (www.federalreserve.gov).

The airline industry is also associated with negative externalities especially those related to environmental conditions. Air transport is responsible for both air as well as noise pollution calling for collaborative measures by the relevant parties to have it checked. Noise pollution can be reduced by ensuring that airports are located miles away from the central business districts or away from where many people are situated. In this age where nations across the globe are very concerned with global warming effect appropriate measures must be adopted to curb air pollution by the airline industry. (Helium Inc). Statistics have that approximately 13% of the total CO2 a green house gas is attributed to the airline industry. There are other dangers associated with air pollution from the airline industry for instance some types of cancers. The Federal Aviation Administration is committed to ensuring that the negative effects of noise pollution are reduced by adopting noise monitoring as well as reduction measures. (Helium Inc.).

Various laborers offer varied expertise in the airline industry depending on their level of education, experience and expertise. For instance a pilot will spend more years of study than a stewardess and the two will generally earn varied wages. (www.bls.gov) Wage inequalities will also vary depending on the airline company in question where some such as those dealing with high technology aircrafts stand to earn higher wages. One’s experience also plays a vital role in enhancing wage inequalities and so does the distance traveled. Another factor that ensures the wage inequality is the fact that varying laborers are supported by varying labor organizations or movements who will advocate for their rights in a different manner. Wages variations from the highly paid to the lowly paid are in this sequence, Commercial pilots, Aircraft mechanics and service technicians, Flight attendants, First-line supervisors/managers of office and administrative support workers, Transportation workers, Cargo and freight agents, Reservation and transportation ticket agents and travel clerks, Customer service representatives, Laborers and freight, stock, and material movers.(www.bls.gov).

 The economy plays a vital role in influencing the airline industry. A booming economy will ensure high investment rates which will not be confined to a specified region. This investment encompasses foreign markets and thus the demand for air travel tickets will be higher. Incomes will be higher when economic growth has been recorded and people will afford to pay for flights for recreational purposes. This is in contrast with a situation where the economy suffers a recession and there is reduced money in circulation hindering investment. Low incomes will also be associated with reduced tendencies to travel for recreational purposes. Economic influences that have negative effects on the airline industry include high inflation rates as well as increased in the fuel prices which is a major resource used in the industry. High taxation will also lower the profit margin levels of the airline companies in addition to triggering the increment in the prices of air travel tickets as the airline companies will pass on the added cost to consumers.

References:

Air Transportation. Retrieved on 25th May 2009 from

http://www.bls.gov/oco/cg/cgs016.htm#earnings

Board of Governors of the Federal Reserve System. Federal Open Market Committee

FOMC. Monetary Policy. Retrieved on 24th May 2009 from http://www.federalreserve.gov/monetarypolicy/fomc.htm

Button K. 2005. The taxation of air transport.

. McConnell, C. and. Brue S. (2005). Economics: Principles, Problems, and

 Policies. McGraw-Hill Professional Publishers

Helium, Inc. How does airport pollution affect the environment? Retrieved on 25th May

            2009 from http://www.helium.com/items/718705-how-does-airport-pollution-

            affect-the-environment

Morrison S and Winston C (1995). The evolution of the airline industry.

            Brookings Institution Press,

Vasigh B, Tacker T and Fleming K. (2008). Introduction to Air Transport

            Economics: From Theory to Applications. Ashgate Publishing, Ltd.,

 

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