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Introduction: Airlines Industry
Airlines industry is affected by several factors such as monetary & fiscal policy, wage inequality, price elasticity. These factors play a major role in the functioning of airlines industry. The condition and circumstances going in the world changes the demand and supply.
Airline industry had a severe effect due to the attack by the terrorists on World trade Center in the year 2001. People didn't rely on the airlines after this attack as airplane was used for the attack. Aviation sector suffered huge losses as people stopped traveling by air. Debts of the airlines companies increased and some of the airlines went bankrupt. Fiscal and monetary policies were also impacted in a negative manner.
As market condition is continuously changing, it is difficult to predict the future of airlines. The industry has faced several problems due to rising inflation, fluctuations in oil & fuel prices, rising interest rates. The overall industry is in a weak position as there is decrease in the demand. The difficulty has also increased due to the intense competition in the industry. Companies are providing additional services at low cost and decreasing the fare to attract the customers.
Various factors which create an impact on Airline Industry are as follows:
Shifts and Price Elasticity of Demand and Supply
To know about the shifts and price elasticity of demand and supply, the concepts of demand, supply, shifts and price elasticity should be reviewed. Demand can be defined as willingness and ability to pay for a particular product. The demand for a product largely depends on its price (but it is not the only factor which determines it). The shifts in demand curve (extension & contraction) occur as a result of change in the price. If the demand for a product increases due to the fall in price then it is known as extension of demand. A fall in the demand of a product as a result of the rise in the price is called as contraction in demand. A change in demand, due to the factors other than price is described as shift in demand. Price Elasticity of demand is defined as the percentage change in quantity demanded of a product due to the percentage change in its price, other things remaining constant (Air Travel Demand Elasticities: Concepts, Issues and Measurement, 2008).
The supply of a product refers to the various quantities of the product, which a seller is willing and able to sell at distinguishing prices in a given period of time. A shift in supply means an increase or decrease in the quantity supplied at the same price. Elasticity of supply refers to the percentage change in the quantity supplied of a product due to percent change in its price. When the change in the quantity supplied changes more than proportionate to the change in its price, the supply is elastic. On the other hand, if the change in the price leads to a less than proportionate change in quantity demanded, the supply is inelastic.
After the attack of 9/11, there is a great fall in the demand of Aviation Sector. This sector is highly unstable, as it is totally dependent on the market situation. There are various factors which influence the demand and supply curve. Increase or decrease, contraction or extension, terrorists attack etc creates an impact on the Airline Industry by shifting the demand and supply curve. Price elasticity of demand and supply is also influenced by competition. Another factor which affects demand and supply can be the alternatives available like travel by train or by car (Air Travel Demand Elasticities: Concepts, Issues and Measurement, 2008).
Positive and Negative Externalities
As mentioned, Airline industry is highly influenced by situation of the market. Due to the nature of the business, Aviation sector is strongly struck by the economic system. Positive and Negative externalities affect the prices of airlines. So a great level of fluctuations in the price of airline tickets is seen because of positive and negative externalities. They play a major role in influencing the demand and supply curve of Airline Industry. Constructive and unconstructive externalities should be properly addressed as they are crucial for the success of the industry and also are important factors to have a competitive edge.
Airline Industry experiences a positive impact from the positive externalities by boosting the travelers to avail the airline facilities. The negative externalities affect the airline industry across long distances also. There are various factors (negative externalities) like increase or decrease in the prices of fuel, pollution, noise etc. These externalities create a strong impact on the whole airline industry. Hence, there are various externalities which give rise to violent disturbances like the crash of airplanes, over-head costs etc.
Inequality in wages is regarded as a major issue in the U.S. labour market. Wage inequality implies that a lacunae has come between high-paying workers and low-paying workers. A wide gap has come in between these groups of people which are creating dispersion in wages. There are also various other economic and social factors which gives rise to inequality in wages. This further results in many problems like low unemployment etc.
Airline Industry has witnessed many cases of wage dispersion in its past. There were various measures adopted to curb this problem so that there is decrease in the issues of wage inequality. Various policies or ordinances are made to direct the efforts towards controlling wage dispersion. To address the issue of inequality in wages, U.S. government made "living wage legislation" which states that a minimum $10 per hour should be paid to the employees. There is great wage dispersion (until the law being made, 6% of employees were paid less than $10 and approximate 96% were paid near about $14) (Peoples, 1997).
This inequality in wages affects the other industries like tourism industry, hotels and other transportation sectors also. U.S. government has also made various welfare reform initiatives to meet the needs of supply of low-skilled job-seekers (Peoples, 1997). This is done to lessen down the wages of those at the bottom of the distribution, at least in the short run. If the wage corrosion continues for the individuals who are earning less, then inequality is surely to rise. And this will remain a significant policy issue in the U.S.
Monetary and Fiscal Policies
Before knowing how Aviation industry is influenced by monetary and fiscal policies, it is essential to know the concepts of monetary and fiscal policy. Monetary policy is an important tool which is used to regulate the flow of money and rate of interest in order to have an impact on the domestic economy. The goal is to make the economic activities align with the political objectives. Monetary policy is usually administered by a Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the United States. Another important tool used by the government is fiscal policy. It is defined as policy made on the amount spent by the government to render goods and services and the way these expenditures are financed.
Moving ahead with the impact of monetary and fiscal policy on Airline industry, it can be said that the attack on World Trade Organization on 11 September, 2001 deeply affected various policies (including fiscal and monetary policy) of Aviation sector. With the attack of 9/11, great fall in the demand of airline sector is observed. Further, the employees of this sector are also struck by the huge layoffs on a national scale. The decrease in airline industry also led to fall in various other industries like transportation industry etc.
The dramatic decline in the airline industry was alarming for U.S. government as the fall could lead to insolvency. There were number of measures taken by the government like extra tax on the price of the airline ticket, security fee's ('September 11 Security fee') etc. U.S. government took the decision that amount collected through these fiscal policies will be used for the safety of the travelers of airline industry. Various safety tools will also be used in order to protect the travelers.
Affect of Economy on the Airlines Industry and Economic Influences
There is an affect on the aviation sector due to the change in the economy. Companies focus on the externalities & trends in the market as they are impacted by them. Both the economy and aviations sector are affected by each other. If there is change in the economy, it directly impacts the performance of the companies. Similarly a change in the industry influences the economy. For example, it there is a rise in inflation, it will decrease the overall profits of the companies. Another important consideration is of fuel prices. If there is an increase in the fuel prices, operating cost rises which in turn results in increased prices of the tickets. In this case companies have to change their pricing strategies. Ticket prices have to be increased to cover the costs and make out reasonable profits.
Aviation sector is highly unstable as it depends on the market trends. It becomes difficult for the companies to operate when there are negative conditions in the market and they fail. Sometimes, firms are not able to predict the future and are unable to take advantage of the condition. In the airlines industry elasticity of demand depends on the competition. Overall the industry is risky and susceptible. It is very important to forecast the future and make plans accordingly.
It is clear that the economic trends affect the airlines industry. So, the companies should design their strategy according to the existing market conditions. The companies should review their strategies time to time to make them according to the changes in the economy. There are many micro and macro economic factors which affects the airline industry. The major factors which can affect the industry in a negative manner are fuel prices, economic condition, rate of interest & disposable income.
Fuel constitutes the major portion of the total cost. If the price of fuel increases, it has a severe impact on the earnings of the company. A slight increase in the prices leads to decrease in a significant amount of profits. Another economic influence is the condition of the economy. If the economy is facing recession, people also do not have much savings which leads to fall in demand. They try to opt for cheap mode of transportation.
Rising interest rates also significantly impact the industry in a negative manner. If the rates of interest rise, there is burden on the company. Companies have to pay additional cost for it in the form of interest, thus decreasing the income.
Air Travel Demand Elasticities: Concepts, Issues and Measurement. (2008, April). Department of Finance Canada. Retrieved September 3, 2008, from http://www.fin.gc.ca/consultresp/Airtravel/airtravStdy_1e.html
Peoples, J. (1997). Regulatory Reform and Labor Markets. Springer. Retrieved September 3, 2008, from http://books.google.co.in/books?id=jI_wzJqxPUgC&pg=PA207&lpg=PA207&dq=Wage+inequality++%2B+airlines+industry&source=web&ots=W0txcGrq63&sig=jbYAcOrKnE6FeAgyg_iJEW3cQF4&hl=en&sa=X&oi=book_result&resnum=10&ct=result
Wage Inequality in the Airlines Industry. (2007). Retrieved September 3, 2008, from http://www.associatedcontent.com/article/427470/wage_inequality_in_the_airlines_industry.html?cat=3