Airline industry provides us air transportation that improves our lives by shortening the time it takes us to reach a destination and also deliver goods. Airline industry undergoes oligopoly market, where only a few sellers that provide similar products or services but differentiated in the branding and the promotion method. Basically, there are four main categories in the airline industry, which is international, national, regional, and cargo. International flights provide services between countries; both national and regional flights are domestic flights within a country, but regional flights have shorter distance compare to national flights; cargo is mainly for the use of transport goods. In this assignment, we are going to briefly explain the determinants and the changes in market condition that affect the demand and supply of the airline industry.
There are few determinants that will cause a change in the supply demand curve in the airline industry.
Determinants on demand curve.
The first determinant is income. When a country experiences a growth in the economy, the average income of citizens will increase.
In this case, air ticket plays a role as a normal good, this is because an increase in the income will lead to an increase in the demand of air ticket purchased, one example is families might travel more often as they are in good economic condition.
The second determinant is prices of related goods, where a change in price of a good might affect the demand of the other good.
In the airline industry, the price of fuel has a direct influence to the demand of air ticket. When the price of fuel increases, airline industry has to increase the price of air ticket to maintain its revenue. Therefore, the fuel price and the demand of air ticket have a relationship of complements, where increase in the fuel price leads to a decrease in the demand for air ticket. However, in some special cases especially during a decline in the economy, the airline industry will not raise the price of air tickets because the customers would scare away. Therefore, the demand of air tickets is also quite dependent to the condition of economy.
The third determinant is number of buyers. The more the buyers in the airline industry, the demand of air ticket will be higher.
When a promotion is held by the industry airlines, there will be more buyers on the purchase of air ticket. This is because the air tickets normally sell at a lower price to attract more customers especially during a not-so-peak season. Thus, the demand or air tickets will increase and the airline industry will gain more profits even though the air tickets are selling at a lower price.
The last determinant is expectation on future income and future price, which means the prediction of consumers on how much they will earn and the value of a good in the future.
For example, if the economy has a positive development, where people expect a higher income in the future, they might go for a vacation and shift the demand curve of air ticket to the right. However, if they realize there will be an increase in price of air ticket in the future probably due to peak season, they will choose to purchase now then later and cause the demand curve to shift to the right.
For the other variable like tastes that can affect demand curve, we will ignore it because it is based on personal behavior and is uncertain to the airline industry.
Determinants on supply curve.
The first determinant is input prices. When the cost of producing goods increases, the supply will decrease.
In airline industry, one of the main input prices is the fuel price. As other variables are constant, when the price of fuel increases, the number of flight per day will decrease to reduce the cost of airline industry.
The second determinant is technology. A better technology can shift the supply curve to the right.
Technology advancement plays a very important role in airline industry. Airline industry is trying their best to seek for better technology in fuel conservation. Besides, they also work with airframe and engine manufacturer in designing the components of aircraft to reduce the fuel consumption of each flight. Thus, with the improvement of technology, airlines can provide more flight then before using the same amount of fuel.
The third determinant is weather. As this is air transportation, weather often becomes a big issue to the airline industry.
A heavy snow during winter, or a bad pollution, often disrupts the takeoff and landing of aircraft. Unfortunately, weather is not control by humans, the airline industry only can do their best in providing complete and safety facilities to protect their users. Although bad weather does not last very long, it does bring some effect on flight for short periods.
The last determinant is expectation on future price. When a firm expects there is a raise of price in future, they will supply less today until the price of the product increase.
In the airline industry, when they expect the price of air ticket to rise in the coming peak season that brings higher profits, they will reduce or maintain the number of flights now. Thus, when comparing the number of flights for two periods, the supply for now can said to be less compare to future.
Since airline industry undergoes the oligopoly market, the determinant of number of sellers will be excluded. Other variables like taxes and subsidies will also be excluded as they are not uncertain.
As we can see from above, airline industry has to concern many determinants that can affect the airlines demand and supply. Besides, they have to observe carefully on the changes in market condition and take immediate action if there is any unexpected issue. According to the Air Transport Association (ATA), labor is the largest expenses of the airline industry, followed by fuel cost. Other variables like weather and technology also have to put well attention to ensure the safety and revenue of the airline industry. The study of economics may help the airline industry when making a decision and better choice by providing knowledge on the efficiency use of resources.
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