Airline Industry
The airline industry is extremely influenced by the elasticity of demand, externalities, wage inequality, monetary policies, and fiscal policies. The elasticity of demand is impacted solely on the current market conditions, and the consumer’s reason for travel. The September 11th tragedy has had a very damaging affect on the airline industry. It has impacted the fiscal and monetary policies, supply and demand, and it has created many problems worldwide with employment. The airline industry is perceived as being unpredictable because it is relies on the current market, and the market is always changing. Incidents such as inflation, oil prices and terrorist attacks seriously influenced the demand for airline tickets throughout the years. Competition from other airlines consistently affects the price of airline tickets because it allows the customer other companies to choose from. Alternatives are to travel by train, car, or avoiding travel whenever possible, and consumers have resorted to all of these substitutes during unstable times in our economy. The elasticity of demand is very much affected by the customer's purpose for travel. Airline customers usually fly for business or pleasure.
Airlines use a method of combining their income and inventory costs to establish ticket prices. While it is essential for this industry to focus on being profitable, the main focus is to increase the cost of the flight revenue. One huge factor that increases the cost of tickets is when the customer orders there tickets close to their departing date, when people wait to buy their tickets, the airline industry sees this as a risk. And since they need to make up for unsold seats, buying your...
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Citations
· The Baltimore Sun. (2008). Demand for jet fuel strains supply system -- Economy, Business and Finance, Volusia County, September 11, 2001 Attacks -- baltimoresun.com from http://www.baltimoresun.com/business/bal-bz.jetfuel11aug11,0,4909483.story
· Enberg, D (2005, Sept, 15). Why Do Airlines Go Bankrupt?. Retrieved May 17, 2008, from http://www.slate.com/id/2126383/
· Zabin, C. (1999, December). Retrieved May 18, 2008, from Living Wages at the Port of Oakland: http://www.iir.berkeley.edu/livingwage/pdf/portoak.pdf
· (2001). Transportation Security Fees. Retrieved May 18, 2008, from Transportation Security Administration Web site: http://www.tsa.gov/research/fees/passenger_fee.shtm
· FRBSF. (2002, January 18). Economic Letter. Retrieved May 18, 2008, from FRBSF: http://www.frbsf.org/publications/economics/letter/2002/el2002-01.pdf
The immediate financial repercussions of the terrorist attacks were astronomical. Makinen (2002) reports airlines received a $15 billion federal aid package. Additionally, insurance ...
of price versus service in the airline industry as a whole, as well as, the
Snow, K., Bash, D., and Barrett, T. (2001, September). Congress approves $15 billion airline bailout. Retrieved February 8, 2008 from http://www.cnnstudentnews.cnn.com/2001/fyi/news/09/24/airline.bailout/
The airline industry has long attempted to segment the air travel market in order to effectively target its constituents. The classic airline model consists of First Class, Business Class and Economy, and the demographics that make up the classes have both similarities and differences to the other classes. For instance there may be similarities between business class travellers on a particular flight, but they will not all be travelling for the same reason. An almost-universal characteristic of air travel is that customers do not fly for the sake of flying; the destination is the important element and the travel is a by-product, a means-to-an-end that involves the necessity of an aircraft that gets the customer from point A to point B. Because the reasons can differ greatly in the motivations for a customer wanting to fly, it can be difficult to divide the market into discrete segments, that is, there is always going to be overlap in the preferences and characteristics of any given segment. With that in mind, the commonalities that are shared between the clientele that make up the respective classes can easily withstand analysis.
After September 11th, 2001, the airline industry experienced a significant drop in travel. The reasons for the airline industry downfalls also included a weak U.S and global economy, a tremendous increase in fuel costs, fears of terrorist's attacks, and a decrease in both business and vacation travel.
The results of airline deregulation speak for themselves. Since the government got out of the airline business, not only has there been a drop in prices and an increase in routes, there has also been a remarkable increase in airline service and safety. Airline deregulation should be seen as the crowning jewel of a federal de-regulatory emphasis. Prices are down: Airline ticket prices have fallen 40% since 1978. Flights are up: The number of annual departures is up from 5 million in 1978 to 8.2 million in 1997. Flights are safer: Before deregulation, there was one fatal accident per 830,000 flights, now the rate is one per 1.4 million flights. So what's the problem?
According to the International Air Transport Association, 2001 was only the second year in the history of civil aviation in which international traffic declined. Overall, it is believed that the IATA membership of airlines collectively lost more than US$12 billion during this time (Dixon, 2002).
In order to measure the impact of United's price increase, we would need the price elasticity of the demand. The main problem is that there is no agreement as to whether, generally speaking, air transportation is or is not relatively price elastic. There is ample evidence that the introduction of deeply discounted fares by the low cost carriers can be very price elastic, although, each type of traveler has its own price characteristics.
Along with the low stock index numbers of September 17th, the airline industry and travel stocks were also rocked. One of several airlines announcing layoffs, US Airways said that they would be terminating 11,000 jobs. These heavy losses were contributed to airlines “being grounded last week [week of September 11th], plus passengers have been apprehensive to fly, in the wake of the hijackings” (Stock Markets Reopen 1).
2.Price: A price must be set to add value to the consumer but also add revenue to the airline. Cost is considered the most volatile areas in the airline industry today; deregulation has forced pricing to become the major competitive variable. Like any industry supply and demand control the pricing elements of the ai...
Airline and travel industry profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic, the Iraq wars, rising aviation turbine fuel prices, and the challenge from low-cost carriers. (Narayan Pandit, 2005) The fallout from rising fuel prices has been so extreme that any efficiency gains that airlines attempted to make could not make up for structural problems where labor costs remained high and low cost competition had continued to drive down yields or average fares at leading hub airports. In the last decade, US airlines alone had a yearly average of net losses of $9.1 billion (Coombs, 2011).
Southwest Airlines is operating in an industry that is struggling to make profits. The slowing economic growth and raising fuel costs are lowering earnings while revenues remain the same. The macroeconomic factors affecting the airline industry include unemployment, the economic growth in the United States, and inflation. With low economic growth, consumers are finding luxury items more difficult to purchase and airline tickets for vacations fall into that category. Unemployment contributes to a lack of vacation travelers since individuals who are not employed do not have extra money for vacation or airline tickets. Inflation also causes operating costs of the airlines to be higher cutting into profits.
The main threats to the industry over the next five years are the rise in oil prices, legislation, the TSA, and labor costs. Each of these threats affects the scheduled air transportation industry, not only endangers Delta Airlines, but the entire industry. As the price of labor increases for ground operations and pilots, this creates a burden on the industry by causing them to spend more to satisfy their labor requirements. The price of fuel increasing leads to the price of fuel increasing, which not only affects a single airline, but every airline. With each time that the crude oil price rises, the prices associated with the costs of refining the jet fuel as well as transporting it.
An example of price discrimination in the private sector is the airline industry. In most cases, passengers sitting next to each other on any given flight did not pay the same price per ticket. Factors such as: one-way vs. round-trip tickets, duration of stay, promotions, and when the flight was purchased, all impact the overall price of tickets. The airline industry itself is able to control the market price for the tickets based on demand and the amount of passengers on the flight. Such price discrimination is use...
The airline industry is very susceptible to changes in the political environment as it has a great bearing on the travel habits of its customers. An unstable political environment causes uncertainty in the minds of the air travellers, regarding travelling to a particular country.