Term Paper on "Economic Profile of the Airline Industry"

Term Paper 5 pages (1692 words) Sources: 4 Style: APA

[EXCERPT] . . . .

Economic Profile of the Airline Industry

Economic profile of an airline industry

Elasticity is a tool by which we can calculate how customers and retailers react to modifications in market conditions. The law of demand affirms that a "fall in the price of a good raises the quantity demanded." The price elasticity of demand calculates "how much the quantity demanded responds to a change in price," that is "how willing consumers are to move away from the good as its price rises." Demand for a commodity is assumed to be elastic if the amount required responds to a large extent to modifications in the price. Thus, "elasticity is greater than 1" and "quantity moves proportionately more than the price."

An exceptionally unbalanced industry is the airline industry for the reason that it is greatly reliable on present market environment. Occurrences like "inflation, terrorist attacks, and the price of oil" have distorted the requirement for flying tickets significantly all through the years. Rivalry constantly alters the cost of airline tickets due to the fact that it provides to the client other choices. The elasticity of demand in the airline industry is seriously altered by the clientele's reason for travel, which are basically either pleasure or business.

The price elasticity of the airline industry is elastic. The congestion of airports and flight delays has made air travel more and more of a hassle; people are seeking alternatives and trying to avoid air travel. Flying is essentially a luxury, thus extra taxes are legal. In order to establish their ticket prices, companies in the Airline industry use a "formula of combining their yield and inventory costs." Although it is highly essential to keep the attention on making a profit, the main importance should be attributed to the maximization of the cost of the flight income. One major aspect that supports an augment in the price of tickets is connected to the departing date. "Ordering a ticket close to the departing date," is considered "a risk factor because they need to make up for all unsold seats."

The Externality is "the uncompensated impact of one person's actions on the well-being of a bystander." There are two types of externalities: negative and positive. "If the impact on the bystander is adverse, it is called a negative externality; if it is beneficial, it is called a positive externality." Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities determine markets to produce a lesser amount than is publicly sought-after. To fix the crisis, the government can "internalize the externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities."

Externalities are very important in shaping supply and demand due to the fact that the airline industry is a direct creation of market requirements. After the September 11th tragedy a decrease in airline travel was noticed by specialists, mostly because of safety concerns. At times when there is an enormous boost in tariffs, the cost of tickets grows in view of the fact that there is a clear relationship amid supply and demand. When there is a decreased employment rate, and when there is a strengthen dollar, citizens are inclined to travel more.

The airline industry is considered to be very unstable, thing attributable to the instantaneous response to calamities. The airline industry has an important part in globalizing thr economy. A negative externality affecting the airline industry is also the increase and decrease in fuel price. However, due tot the fact that oil costs have risen in the last years, customers have got used to this alteration.

Another negative externality is the fact that a large quantity of airline commutes produces pollution. In 2004, "carbon emissions from airlines rose about 12%." In England, "air traffic accounts for about 5.5% of the country's CO2 emissions."

In numerous situations external costs can have an effect on the existence of an airline. They depend on consumers to purchase their tickets in order to endure the external cost of fuel, employment, and publicity. The external costs are established depending on the existing state of the market. "Over the last 20 years airlines such as PanAm, Texas Air and TWA have gone out of business." Externalities like catastrophes (even crashes) combined with exaggerated costs left these airlines in mayhem. "Two notable airlines United and Delta went bankrupt, but they managed to climb out by making changes. Delta and United escaped bankruptcy by cutting back on employee pay, pension plans, and in-flight meal service."

Wage inequality has always been present in economy. Employees with more human capital earn more than employees with a smaller human capital. However, there is also the term of "compensating differential," which is ubiquitous in this domain and that "economists use to refer to a difference in wages that arises from non-monetary characteristics of different jobs."

However, Competitive markets are inclined to border the impact of discrimination on salaries. Studies have concluded that profit maximizing behavior, can decrease biased salary differentials. On the other hand, discrimination will persevere in competitive markets, if clients agree to pay more to discriminatory companies or if the government passes regulations requiring companies to show favoritism.

Moreover, in order to stop wage inequality, many countries introduced a living wage ordinance due to the fact that statistics shown that there is a connection among wage inequality and high turnover. Wage inequality in the airline industry is established by analyzing the wages of the airline employees. According to the Association of Community Organization for Reform Now "approximately 78% of employees at the San Francisco Airport made under $10 per hour. In 2004 when the living wage ordinance was passed in San Francisco and 99 other cities the legislation permitted a wage increase of 33%." Firstly, not every employee benefited from the remuneration augment. Secondly, one should remember that these regulations only applied to non-managerial personnel. However, after the implementation of these regulations, "less than 6% of employees were making less than $10 per hour, and 96.7% were making under $14 per hour."

Overall, the airline industry has taken advantage from living wage regulations due to the fact that wage rising encouraged a diminished turnover rate and an increase in labor effectiveness. Living wage regulation has diminished the occurrence of wage inequality which has impacted the entire tourism industry, hotels, and other transportation

The tragic events of September 11, 2001 had a tremendous impact on the fiscal, monetary, and federal aviation policies practiced in the airline industry.

Following the attacks, there was an instantaneous decline in demand and the base-ticket prices augmented, together with additional taxes. In a matter of days, the airline labor force was faced with substantial layoffs at a national scale, together with the other branches of the travel industry that went through analogous effects. Added to the fright of flying in various travelers, people were inclined to remain at home due to the increase in ticket prices. This type of events causes many airlines to face economic failure.

Moreover, to the increased ticket prices the government added a supplementary cost to the price of a ticket called the September 11th Security tax. "The funds raised through this September 11 Security Fee will be used to implement new aviation security measures to help achieve this most important goal" Although people understood the need for this new policy, they did not purchase additional airline tickets, leading to other augmentations of the base-ticket price.

In order to conclude our research we must say that the airline industry is affected by market tendencies and externalities. Due to market dependency, experts view the industry as being very unstable, although hits in the airline industry directly influence the market. Moreover, the elasticity of demand is determined by the existence of other transportation means. Market circumstances shape the total request… READ MORE

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