Term Paper on "Effects of the Economy on the Airline Industry"

Term Paper 6 pages (2018 words) Sources: 6 Style: APA

[EXCERPT] . . . .

Economy on the Airline Industry

The changes underwent by economy play a high importance upon the development of all the industries. One could claim that industries are independent and that the key to their successful functioning depends on the efficaciousness of their management. This is true to a certain limited extent. Industries may have a certain degree of autonomy, but they do not undergo their activities on the moon.

The market is regulated by laws which depend on the status of the economy. Supply and demand depend on each other, just like they depend on the incomes of people. Consequently, it can be stated that no industry whatsoever can escape the influence of economy.

The latest trends in the development of the business environment, such as the rapid technological development, globalization and changes which occur with high frequency surely play an important part in the future development of the airline industry as well. In addition, industries are likely to be influenced by the changes in consumers' attitude and behavior. Furthermore, it can be stated that the status of economy is influenced by the changes in consumers' life style and that it influences at its turn various industries, the airline industry included.

Shifts with the price elasticity of supply and demand

One of the elements which has the potential to influence the development of the airline industry regards the price elasticity of supply, but al so that of demand. As far as the demand is concerned, it is safe to say that diminishing the prices will have the increase of the demand as one of the consequences. In other words, the demand is price elastic.

Flying is no longer a luxury, but a common good nowadays. Nevertheless, not all people can afford to fly the same companies, nor can they afford to acquire this type as service with the same frequency. The differences in the incomes that they make reflect on their power of acquisition.

Therefore, the diminishment of the price for air tickets is most likely to lead to an increased demand. People travel because they have to or because they want to. Regardless of their reason, they prefer to do it comfortably and efficiently. In other words they wish to get to their destination as fast as possible, with the maximum of comfort during the trip and paying a reasonable price for the entire experience. Flying can respond to all these customer needs. it's main advantage is represented by the small time required to get people to their destination.

Therefore, in an era when the saying "time is money" is more than relevant for the majority of people and when velocity of action enjoys high popularity, it is obvious why the demand for airline services is price elastic. Consequently, airline companies will increase their incomes by selling more tickets to people who, attracted by smaller prices, will choose to travel more and thus, fly more. "For passengers with high price elasticity, the airlines will provide low airfares which will attract many customers and hence secure high revenues for the airlines" (Satarupa, 2005).

Not all the clients of airline companies prove to be elastic regarding the price. " These passengers will mostly travel on immediate or short notices from their companies and will purchase tickets at much higher prices." (Satarupa, 2005).

Taking this into consideration, it is safe to say that airline companies will be able to maintain the benefit brought by the category of clients who are not influenced by the price of the flying services, because these represent a need and because they can afford whatever price the companies set.

The law of supply states that higher prices raise the quantity supplied. The price elasticity of supply measures how much the quantity supplied responds to changes in the price." (Mankiw, 2004) in other words, airline companies would provide services with a higher frequency should the price offered for them increase. The situation does not seem highly plausible, because of the fact that nowadays, people wish to spend less to get the same product/service quantity or even more. In addition, even in the case in which economy would undergo a boom and incomes would increase for everybody, a case which does not have a high probability, people would not react positively to increases in prices.

Negative or positive externalities

All the industries which are engaged in manufacturing and/or selling a product/service are bound to produce externalities. These may be positive (affecting the third parties in a positive way) or negative (affecting the third parties in a negative way), but they normally exist. Externalities produce outcomes upon the environment or upon other people. No matter the case, they are an issue which needs to be dealt with.

It can be stated that the externalities produced by the airline industry, if they are negative ones, will eventually have negative consequences upon the evolution of the industry itself. In addition, it will lead to long-term negative consequences upon the economy as a whole since industries affect the status of the economy that they are part of. Consequently, that will negatively influence the airline industry again, just like in a vicious circle, because the economy must come up with defence and self-regulation mechanisms. "In the presence of externalities, society's interest in a market outcome extends beyond the well-being of the buyers and sellers who participate in the market; it also includes the well-being of the bystanders who are affected indirectly. Because buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply, the market equilibrium is not efficient when there are externalities" (Mankiw, 2004) negative externality that is produced by the airline industry is the noise. While it does not affect the sellers, nor the buyers of the product, it affects people living close to the airports. The problem is bigger in the case of heavier, bigger planes and crowded schedules. " general "improvements" with technology and increases in population have made the situation more difficult to tolerate." (Muskin, Sorrentino, 1977)

Wage inequality

Wage inequality is a reality that has always existed and will always exist, since people have different qualifications and capabilities. Naturally, this economic aspect has a certain influence upon industries, the airline one included. The inequality of income reflects on the acquisition power of people. In other words, the issue of wage inequality is connected to that of the elasticity of the supply price. Diminished prices attract people with lower incomes and the airline industry acquires more customers, thus increasing its incomes.

Monetary and/or fiscal policies

The monetary and the fiscal policies are another important factor that needs to be taken into consideration when discussing the relationship between economy and the airline industry. The fiscal policies of one or more companies in the airline industry can have a major impact upon the other companies and thus on the entire industry. It is also highly likely for a major change in the airline industry to have an impact upon economy.

Let us take for example, the demands that the employees of airline companies might have in financial terms. One of the issues which concerns them is represented by the possibility of the company going bankrupt. Naturally, they do not want to suffer because of the choices that their company makes. In this regard they can demand an insurance contract that the union for negotiate for them. (Gopwani, 2007).

On the other hand, there are governmental policies which are conceived in order to regulate the functioning of economy. These policies, which often regard monetary and/or financial issues can influence the functioning of various industries, such as the airline industry. A relevant example under these circumstances would be the price of fuel.

Economic effects of the industry

It is not only economy that can influence the functioning of industries. Influence can come from the part of the industries themselves, through the sector changes that occur and not only. The boom of the airline industry for example, will definitely have an impact upon the industry of metal and fuel. More economical input into the industry, means more output from the industry and consequently, the possibility of further investments. This means influencing other industries and at the same time, the economy.

Another example could regard the bankruptcy of the airline industry, lets us say, for a malfunctioning of all the airplanes. This would have negative consequences in a large area of activities, from tourism to the production of aircraft materials or the commerce of fuel. People would also chose other means of transport, which means a development of other industries. All in all, kit would be an important change in the overall functioning of economy.

Influences that can affect the industry in a negative way

There are naturally influences that can affect the functioning of the airline industry in a negative manner. One of them has been represented by terrorism. The terrorist attacks which have marked September 11 have left a mark upon the attitude and… READ MORE

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