Economic Profile of the US Airline Industry - Research Paper Example

? Economic profile of the US airline industry Introduction The airline industry is a cyclical one. The industry witnesses bankruptcy as well as M&A activities every decade. The airline industry of United States is currently standing a space from where the future does not seem to be bright. The estimates of the International Air Transport Association and that of Federal Aviation Administration expect a rise in cargo traffic and passengers along with decline in profits for the airline companies. Things are to be sorted out before the estimation of profits for the year 2012. As the third phase of quantitative easing the Fed announced to inject 40 billion dollars into the economy. The crisis of the Eurozone acted to be the catalyst in adding the woes to the sector. To combat the problem of high exposure to oil prices the airline companies have come up with some tactics like hike in ticket rates, replacement of the airplanes that were fuel efficient and various other strategies of fuel hedging. Some of the major operating companies have already cut capacity with the aim to increase profits. The open skies agreement between United States and the European Union has provided the opportunity to the commercial airlines to begin operating flights between the countries of the European Union and the United States (Department of Transportation, 2012). Shifts and price elasticity of supply and demand The airline industry is dependent on the conditions of the market. The industry is on the unstable path since 2001. The demand for the industry was greatly influenced by the terrorist attack, the global financial crisis and the fluctuations in the oil prices. It is a competitive industry as many players have emerged into the market. The other modes of transport provide competition to the industry. Yet it can be argued that the industry faces competition only within itself and the intensity of competition from other modes of transport are less. But in terms of transportation of cargo, train services can pose a serious threat to the industry. The consumers can avail the opportunity to send their cargos through many other transport modes other than flights. Therefore choices are limited for the airline industry. Some of the diseases like swine flu or avian flu forced many passengers not to travel through flights. This had negative impacts on the industry. The elasticity of demand is affected by the reason the passenger travels. Three reasons that can be accounted for travelling by airplanes are business necessity, time saving and pleasure. The financial crisis forced many travelers to opt for other modes of transport leading to loss of revenue for the industry as a whole. While calculating the price of tickets the airline companies use a formula that takes care of the yield as well as inventory cost. Sometimes customers look to book tickets that are close to the departure dates. There is certain amount of risks to the airline industry as if the seats are not filled the flight will have to travel with vacant seats which again brings revenue loss to the consumers. In order to mitigate such kind of risks the airlines have to increase the price of tickets. The high volatility of the prices of crude oil leaves the airline operators at greater risk of cost fluctuations. Therefore the demand conditions are highly affected by the fluctuations in the crude oil prices. The travel by airplanes is considered as luxury and luxury tax is added with the price of tickets. The demand conditions can be affected by the existence of such taxes too. The price elasticity of supply for the airline industry is elastic. The availability of seats in the airplanes responds substantially to the changes in prices which prove the elasticity of the airline industry. Elastic supply can also be witnessed in the price wars that are initiated by the competitors. The drastic changes in the prices of tickets bring about large or small changes in the availability of seats on airplanes. Monetary and/or fiscal policies that have affected the airline industry The monetary and the fiscal policies can influence the aggregate demand. Monetary policies can influence the shift in the aggregate demand for goods as well as services by increasing the supply of money. Some of the monetary and fiscal policies that are accrued to the airline industry are as follows: Deregulation: In the mid 1970s, there were reports on burdening regulation and the costs on the consumers which paved the way for deregulation of number of industries. The Airline Deregulation Act was introduced during this time. The airline industry had been more concentrated since deregulation came into being. Expansionary fiscal policy: After the attacks of 11th September, the government had provided an aid amounting to 40 billion dollars to the airline industry from the effect of expansionary fiscal policy. The airline industry was crippled by the attack and therefore immediate aid was ranted for the industry. The government was smart enough to realize the importance of effective and safe air travel system. The aid would help to keep the industry on the stable path. Impact of policies on competition: The airline industry can be thought of to be an example of an industry where there is combination of competition and regulation with policies that are effective on the level of competition. One of the policy choices is the mechanism that allocates the boarding gates as well as facilities at the airports. Most of the airports are dependent on the non market mechanisms to allocate the resources that are scarce. The level of competition can also be affected by the antitrust policies. With the increase in concentration of the market the price of air travel rises (The University of Arizona, 2002). The market benefits the consumers by venturing into new markets. More frequent and convenient flights are offered to the consumers. In the industry there is possibility of merger and the policies of antitrust encourage the need for a merger. The industry is under the control of firms that set the prices on the domestic routes based on the conditions of the market. There is fluctuation of profits in the industry which implies steady growth manifested by the lower prices of airplanes and the suggestive impact of deregulation. The efforts to allocate the key resources also provide the opportunity for achieving a more efficient result. Legislation and regulation combine to form the fiscal policy. The regulation policy adopted in the year 1979 led to increase in the passenger traffic as well as increase in the price of fares. The restrictions imposed on the foreign ownership and rights on cabotage resulted in restricting the level of competition within the industry. In order to get around these restrictions the airlines companies used the global alliances along with joint ventures with antitrust community with the agreements of code sharing. The policies of the antitrust laws need to balance the fact mergers can lead to the rise of air fares but will also open up new networks which will indirectly affect the passengers in positive fashion. The security measures are made mandatory for all airlines by the government which imposes additional costs for the companies and surcharges on fare for the travelers. The industry is affected by the levy of excise duties and other fees on air carriers. The revenues from the taxes are used by the government for the purpose of improving the airports and improving the facilities at the airports to cater the needs of the international passengers. The introduction of the fees raises the price of tickets and in the current economic scenario it negatively affects the airline industry. This may lead to loss of employment as opportunities as demand for airline tickets are expected to go down with increase in price. Numerous stabilization packages were announced by the government to influence the airline industry. Effects of international trade on the airline industry in the US The same factors that determines economic performance also affects the growth of the international airline industry. The factors that can be accounted are growth in international trade, the rise of GDP and the growth of the industries that use air services. Sustained economic growth of international trade has strong positive impact on international traffic. International trade can have direct or indirect effect on the industry since the industry covers all air transportation services that are offered to the residents of one economy to that of the other. The services include transport of cargo, rentals of carriers with crew. With the removal of trade barriers, the country of US will be more open towards the globe. International trade implies international transportation of goods or services (University of Johannesburg, 2010). With the improvement in conditions of international trade it can be anticipated that the exchange of goods or services will facilitate the industry. The industry will gain from the transportation facilities. This is a positive impact of international trade on the airline industry. United States aims to exercise the free market forces in the context of reciprocity between partners of trade. The objective of the civil aircraft trade policy of the country is to promote greater opportunities for the exports of the country. The trade policy reduces or eliminates the market access as well as the barriers to investment abroad. Conclusion Conclusively it can be stated that although the airline industry is currently not witnessing the bloom period but considerations of the above discussions will facilitate the policy makers to arrive at the decisions that will pave the path for the industry to follow the sustainable path. It is not a hidden secret that for an economy to attain growth the sectors within the economy must experience simultaneous growth. The efforts of the Federal government to keep the industry on the stable track calls are appraisable. The price elasticity of supply and demand has been discussed with reference to three factors. The monetary and the fiscal policies that can affect the airline industry have also been discussed. The economy plays a big role in the success of the industry. The rise in the prices of fuel and the fluctuations in the demand will bring success ir failure for the industry. The economy can also contribute in the industry through lack of competition or through increased competition. The bigger airline companies can afford to offer low fares which makes it difficult for the smaller companies to compete. References Department of Transportation, (2012). AVIATION INDUSTRY PERFORMANCE. Retrieved From: http://www.oig.dot.gov/sites/dot/files/Aviation%20Industry%20Performance%5E9-24-12.pdf. The University of Arizona, (2002). Competition and Regulation in the Airline Industry. Retrieved From: http://www.u.arizona.edu/~gowrisan/pdf_papers/airline_competition.pdf. University of Johannesburg. (2010). How the economy affects the success of the US airline industry. Retrieved From: https://ujdigispace.uj.ac.za/bitstream/handle/10210/1253/CHAPTER3.pdf?sequence=19. Read More