Global economic and lobal recession - Essay Example

Micro and Macro Economics Essay Airline Industry There is a rising concern on the volatility of the airline industry with regard to the profitability projections in the future. In light of the developments in the oil producing areas such as in the Middle East, political instability and uncertainty that affects the cost of fuel present disturbing reality on the profitability of the industry. Despite the general recovery indications from the recent economic crisis, the airline industry seems to be faced with the glaring political challenge that is likely to occasion mixed fortunes of operation. Whereas productivity in the airline industry would be favoured by the general improvements in the performance of the global economy as it recovers from recent recession, the fear of operation costs seems to be aggravated by rising fuel and related cost elements. In further developments in the political arena, particularly in the Arab world and North Africa, it is unclear on the actual outcomes of the standoff with direct economic impact being expected. In this discourse, the mixed fortunes of the performance of the industry as presented by economic recovery and political uncertainty will be discussed as Niththyananthan (1) observes. Niththyananthan, Keveri, “Higher Fuel Costs to Hurt Airline Profits,” 3 March 2011. Web. http://online.wsj.com/article/SB10001424052748703559604576175882383910242.html (Accessed 7 June 2011) Global Recession Since the 2008 global economic crisis the airline industry was severely affected by reduced business revenues as the market adjusted to difficult economic times. Commercial and private travel costs had to be reduced in order to keep in touch with the economic realities that global performance had dipped into. Many related industries such as the motor vehicle industry were also severely hit to liquidation, which illustrates the magnitude of the threat that the industry faced. As a result of the reduced fortunes and opportunities in the industry and many national economies in general, governments had to chip in their protectionist policies against adverse impacts on the economy. As a result, there was an increase in government debt particularly in European economies that have had adverse impact on the integrity of the industry as an aftermath of the recession. The banking sector which impacts directly on the performance of most industries was also hit during the recent economic crisis and until full stabilization occurs, operation certainty remains elusive in the airline industry. According to Niththyananthan (1), the domestic market in the whole of Europe is particularly affected by the proceeding in the banking sector to such an extent that business operations are conducted with extra caution. This explains the huge national bailout pleas that certain economies in Europe have been forwarding to the IMF and the European Union, since their economies were severely affected. Seeking for international funding by these governments from such institutions is aimed at regaining control of the national economy which must be addressed from various perspectives. If the national banking sector and the government debt continue to be operated with the caution that recent developments have proved, it is going to be beneficial to the airline industry in Europe and across the world. The appropriate reorganization that perhaps all national economies need to address the threats facing the airline industry with must aim at stabilizing the fragile domestic market. Freight and other air travel opportunities will need to be addressed from a perspective that takes note of the regional currency and market stability. International business under which a majority of commercial air travel business arrangements are supported will increasingly gain confidence from the stability of the domestic market and currency. For instance, the stability of the US dollar and the Euro will be influential if the economic expansion programs embarked by the authorities to curb recessionary impact are to bear fruit. In such instances, individual industries will depend on the performance of government activity in dealing with debts as well as financial institutions policy to curb unpleasant economic performance. Using figures projected by the International Air Transport Association regarding profit projections for the year 2011, it is clear that the countries and regions worst hit by the recent recession will also bear a portion of the adverse economic performance on the industry performance. Alternatively, political unrest causing fuel costs to swell beyond the free market limits which depend on the forces of supply and demand is likely to overshadow the stabilizing recessionary impact. However, there are other costs besides fuel that are likely to determine the total cost of global airline industry in several respects. As illustrated in the graphs contained in the Figure 1 below, costs of operation had started to reduce after the 2008 global recession. This could have been interpreted by the above observed reasons such as reduced travel services uptake by private and commercial customers due to readjustments that preferred other modes of transport to air travel. Besides, the inflationary element of costs of operation could have eaten away a large proportion of revenue. Figure1. Niththyananthan (1) In the year 2010, it is expected that fuel costs will significantly continue to rise to increase the overall cost of operation. Despite the significant increase in fuel costs, there are expectations that slight changes will be expected in other elements of operation costs bearing in mind that there are still significant threats of recessionary impact on the economy. As far as global economic performance is expected to be recuperating sluggishly due to mixed effects of the recession, it is also expected that the same will continue to happen on the political arena. This creates the balance of conditions that are expected to favour business operations between various countries, for instance the oil producing and non-oil producing countries. With regard to the political unrest in the Middle East, the airline industry operating in the affected countries will continue to be affected in operations since operations remain tricky in such regions. Besides, the result of the political unrest seems to bear a huge fragment of the recessionary effects such as unemployment and rising cost of food and other essential commodities. Without appropriate political support for business by political sector, the airline industry will suffer from higher costs of operation. The International Air Transport Association (IATA) was force to cut down its forecast for the airlines’ net profit in 2011 because of the surge in the fuel costs; the surge in the fuel costs was further fuelled by the Middle East political unrest. IATA represents close to 230 airlines which comprises of 93 percent of the scheduled international traffic; IATA expects net profits amounting to 8.6 U.S. million dollars in 2011 down from the previous forecast of 9.1 U.S. million dollars. The industry got 16 billion dollars in net profits in 2010 after the rebound from the withering global economy downturn that witnessed a number of airlines going out of business. The director general and chief executive of IATA Giovanni Bisignani, asserts that Middle East political unrest has resulted in one barrel of oil going at a price of $100; the price is higher than the one assumed in December ($84 per barrel). He says that the higher costs will be offset by the stronger revenues. Bisignani said that buffer in the industry was very small to absorb the shocks and that the carriers in the airline industry were not well balanced. Oil is the biggest risk today and if the rise stops the global economic expansion, the outlook will diminish rapidly. A barrel of Brent crude oil was being sold at $116.35 during the unrest in Middle East and in particular Libya. The IATA forecasts are based on the average fuel prices ($96 per barrel) in comparison with the December estimation of $84 per barrel. IATA estimates that airlines face additional 1.6 billion dollars in cost “for every dollar increase in the average price of a barrel of oil over a year” (Niththyananthan 1). The average oil prices are now 20 percent higher than the previous year; they are expected to account for close to 29 percent of the operating costs in comparison with 26 percent in 2010. The IATA fuel bills have increased to $166 billion in 2011; the total increase is by $10 billion. The passengers have started feeling the effect of the rise in fuel cost. The airlines already began to increase the fuel additions to passengers and some of the airlines have warned that they will be forced to reduce the capacity or raise the basic fares. The Airport Council International (an association representing the airports) asserts that the European airlines appear to be shielded from the ever increasing fuel prices. The carriers in Europe have hedged 60 percent of their needs for fuel while the U.S. carriers have managed to hedge 34 percent of their requirements. The Asian airlines have managed to hedge 30 percent of their needs for the year and the Latin America airlines have fixed a 22 percent price for their needs. According to IATA, the Asia-Pacific carriers are expected to have a collective profit if 3.7 billion dollars; the region has the highest profit margin (4.6 percent). Despite the economic prosperity, airline cargo demand and trade is slowed by the inflation fighting measures enacted by China. The North American carriers are expected to provide profits amounting to 3.2 billion dollars and they are assisted by the prior capacity cuts which have resulted into greater yields. The European carriers are expected to deliver 500 million dollars in profits. IATA says that the Europe government debt crisis and the continuing banking keeps the domestic home markets weak but the unstable euro offers stimulus to the outbound freight, long-haul business travel, and export industries; the stimulus drives the regional profits upgrading forecast. The Middle Eastern carriers are expected to deliver 700 million dollars of profit; Libya, Tunisia, and Egypt (regions where political unrest has been rampant) account for close to 20 percent of the regional international passenger traffic. The Latin American carriers are projected to generate 300 million dollars in profits; this is lower than the 1 billion dollars generated in 2010 due to the exposure to high oil prices. The African carriers are expected to remain in the same position because of the intense competition from the carriers in Middle East and other profitable business traffic. The region is out of danger because of the strong economic and transport demand growth, and the growing trade links and direct investment with Asia. The forecast for passenger demand is set to rise by 5.6 percent this year than 5.2 percent forecast in the previous year. Cargo demand is also set to rise by 6.1 this year, higher than the previous forecast of 5.5 percent. Passenger and cargo yields are expected to rise by 1.5 and 1.9 percent respectively in 2011. Works Cited Niththyananthan, Keveri, “Higher Fuel Costs to Hurt Airline Profits,” 3 March 2011. Web. http://online.wsj.com/article/SB10001424052748703559604576175882383910242.html (Accessed 7 June 2011) Read More