The Washington Post Article - Assignment Example

229110 Instructions: Read a economic major newspaper or weekly publication and select a single article that either reports on interesting economic news that can be analyzed by the concepts or models in macroeconomic or (2) discusses one or more economic issues related to the concepts or models in macroeconomic. Write a four - page essay analyzing the topic or critique the article from economic perspectives. The questions that you may address in this essay may include, but are not limited, to the following: • What is the main economic issue? • How is the economic issue related to the concepts or models that you have learned from this course? • What sorts of arguments/opinions have been discussed? • Do you agree or disagree with the analyses/opinions? Why? What argument would you, as an economist, make? The article to be evaluated in this discussion was selected as it raises several very important economic issues that have been covered in our recent classes. The article chosen was the following: UAL shrinks business, cuts staff to offset fuel By Kyle Peterson, Washington Post, Wednesday, June 4, 2008. This article was taken from the website of the Washington Post. The article is primarily concerned with the plans of the airline company UAL to reduce its size with almost immediate affect: “United Airlines, will slash its domestic capacity and its labor force, following similar cuts by rivals, as the industry grapples with soaring fuel costs and a weakening economy.” The Washington Post then goes on to describe the consequences of the decision made by the senior management of UAL: “The move, an extension of previous plans, calls for a domestic capacity cut of 14 percent in the fourth quarter. The reduction means the elimination of 100 planes from its fleet as well as 1,400 to 1,600 job cuts.” As well as describing the downsizing plans of the senior management at UAL the Washington Post article goes on to explain the reasons for the decision to downsize that influenced the company’s senior decision-makers. This Washington Post article mentions highly important economic theories and factors that can be useful in understanding how they actually work in practice. The Washington Post article begins by stating that the senior management team at UAL has decided to reduce the size of the company due to adverse economic conditions both at home as well as abroad. The main economic factor that the Washington Post article mentions is the very damaging economic consequences of the high cost of crude oil supplies, from which aviation fuel is produced. Being an airline UAL is particularly vulnerable to the fluctuations in the global market prices for crude oil supplies. When crude oil supplies are priced at low prices it was easier for UAL and other airlines to make profits than at present when record-breaking crude oil supply prices have plunged the company into heavy financial losses. The Washington Post article also points out that the ill affects of crude oil supply prices seriously damage more than airline companies. Basically the senior management team of UAL faced the choice of increasing its airfare prices significantly, or otherwise reducing its operating costs through a drastic cutting down of its over all size. Perhaps if the American economy was currently in a stronger position rather than being in a period of sharp down turn the senior management team of UAL would have opted to raise its ticket prices. The Washington Post article gives us an insight into how the level of demand and supply affects the global economy as well as national economies. There is a high global demand for crude oil supplies that it is hardly been matched by current levels of production, thus leading to a shortage of supply. High levels of demand combined with restricted levels of supply therefore results in higher prices for crude oil and related products, which in turn lead to a general increase in the rate of inflation. Given the importance of crude oil supplies to the US economy these high prices are inflationary as well as adversely affecting levels of demand for goods and also services. Lower demand and revenue leads to many companies deciding to close down outlets, services, and ultimately reduce workforces. The Washington Post article makes it clear that it considers the US economy is suffering a recession, which is made worse by the global rise in crude oil prices. These crude oil price rises are thus a significant factor in the present decline of the American economy. The Washington Post article also indicates that the airline in the US has a greater level of sensitivity to changes in the demand as well as the supply of crude oil. It is a raised sensitivity that arguably has a significant impact on the profits or indeed the survival prospects of these companies. Aircraft are very expensive in terms of their development costs, their initial purchase prices, high maintenance costs, as well as the need for very large quantities of aviation fuel. The airline industry is a sector of the economy that has traditionally had high operating costs, and due to being highly competitive (at least in the US) has not charged excessively high fares. UAL and other American based airline companies had to rely on a high demand for flights combined with relatively low prices for aviation fuel in order to make any profits at all. The record-breaking crude oil supply prices and therefore aviation fuel has meant that the senior management of UAL has had no choice but to reduce the number of routes and aircraft in operation as well as reducing its workforce. The reduction of the number of routes and aircraft in operation as well as reducing its workforce is intended to reduce the operating costs of UAL. The Washington Post article makes it clear that it is harder for companies to cope with the increased costs of crude oil when their national economies are in a state of recession. Recession gets the economy into the vicious circle of lower demand and revenue leads to many companies deciding to close down outlets, services, and ultimately reduce workforces. Downsizing allows companies to survive in the short-term and hopefully regain their former strength over the long-term. Over all this is a useful article for understanding the affects that high commodity prices and falling domestic demand can have on companies. This article does not go into any detail about the economic affects of low commodity prices and increasing domestic demand can have on companies. I would agree with the analysis of the affects that high commodity prices and falling domestic demand can have on companies presented in this article. It seems to be an accurate summary of the problems caused by high oil prices. I would have produced an article that does go into any detail about the economic affects of low commodity prices and increasing domestic demand. Bibliography UAL shrinks business, cuts staff to offset fuel By Kyle Peterson Reuters Wednesday, June 4, 2008, www.washingtonpost.com Read More