Changing Economic Environment - Shift in Market Forces of Supply and Demand in the Airline Industry - Case Study Example

Number Subject Name Lecturer’s Name Business Due date Date Submitted Table of Contents Introduction 2 Market forces of supply and demand 3 Shifts in the demand and supply curve 3 Shift in the demand curve 3 Shift in the supply curve 4 Elasticity 4 Price elasticity of demand 4 Price elasticity of supply 5 Tax burden 5 Industry trends 5 References 7 Appendices 8 Introduction The market forces affect the airline industry just like any other industry. The Australian Airline relies on domestic as well as international clients. The international customers are mostly tourists. It is therefore largely affected by the fluctuating levels of tourists as well as the changes in the amounts charged for the flights. Besides these factors, there are also other economic environment factors that affect the airline industry as will be discussed in the text. In the recent years, there has been a drop in the growth rates in the Australian Airlines (CAPA Centre for Aviation 2015); this text will endeavor to look into some of the issues that affect this industry. (See Appendix 1. Growth of airline industry) Market forces of supply and demand Every market is driven by the supply and demand in that particular field. In economic terms, supply means the availability of a product on the market for consumption while demand means the availability of willing buyers for a specific product. The interaction between supply and demand determines the prices in the market, ceteris paribus. It has been said that the availability of a product and the desire for that specific product determines the range within which its price is to fall. The prices in the airline industry will, therefore, be determined by the interaction between the number of available passengers and the number of service providers. However, the prices are not solely determined by the forces of supply and demand unless in a perfect market that is not always the case. Ordinarily, when there is a huge supply of the product, and there is no equal or more demand of the product than the supply, the price of the product is supposed to go down. Similarly, when there is a high demand for a product, and there is not enough supply to satisfy the demand, the price is expected to go up. About the airline industry, whenever there is a high demand for flights, the prices per flights are expected to go up. Whenever there is a significant drop in the number of travellers via the airlines, it is expected that the prices will go down. This aspect has further been illustrated with the 2009-2010 scenarios in Australia under the industry trends section. In this case, we consider the few number of airline companies in Australia when considering the supply aspect of the airline industry. (See Appendix 2. Movement along the demand curve) Shifts in the demand and supply curve Shift in the demand curve As stated earlier in the text, the demand for the airline industry is created by the number of persons wishing to travel by the use of the available airlines. The demand may be driven by various forces including the price charged per flight. There have been other factors that drive the demand such high profile events. In such a case, the airline industry is expected to have a huge number of travellers using their services. Such high profile events would include games such as the world cup, Olympics and such kind of games. Australia has had the chance to host the Olympics in the year 2000, giving the airlines a good return on their investment due to the games. The demand is also affected by the world economic situation. Whenever there are major depressions in the world, the airlines are likely to suffer too because few people would opt to travel unless it is very necessary. Another important aspect to be considered in the airline industry in Australia is tourism. Australia has been able to attract a huge number or tourist. These tourists form a good number of the airline’s customers. Whenever the economy around the world is shaky, it is also expected that the number of tourists will go down, hence affecting the demand for the airline industry. All the above discussed factors will in the long run result to a shift to the left in the demand curve. (See Appendix 3. Shifts in the demand curve) Shift in the supply curve The hard economic times has seen a drop in the growth of airlines in Australia. The drop has been attributed to the less usage of air transport owing to the economic situation. The reduction in the number of tourists and the rise in the dollar have all contributed to the slow growth in the industry. The increase in the fuel prices has also led to an unfavorable condition for the growth of the industry. The airlines have to battle between trying to reduce the cost of travel with the high cost of operation they incur as a result of the economy. The supply curve, therefore, has had a shift to the left as a result of the described factors. Elasticity Elasticity is the extent to which a variable is sensitive to the change of another variable. In economics, there is supply and demand and the result of which is the price. If the airline industry is to be observed closely, then we can have a look at how the prices trigger a change in the demand or supply. Another way to look at it is how the demand causes a change in the prices in the airline industry. In this case, the supply does not change because the airline companies do not change as a result of the restrictions put for new entrants. Price elasticity of demand Price elasticity of demand is how sensitive the demand for the airline services would be sensitive to a change in the travel prices (Moffatt 2013). It has been stated before that an increase in the prices in the airline industry has resulted in a reaction from the customers, most of them avoiding local flights and only going for international flights (CAPA Centre for Aviation 2015). The reason international flights rarely affected is that most of those flights are highly important, some being business related. The response by the customers would show that the airlines should avoid increasing local costs and possibly look for alternatives of reducing operational costs. The international flights can be raised without much effect. Price elasticity of supply The supply in relation to the airline industry is the number of airlines providing services in the country. The industry is not elastic due to the major regulations in the airline industry. These regulations make it hard for new entrants to the industry. Tax burden In Australia, the government introduced what they call the carbon tax. This tax was introduced to control carbon emissions by companies. The tax has increased the cost of many companies since the government taxes huge amounts as a carbon tax. The short term effect of the carbon tax is that it would result in an increase in prices. However, major airlines have been unable to transfer the cost of the carbon tax to the consumer because of the competitive market in the airline industry. In the long run, the airlines have ended up being the bearers of the tax burden for two reasons. The first reason is that if the airlines end up passing the cost to the consumer, the same will result in an increase in their overall prices. In such a competitive market, the airline that chooses to raise its cost will have a major problem in getting customers. The result is that it will end up suffering losses in the long run. The second reason is that if the company opts not to transfer the cost to the consumer, which is the most likely scenario because of the competitive nature of the business, the company will end with a very small profit margin or even end up making losses. The carbon tax has therefore brought a very hard situation for the airline companies in the sense that, whichever way they choose to handle the tax burden, the result is that they are the ultimate bearers of its cost. Many airline companies have found it impossible to operate as a result of the chocking amounts of cash required by the government as the carbon tax. The woes of many companies have been attributed to this tax. A good example is Qantas, which has pointed out that the tax made it so hard for an airline to operate. The carbon tax liability of Qantas in the year 2014 was predicted to be $118 (Owens 2014). The huge amounts would indicate just how much the tax is crippling the airline industry. Industry trends Due to high charges in the airline industry in the years 2009 and 2010, people for opted for international flights rather than domestic ones. Furthermore, there was a great drop in the number of persons opting to travel; most people would go for teleconferencing instead of travelling. The prices would lead to a nose dive in the industry if something were not done. Considering that there was also the aspect of competition from other airlines, it was critical that action be taken to save the industry from further going down. The strategy that has been employed is on slashing of prices (IBIS World 2015). It is clear that the prices charged per flight affect to a great extent the number of persons taking flights. The cost incurred in the airline industry is very high; the service providers are in most cases left with a very low profit margin. Some of the solutions that the airlines are running to are the digitization of systems (Price Waterhouse Coopers 2015). The effect of this is a reduction in the operation cost in the airline companies. The airlines can get at least a bigger portion of the profit as opposed to when using manual operations. Another trend has been on customer focus. The airlines as seen in the above discussion are facing major challenges. However, they opt not to transfer the high cost of operation to their customers (Miletic 2009). This is a strategy to try and focus on the needs of the customers although it also serves a prudent choice of avoiding a backlash for the airlines. The airlines are also looking at various ways of fulfilling the customers’ expectations. It is a known fact that people in this modern world are looking forward to an improvement in service providers in every sector. Furthermore, the clients expect that the comfort of the carriers would improve each and every time. Despite the fact that fulfilling such customer needs is an expensive deal for the airlines, most of them are trying their best to make their customers’ dreams a reality. Airliners have also introduced a new trend in the market, many of them have ventured into the introduction of megacarriers ( Wensveen 2010). The purpose here is to try and reduce the cost incurred per flight. The venture would see the operation cost reduced to some extent, giving the airlines a chance to make some profit out of it. Airlines have resulted in a slash in their prices, especially in the domestic market. This is because of the sensitivity of domestic market to an increase in prices. (Appendix 4. The trend of domestic prices in Australia) References CAPA Center for Aviation 2015, Australia domestic airline market outlook: Qantas Group reins in capacity as Virgin continues growth, 17th April 2015, viewed on August 25, 2015, available from http://centreforaviation.com/analysis/australia-domestic-airline-market-outlook-qantas-group-reins-in-capacity-as-virgin-continues-growth-218946 IBIS World 2015, Domestic Airlines in Australia: Market Research Report, ANZIC 14902, June 2015, viewed on August 25, 2015, available from http://ibisworld.com.au/industry/default.aspx?indid=472 Jared Owens 2014, “Qantas blames woes on carbon tax,” The Australian; Business Review, March 05 2014 available from http://www.theaustralian.com.au/business/aviation/qantas-blames-woes-on-carbon-tax/story-e6frg95x-1226845877582 Miletic, D 2009, Fares slashed in airline price war, Traveller, The Age, viewed 23rd August 2013, http://www.theage.com.au/travel/travel-news/fares-slashed-in-airline-price-war-20090414-a69b.html Moffatt, M 2013, Price Elasticity of Demand, About.com Economics available from . Price Waterhouse Coopers 2015, 2015 Aviation Trends, available from http://www.strategyand.pwc.com/perspectives/2015-aviation-trends Wensveen, J 2010, The Airline Industry: Trends, Challenges, Strategies, The University of Sydney, Sydney. < http://sydney.edu.au/business/__data/assets/pdf_file/0010/67789/johnw-presentation.pdf > Appendices Appendix 1. growth of airline industry Appendix 2. Movement along the demand curve The quantity, in this case, will represent the supply in the airline industry Appendix 3. shifts in the demand curve Appendix 4. The trend of domestic prices in Australia Read More