The Airline Industry and the Economy - Essay Example

The Airline Industry And the Economy Introduction Transportation serves as backbone of the economy because no economic activity will ever happen without the efficient conveyance of people and goods from one place to another. Of the existing modes of transportation, airlines clearly enjoy an advantage over buses, trains and boats in terms of reach and speed, which are crucial especially in the export and tourism trade and for businesses dealing with perishable merchandise. So whenever the airlines suffer from an industry slump, the economy mirrors this difficulty, the same way that high growth in the economy translates to high growth in the airline industry. This paper thus discusses the interaction between the airline industry and the economy and identifies the specific economic factors and conditions that can help or hinder the operational efficiency of airlines. Analysis of Research The shape of the economy is determined by its fiscal and monetary policies, market regulations, capital and export markets, degree of stability and competition, factor endowment and social ahead capital. Fiscal and monetary policies involve government expenditures, money supply, interest rates, currency exchange and inflation rates, and the operation of the banking system. The objectives of fiscal and monetary measures are to keep government from deficit spending and provide stability in money supply, interest rates, prices and the banking system. Once these conditions are emplaced and government spends within limits to avoid heavy external debt, capital credit is available for industries, purchasing power is strong and the economy produces a wide range of goods for the export market. As for market regulation, some of its cornerstones are the efforts to maintain a healthy balance between competition and cooperation and to discourage monopoly and oligopoly. The reason is that where competition is completely unregulated and trade monopolies or oligopolies are allowed to operate, the large enterprises are likely to devour the smaller ones. Factor endowment relates to the supply of land and capital and the size and health of the workforce, while social ahead capital has to do with the availability and quality of power, water, communication systems, housing and transportation. The economy will have difficulty taking off if land and capital are hard to come by and labor supply could not meet the demand of industries in terms of skilled and able-bodied workforce. The economic engine will likewise sputter if water and power supply is unreliable, housing is scarce and expensive, and communication and transportation systems are inefficient. In the transport sector, the airline industry is the most sensitive to economic ups-and-downs and the most vulnerable to natural and man-made disasters, terrorist acts, wars and extreme weather events. This was once again demonstrated in 2001 when air travel worldwide grounded to a halt in the aftermath of 9/11. Flag carriers Swissair of Switzerland and Sabena of Brazil folded up, while several US airlines placed themselves in bankruptcy proceedings to avoid complete collapse. From 2001 until 2005, the airline industry worldwide suffered losses reaching $43 billion, which was equivalent to the combined capitalization of 13 US airlines in today's terms. Even British Airways, the world's biggest international airline, was unable to pay shareholder dividends for four years, had to trim 5,800 jobs and to introduce pay cuts to managers. In the US, the government came to the rescue of the distressed airline industry by allotting a $15-billion bailout fund. The industry used the assistance to hire back some 10,000 workers that were laid off at the height of the crisis, which was the primary concern of the state. In the absence of such economic upheavals, the main concerns of the airline industry are the costs of aircraft acquisition and maintenance, fuel and salaries. These are the direct operating costs of airlines, which represent 60 percent of the airline expense. The indirect operating costs are those spent for distribution and reservation, sales offices, advertising and sales promotion, agent fees and commission and ticketing fees. Aircraft acquisition is crucial because fleet expansion enables an airline to stay ahead of the competition. The reason is that air passengers tend to favor airlines with the newest fleet of aircraft for safety considerations, and avoid those whose planes are four years old or more. Aircraft maintenance is another critical area especially for airlines based in less developing countries, since they need to import spare parts and other aircraft equipment and have the maintenance work done overseas. As for fuel, the airline industry bleeds more every time the OPEC cartel raises the prices of oil products in the world market. The industry sustains the same extra costs when there are calls from government and trade unions for it to narrow the wage gaps between airline employees. Wage inequality is most pronounced in the airline industry because it is composed of various job specializations that require different wage levels, apart from management positions. Pilots, for example, need to be paid higher than aircraft technicians, these technicians need to be paid higher than flight attendants, and flight attendants are to be paid higher than secretaries. In the US, this wage classification system is mandated by the Airline Industry Deregulation Act of 1978, which also provides that newly hired employees have to make do with a wage level much lower than that of the old employees doing exactly the same job as long as the labor union agrees with such a setup. Such wage disparity worsens during widespread economic crises, as happened after 9/11. As the distressed airlines terminated their operations, the pilots, technicians and other employees who found themselves out of work sought employment in the surviving airlines even at rock-bottom wages and on a uniform level. Summary 1. How the economy affects the success of the airline industry The economy affects the success of the airline industry when the money supply and the banking system are stable such that capital credit is always available for this capital-intensive industry. Airlines frequently need to acquire new fleet of aircraft to be competitive because air passengers concerned of their safety traditionally shun airlines with old planes, and this requires huge amounts of investment. Moreover, the capital funds for this purpose must not only be available from the banking system but should also carry moderate interest charges so that debt servicing would not be too difficult for the airlines, many of which still have to import spare parts and aircraft equipment and send their aircraft for maintenance to other countries. This can only happen when the fiscal and monetary policies are well taken to control inflation, interest and currency exchange rates. With lower rates of inflation and currency exchange, the airlines pay less for such debt servicing, importation of spare parts and maintenance. This enables the airlines to offer discount rates especially during lean seasons. When economic growth is stable, the purchasing power is strong, prices are manageable and the export trade booms. This means more business for the airlines in terms of heavier tourist and cargo traffic. The growth of the airline industry is dependent on the attractiveness of its host country as a business and tourist destination. If business is slow and there is a scarcity of tourist attractions in one country, its national carrier will suffer from lack of patronage. A progressive economy is matched by the growth of computer use because of increased purchasing power. This augurs well for the airline industry, which is finding online selling and reservation as an effective way of improving customer service and operating efficiency. British Airways, for example, used to sustain losses of up to 2 million pound sterling daily in the immediate years following 9/11, but the airline began to realize savings of 134 million pound sterling after going online for its ticket reservation and sales. Fuel eats up a huge portion of an airline's direct operating cost so a nation's economy that manages to lessen its dependence on foreign oil by developing alternative sources of energy helps the airline industry avoid financial troubles. The reason why the more recent oil shocks failed to upset many airlines, as did the first oil shock in the 1970s, is that many non-oil producing countries have developed other sources of energy. 2. Economic factors that adversely influence the airline industry When the economy is in dire straits, the overall conditions are not conducive to the growth of the airline industry. The usual indicators include the following, which are enumerated along with their adverse effects on the airline industry: Instability in the banking system - this affects the availability of capital credit, which is critical for the airlines to sustain and make their operations competitive. High lending and foreign exchange rates - if capital funds are available, these require prohibitive interests, and debt servicing is an added burden to the airlines because of the higher cost of money. High prices and Inflation - these result in a diminution of purchasing power, which usually means that less people can afford to travel by air. High-cost factor endowments - when the cost of land and housing goes sky high and the supply of skilled and able-bodied workers goes scarce, airlines are hard put to provide for the need of their employees and to fill their manpower requirement. Poor social ahead capital - inadequate supply of power, water, communication systems and transportation is common to developing economies and this hinders the operations of the airline industry. Stiff competition - another characteristic of a distressed economy is the absence of market regulations to control competition and monopolies. These are detrimental to the smaller airlines. Low productivity - when the gross national product is nothing to crow about and the export trade is in the doldrums, business is slow as well for the airline industry. Few tourist come-ons - economic managers grappling with problems of high finance and market inefficiencies tend to place tourism development to the bottom list of priorities, which is a mistake because tourism brings in as much foreign currencies as the export trade. The failure to attract tourists makes a big difference in the profitable operation of the airline industry. Wage disparity - this is common in struggling economies where the more profitable organizations provide higher wages than the small ones, although it may involve workers in the same type of job. For the airline industry, however, this causes labor unrest because of persistent demands for wage equality. Airlines can ill afford in-house labor strikes because such disruptions will be costly and damaging to its operations. References: Brown, D. (1991). 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