Externalities Affecting the Airlines Industry

The airline industry is strongly affected by the economy due to the nature of its business. Prices in the airline industry fluctuate due to many positive and negative externalities. Events such as, "The September 11^th Tragedy"� affected the airline industry very negatively. The airline industry depends on the transactions from buyers due to high overhead costs. Work and labor weigh heavily on profits, and determine the lifespan of many airlines. The airline industry can be viewed as a natural monopoly, but there is clear evidence that states otherwise. While it is difficult to classify, it depends on the circumstances, which will be discussed further into this analysis.

The airline industry is viewed as being very unstable due to the effects it suffers from positive and negative externalities. The airline industry is impacted very negatively when nationwide tragedies occur. The process begins with a downturn in our market, then immediately the airline industry reacts. There are some special cases, such as "The September 11^th Tragedy"� for an example. As a result as the terrorist attacks, the airline industry was hit very hard. The airlines were market was impacted tremendously by the events on September 11^th, because the airline industry affects the globalization of our economy. Immediately following September 11^th, prices went up on airline tickets because the tourism industry was not doing well following those events. It makes no difference if the airline industry is attacked directly or indirectly, all conditions of the market affect the airline industry and vice-versa. The market conditions have improved somewhat, there have been other terrorist attacks that have occurred in other parts of the world, but none similar to "The September 11^th Tragedy". Consumers and the airline industry suffers when the market conditions take a negative turn. There is a strong correlation between the market conditions, and the ticket sales. The rise and decline in fuel prices is another externality that affects the airline industry. In that case, ticket prices rise and customers look for more economical substitutes.

The airline industry is highly dependent on transactions from buyers to keep their businesses profitable. The airline industry is highly competitive, and extremely dependent on buyers due to high overhead costs. Examples of These external costs include: fuel, labor, and advertisements. The external costs are basically set, depending on the current state of the market. According to (FRBSF Economic Letter, 2002) over the last 20 years airlines such as PanAm, Texas Air, and TWA have gone out of business. There are many more airlines to be named, and the main cause is due to externalities such as tragedies (in some case crashes) as well as over-head costs. The airline industry is a highly competitive environment, and there will be many more airlines such as United and Delta have been near bankruptcy, but they have managed to survive by making cutbacks on employee pay, pension plans, and on-flight meals. The transaction rate affects current employees, retirees, customers, and each airline individually.

The airline industry is difficult to classify due to the broad purposes it serves. Some customers are required to travel for business purposes, and there is no alternative. Many tourists fly, so the industry would have to be classified depending upon the purpose of the travel. Of course tourists who are flying are not being forced; therefore their travel would be considered "excludable". Since an airplane does reach a seating capacity, it would rival so in that case it would be considered a public good. When someone is being forced to travel for business purposes, which would be considered "non-excludable", it is debatable whether or not a rival would exist since there are other airlines. According to (FRBSF Economic Letter, 2002) there is not substantive evidence to support the airline industry of being a natural monopoly.

The airline industry is very unstable due to its market dependency. Unfortunately, positive and negative externalities affect the entire industry, and many airlines are unable to stay profitable. The externalities affect customers, the global economy, employees, airlines, and retirees. The classification of the airlines industry is debatable due to the nature of the industry itself and its customers. Many sources can agree upon the fact that it should not be classified a natural monopoly. The airline industry will continue to swerve up and down according to market conditions, and the same externalities will be in existence.

Annotated Bibliography

Article One:

Article or Web site reference:

FRBSF Economic Letter. (January, 2002 18). Airline Competition. Retrieved September 7, 2007, from Olin Business School- Washington University: http://www.olin.wustl.edu/faculty/gowrisankaran/pdf_papers/airline_competition.pdf

Summary of Article or Web site:

The airline industry is highly competitive, and the conditions of the market have affected the industry as a whole. From1975 to 2000 the average ticket prices have consistently gone done largely due to the popularity of flying. As we analyze the short-term prices, they seem very unstable due to the current state of our economy. Many airlines have been forced to make cut-backs which include excluding meal-service and employee incentives. Without making these cutbacks, for many airlines it would be difficult to survive. This article strongly supports the fact the airline industry should not be considered a natural monopoly.

Article Two:

Article or Web site reference:

Jerram, R. (1998). The Airline Industry. Retrieved September 7, 2007, from London School Of Economics and Political Science: http://www.mega.nu/ampp/PEGB/chap11.htm

Summary of Article or Web site:

The airline industry is similar to many others, such as the telecommunications industry. The airline industry is highly affected by the externalities. Some externalities that are exclusive to the airline industry are crashes some receive more publicity than others, airlines such as PanAm, United Airlines, American Airlines, and TWA have been affected. Other externalities that exist are high overhead costs (for fuel and labor.) the state of the economy, always plays a huge role in determine the direction the industry will go. These externalities have been the cause of some airlines not surviving. The globalization of our economy is affected by the state of the airline industry in the end.