The Airline Industry: The Effects of Monetary and Fiscal Policies

The principles of economics tell us that governments can sometimes improve market outcomes. Methods of influencing market outcomes can come in the form of monetary and fiscal policies. Monetary policies influence shifts in aggregate demand for goods and services by increasing the money supply, reducing the equilibrium interest rates and stimulating investment spending or decreasing the money supply, raising equilibrium interest rates, lowering investment spending (Mankiw, 2004). Fiscal policies shift the aggregate demand curve by increasing or decreasing government spending or through the increase or decrease in taxes (Mankiw). Because these policies influence aggregate demand, the government uses such policies to try and bring stabilization to the economy.

Such polices affect different industries on many different levels. Some industries have positive effects and some negative. In analyzing how monetary and fiscal polices affect the airline industry, we can look at how these policies affect employment, growth of the industry, and product prices.

Many fiscal policies directed toward the airline industry have had profound affects. One such policy is represented by the excise taxes and fees levied on air carriers. Such taxes and fees are allocated by the government to fund improvements of airports, provide security for the airlines and airports, allocate funding for the FAA, provide for services for international customers, and support operations at airpark facilities. These fees represent roughly 26% or $52 of a standard 200-dollar round-trip airline ticket (Air Transport Association, 2005). Current economic conditions of the airline industry are dismal, especially due to the tragic events of September 11^th. The Air Transport Association (ATA) argues that such fiscal policy in these trying times hinder the air carriers' ability to right themselves through a self-help policy. The ATA further explains that in an effort to stabilize the industry, such taxes and fees can account for the elimination of over 129,000 jobs, forced many carriers into bankruptcy, and, because consumers react heavily to price increases in this industry, hinder their ability to allocate funds by raising ticket prices. With this current fiscal policy, air carriers have little maneuverability of funds to meet the demands of an operating budget.

Mike Smith (personal communication, June 10, 2008), former owner of Pacific Crest Aviation in Big Bear Lake, CA, adds that governing agencies institute other fees to generate operating revenues for airports. On example of this is landing fees. Landing fees vary from airport to airport, but play a key role in the determination of where air carriers decide to base their operations. In attempts to accumulate more funding through fiscal policy, Mr. Smith explains that the FAA continues to suggest the implementation of user fees. Still to be determined how such a fee would impact the airline industry; present fiscal policies have air carriers screaming for reform.

Deregulation is another fiscal policy that has considerably impacted areas of the airline industry. Since deregulation in 1979, the airline industry experienced substantial growth. With the emergence of new competition in the industry this created numerous amounts of jobs, drove ticket prices down, and expanded the available market for various air carriers. Through an industrial wide growth of over 200%, new carriers were able to open positions to thousands of new employees in various parts of the nation. Average ticket prices in 1979 remain relatively unchanged today. As an extremely competitive market emerged, the rally for passengers on each carriers flights kept ticket prices down as carrier created connecting flights through this new open sky policy; reaching more consumers, minimizing opportunity cost, and offering competitive pricing.

The Airline industry continues to be affected by the overall condition of the nation's economy. When healthy spending exists and pleasure travel is frequent, air carriers are able to fill flights, raise prices, and maintain a stable economic environment. However, when condition of the nation's economy falls, so do the buying habits of the consumer. This is where the airline industry finds itself today. Struggling to fill flights in a slow economy and fighting heavy fiscal policy.

Recent monetary policies made by the federal government to improve market conditions are sure to have an effect, but how it will impact employment, growth, and prices in the airline industry are still unknown. The most recent monetary policy made by the government came in the form of economic stimulus checks. This in-flow of money into the economy in an attempt to stimulate the purchase of goods and services through out the United States may help diminish the effects of our current sluggish economy. Little to no data exists to show how this has impacted any growth in the airline industry. So far, there seems to be little change in the spending habits of the consumer to travel via air. Because the economic position of the airline industry has been struggling for so long, improvements due to any single event may be impossible to track. Whether changes in fiscal policies, monetary policies, or internal carrier structure help to improve conditions in the airline industry, changes will happen slow and will reflect economic condition in the nation's marketplace.

By successfully managing opportunity cost, and adapting to an ever changing economic environment, airline industries can have economic success. However, the well-being of the nation's economy will have a direct impact on the level of success experienced in the airline industry. During economic shortfalls in the nation's economy, travelers will have fewer resources available to travel for pleasure. Contributing to the negative economic influences in the airline industry, future and existing policies targeting the airline industry will continue to hinder the industries ability to recover losses in periods of economic hardships.

References:

Air Transport Association. (2005). Comments of the Air Transport Association of America, Inc. Before the President's Advisory Pane on Tax Reform. Retrieved June 10, 2008, from http://www.taxreformpanel.gov/comments/_files/040105AirTransportAssocation.pdf

Mankiw, N. G. (2004). Principles of economics (3rd ed.). Chicago, IL: Thomson South-Western.