The Economy's Affect on the Airline Industry

Changes in the economy have a big affect on the airline industry. The elasticity of demand, externalities, wage inequality, and monetary, fiscal, and federal policies all have an impact on this industry. The airline industry is constantly changing due to todays market and today we will be looking at the reasons behind it.Price Elasticity of Supply and Demand

Traveling by air is both elastic and inelastic depending on who it is that is traveling. If a family is planning a trip just to take a vacation and the price of an airline ticket is extremely high, more than likely they will decide to wait on the trip until the prices are lower. This shows that the airline industry in considered elastic. However, if a businessman needs to be at a seminar across the country by the next day, he will need an airline ticket regardless of the cost. In this example, the airline industry would be considered inelastic because it is a necessity. The current market has a big part in the supply and demand in the airline industry. For instance, with the price of oil rapidly increasing, the cost of an airline ticket is also increasing and the demand for leisure travel is decreasing. After 9/11, people were afraid there would be another terrorist attack involving a plane and the demand decreased. Another factor in the cost of an airline ticket is the date it is purchased. If there is an emergency and someone purchases a ticket close to the departure date, even though there are unsold seats available the cost will increase. Externalities

There are quite a few negative externalities in the airline industry. A major one is the noise pollution by major airports. People that live near the airports constantly hear airplanes departing and arriving. This has been linked to heart disease, breathing difficulties and cancer along with other health issues. The airplanes emission is composed of about 70% CO2. CO2 contributes greatly to the greenhouse effect which is the cause for global warming. There are a few positive externalities along with this industry. Hotels near an airport stay busy due to the amount of travelers needing a place to stay.Wage Inequality

Wage inequality is common in the airline industry since there is a big variety of jobs available. In order to address this topic, many states have a living wage ordinance which they use to try to control wage inequality. For jobs involving customer service, you will not earn anywhere near some other positions but then again you do not even need experience. Flight attendants need to be trained in the main city where the headquarters are to the airline they are working for. Some might also need to learn foreign languages. Pilots on the other hand are required to take many hours of training and get a few different types of licenses as well as getting certified. The only way to earn a higher then average income in the airline industry is to have specialized training and experience. An airline pilot makes an average of $113,024 annually. A flight attendant makes an average of only $53,894 annually. Monetary and Fiscal Policies

There are many issues in the airline industry regarding government policies. U.S. airlines informed president Bush of the problems that a $1.5 billion proposal in aviation security costs would have on jobs in the airline industry. After the attacks on September 11th occurred, a fee was added to airfare. That of course decreased the overall demand and is the reason why many employees were out of jobs. If there is another increase in ticket prices, employees fear this will happen all over again. Another issue regarding airlines is safety. U.S. Airlines and government regulators are working together to become even safer. The Federal Aviation Administration started a safety program, Commercial Aviation Safety Team (CAST), to identify and prioritize risks based on past accidents and find solutions to reduce anymore fatalities. The FAA also conducts any maintenance work performed on aircrafts at their own certified repair stations.Problems With Competing Airlines

Another thing that the economy is affecting the airline industry is the competing airlines. The bigger airlines can afford lower fares which makes it hard for the smaller airlines to compete. Different airlines have plans to expand but will not be able to until the cost of fuel is under control. For the low far carriers who allow advanced booking, they will need to work on a plan to avoid bankruptcy. This will make the airline industry continue to boost prices due to the fact that oil prices are expected to continue rising due to the supply.

The economy plays a big role in the success of the airline industry. If companies are doing great and have a lot of business, some of them will need to send employees by air to another destination whether it is to attend a meeting or supervise another location. People will take more vacations if their income is steady which again refers to the business of a company. If companies are not doing well, that is when you will see many employees getting laid off which leaves them unemployed with no money to do much of anything, much less travel. The fuel prices are becoming outrageous with no sight of slowing down which is highly going to affect airlines. Increased rates for tickets due to the cost of this is really hurting this industry.

It goes to show how much the economy affects airlines by the carriers, Delta Air Lines, US Airways, United Airlines, and Northwest Airlines filing bankruptcy in 2005. They have said this is the worst thing that has happened in the industry since the September 11^th attacks. The reason for the Chapter 11 filling is blamed on the rising fuel prices and falling consumer demand. Northwest Airlines is still looking for help in order to pay back the $1.2 billion bank loan they received.

Last month Aloha Airlines and ATA Airlines discontinued all operations. Thousands of travelers were stranded due to this happening unexpectedly. Over 2,200 employees at ATA lost there jobs. The media believes that major airlines will be weakened and unable to offset higher oil with higher revenues. This has led many big airlines into discussing merging with one another.

Sources:

Air Transport Association of America. ATA policy priorities. Retrieved May 18, 2008, from

http://www.airlines.org/government/issuebriefs/ATA+Policy+Priorities+-

+FAA+Reauthorization.htmSmith, P. With oil prices soaring, airlines are struggling as never before. What's in store for fliers? Retrieved May 18, 2008, from http://www.salon.com/tech/col/smith/2008/05/16/askthepilot277/?ybf1=1