Airline Industry

Airline Industry

Economics is explained as the social science that studies the production, distribution and consumption of goods and services. As a guideline for economics, the used of economic indicators are used as a means of predicting or making a forecast about the economy and the different factors that affect those forecast. In this paper, Team A will study the Airline industry how each of the factors of Retail Sales, unemployment rate, Gross Domestic Product (GPD), interest rates and Producer Price Index (PPI) affects the industry on the domestic and international scale. Over the past few years this industry has been significantly affected by such events as the September 11, 2002 terrorist bombing, the high and escalating prices of fuel and recently the shortage that was caused by Hurricane Katrina in August of 2005. Each of these events were world shaking events and in relations to the micro and macro economics presented a ripple effect that to this day is still being felt. The Airline industry, which operated worldwide,

was hit with massive events that affected all economic indicators and almost destroyed the businesses. In the beginning years of economic studies, it was previously thought that economic problems were only caused by non-economic events that only affected the things in that arena. However, with the introduction of Keynesian economic theory, of "everything at once", economist and society began to view that with one change, all things were affected. All businesses began seeing that the market held a variety of interest and the interest in one could drastically affect the interest of another. The government and its economic policies also contributed to how the airlines business either improved or fell. Teams A's analysis of these factors will attempt to show all these factors and how the future of this industry can be predicted from the factors.

Industry Overview

In North America alone there are approximately 209 airlines. The airline industry began as a mail transportation system that would later become a mean for many other things. In time, airplanes were used to transport our military troops, as well as farmers would use them to protect their crops. Airplanes were also used to transport cargo all over the world, which leads to many company such as UPS, FedEx, and even to transport passengers all over the world faster.

Retail Sales

Retail sales are an important economic indicator because consumer spending drives much of our economy. Retail sales account for half of the overall consumer spending which accounts for about two-thirds of final demand in the economy. For example, retail sales of airline tickets have been slow in the previous year. However, in 2006 they went up 7.5% in the third quarter, this being the biggest increase for that period since 2000 (Desert news, 2007). With the rise of fuel prices, airline ticket prices will only continue to go up.

Interest Rate

Interest rates have a large impact on the current state of the economy. The

rise or fall in interest rates dictates how much money is borrowed, which has a direct impact on economic growth. Rising trends in short-term interest rates have consistently been accompanied by rising trends in the stock market, and vice versa. The Fed controls short-term interest rates in the United States. The chart below shows how the Fed's monetary policy has been and continues to be, strongly influenced by what is happening in the stock market. "Specifically, the chart implies that the Fed can be relied upon to cut interest rates in response to persistent stock market weakness and to hike interest rates in response to persistent stock market strength (Safe Haven, 2007)"

There are many variables that can influence the rates on long-term debt, but an understanding of key economic indicators can provide clues to the future direction of interest rates. When interest rates are high, people tend to spend less money and do all that they can to stay away from borrowing money, and putting themselves in debt, which then slows down the movement of money in the economy. One strategy the government employs is to lower down the interest rates, to attract people to borrow money and spend it. When the economy is in danger of rising inflation, the government increases interest rates to make access to excess money more expensive and arrest spending. Interest rates became a tool to influence the economy. "Inflation, supply and demand for money and other general economic indicators are normally related to one another, which in turn dictates which interest rate to peg" (Russell, 2006).

Forecast:

Jan 2007 8.25

Feb 2007 8.25

Mar 2007 8.25

Apr 2007 8.25

May 2007 8.25

Jun 2007 8.25

Jul 2007 8.25

Aug 2007 8.25

Sep 2007 8.25

Oct 2007 8.00

Nov 2007 8.00

Dec 2007 8.00 Jan 2008 8.00

Feb 2008 8.00

Mar 2008 8.00

Apr 2008 8.00

May 2008 8.00

Jun 2008 8.00

Jul 2008 8.00

(Mortgage-X

February 2007)

Jan

2007 Feb

2007 Mar

2007 Apr

2007 May

2007 Jun

2007

Forecast Value 8.25 8.25 8.25 8.25 8.25 8.50

Jul

2007 Aug

2007 Sep

2007 Oct

2007 Nov

2007 Dec

2007

8.50 8.50 8.50 8.75 8.75 8.75

Jan

2008 Feb

2008 Mar