Economic Indicators

Economic Indicators Paper

Introduction

Past events have required the airlines to reevaluate the decisions that are being made in order to optimize profits and to put the feeling of safety back into the customers. By reviewing six indicators, airlines are able to better perform and see where the future of the airlines will go depending on the decisions that are being made. Some of these indicators include Gross Domestic Product (GDP), the unemployment rate, inflation rates, interest rates, personal income and money supply. All of these factors and more can be a determinant in the future of an airline.

Gross Domestic Product

In the reevaluation process, the airlines should take GDP into consideration. When measuring successes and weaknesses of the airlines, GDP is a very important factor. GDP is the gross measurement of total goods and services produced within the domestic United States. After the tragedies in 2001, GDP for the U.S. decreased considerably. The airlines especially were hit hard. Qatar airlines for example, had a growth of GDP that was averaging 14.7% over the past five years before 2002. By 2002, Qatar had a GDP of .8%, which is a considerable different from the previous years. Fortunately for Qatar final GDP data for 2003 showed an anticipated increase of 10.5%. (http://www.qatarembassy.net/gdp.asp) This is not only indicative of Qatar but for all airlines that felt a knee buckling jerk in their GDP. The following outline shows the changes that the air industry can also be affected by up to the present time:

Other highlights of the release include:

* Direct tourism-related sales increased 5.6 percent, $7.4 billion at an annual rate, in the second quarter of 2004.

* Over one-third of this increase was due to growth in passenger air transportation, which increased 11.4 percent to $95.5 billion.

* Hotel and other traveler accommodations grew 7.9 percent to $85.0 billion.

* All other transportation-related goods and services rose 6.8 percent to $109.6 billion.

(http://www.bea.doc.gov/bea/newsrel/tournewsrelease.htm)

Unemployment Rate

Along with GDP, the unemployment rate in the airlines had a major increase after the tragedies in 2001. The airlines have seen more recent job losses in the past three years than they have within the last twenty years. This industry has a large impact on the overall employment rate within the country. "The government's employment report provides information on the unemployment rate and the number of unemployed persons by occupation, industry, duration of unemployment, and reason for unemployment. Unlike the payroll employment data, which is a coincident indicator of economic activity (it changes direction at the same time as the economy), the unemployment rate is a lagging indicator". (http://mortgage-x.com/general/indicators.asp)

The government does not survey every single household in the country to determine the current number of people employed and unemployed. A cross-section of about 60,000 households is used to determine the national average.

The current unemployment rate is 6.64% for September. Recognizing the social welfare programs and unemployment insurance impact on these numbers, they are still higher now than a year ago. The historical data for the past year shows an increase of about 1% since November 2003.

Inflation rate

A concern for many people, whether employed or not, is inflation. Inflation is a continual increase in the overall level of prices. The most widely reported measurement of inflation is the consumer price index (CPI). The CPI measures the cost of a fixed set of goods relative to the cost of those same goods in a previous month or year. Inflation, as measured by the CPI has remained below 5% annually since 1991 and it has been low for the past 20 years. However, all does not ring so sweet for the airline industry. Inflation has hit the airline industry hard in the past few years. The impact of September 11, 2001 still has a major affect on the prices of airline flights due to increased mandatory security measures. Many airlines have gone out of business or have required bailout from congress just to remain open. Another factor creating inflation is the recent high prices of fuel, which is driving up the prices of tickets.

Interest rate

The change in interest rates can help fluctuate to or away from inflation. The Airlines could suffer some new losses this year with low-cost operators being affected. As airlines suffered a collapse in revenue their bonds and preferred stocks saw an immediate decline in price followed by cuts in credit ratings. With a 1% run up in interest rates would roughly adjust the value of a bond with a six-year by 6% also knocking a three-year bond down by 3%. Falling world interest rates, in their view, encourage investors to search for yield in emerging markets and enhance the ability to borrow of indebted countries by reducing the cost of servicing already-existing loans. (Fernandez-Arias, et. al. 1996, p. 380-418) Similarly, rising interest rates in the major money centers curtail lending to emerging markets for reasons largely beyond the latter's control (Dooley, et. al. 1993, p. 395-413). An increase in the industrial country interest rate will also increase the debt burden by the borrowing country; therefore reducing their ability to pay their debts which will have an affect on their creditworthiness.

Another concern is that a rise in global interest rates could curb the appetite of airlines and aircraft lesser for new jets. In recent years, many Airbus and Boeing customers have been able to fund purchases thanks to rock-bottom rates. More fundamentally, some analysts believe that easy financing and a surge of orders from new entrants into the low-cost market, have contributed to a surplus of aircraft (Kamin, et. al. 1997)

Personal Income

Fortunately and hopefully as interest rates continue to climb, our salaries will do the same. "Personal income includes transfers (payments not resulting from current production) from government and business such as social security benefits and military pensions, but excludes transfers among persons." (http://nces.ed.gov/programs/digest/d02/definitions.asp)

In October 2003, personal income was around $9.2B. In August 2004, personal income came in around $9.6B. The State of Washington's Office