Industry Research Completion-Airline (Eco305) Axia College

Airline Industry

ECO305

The airline industry is extremely influenced by the elasticity of demand, externalities, wage inequality, monetary policies, and fiscal policies. The elasticity of demand is impacted solely on the current market conditions, and the consumer’s reason for travel. The September 11th tragedy has had a very damaging affect on the airline industry. It has impacted the fiscal and monetary policies, supply and demand, and it has created many problems worldwide with employment. The airline industry is perceived as being unpredictable because it is relies on the current market, and the market is always changing. Incidents such as inflation, oil prices and terrorist attacks seriously influenced the demand for airline tickets throughout the years. Competition from other airlines consistently affects the price of airline tickets because it allows the customer other companies to choose from. Alternatives are to travel by train, car, or avoiding travel whenever possible, and consumers have resorted to all of these substitutes during unstable times in our economy. The elasticity of demand is very much affected by the customer's purpose for travel. Airline customers usually fly for business or pleasure.

Airlines use a method of combining their income and inventory costs to establish ticket prices. While it is essential for this industry to focus on being profitable, the main focus is to increase the cost of the flight revenue. One huge factor that increases the cost of tickets is when the customer orders there tickets close to their departing date, when people wait to buy their tickets, the airline industry sees this as a risk. And since they need to make up for unsold seats, buying your ticket(s) at the last minute causes them to be higher. Since the airline industries inflation or deflation is a direct result of market conditions, it is very much affected by all externalities. Many people observed a decline in travel after September 11th took place because of safety concerns. When there is a vast increase in fares that undeniably interfere with the need for travel; this affects the price of tickets and they will continue to rise since a clear relationship between supply and demand exists. When the employment rate is high, when the dollar is strong, and the economy is doing well, people can afford to travel more. A high percentage of the income is contributed to operating expenses, such as fuel and labor.

Positive and negative externalities have an important position in influencing the supply and demand of the airline industry. Since the airline industry feels the direct results of market conditions, it is very much changed by all externalities. A lot of people observed a drop in airline travel after the September 11th strike took place, due to safety concerns. After a considerable increase in fares, this definitely gets in the way of the demand for travel; and it will cause the price of tickets to keep on rising seeing as there is a clear relationship between supply and demand. People will travel more when the economy is thriving, and the cost of living isn’t exceeding the amount of money people are making; it also helps when the employment rate is higher too. The airline industry plays a key role in the globalization of our economy and the market is strongly reliant on the airline industry. The rise and decline in fuel costs is another negative externality that affects the airline industry. Fuel costs have been on the rise for quite sometime, so customers have gotten used to the change. “June passenger traffic was up 4 percent from 2001 levels, according to industry data - and energy demand rises throughout the economy.” “The price of jet fuel averages $1.91 per gallon in Los Angeles, up 46 percent from a year ago, according to government data.” And it is predicted that this situation will get worse before it gets better (Baltimore Sun, 2008). In many cases external costs can affect the lifespan of many airlines. The airlines are dependant on consumers to buy their tickets in order to endure the external cost of fuel, labor, and advertising. The external costs are set depending on the current condition of the market. Externalities such as tragedies (in some cases, crashes) as well as over-head costs left airline in chaos. Two notable airlines United and Delta went bankrupt, but they managed to climb out by making changes. Delta and United escaped bankruptcy by cutting back on employee pay, pension plans, and in-flight meal service. The rate of transaction affects the livelihood of current employees, retirees, customers, and each individual airline.

There is no clear classification of the airline industry because it serves a broad purpose. If a customer is flying for business purposes overseas, there is no easy alternative. The classification would be based on the customer's purpose of travel. People who are flying for pleasure are not being forced, so leisure travel would be considered excludable. There are clear seating capacities on airplanes; it would rival which would classify the airline industry as a public good. When someone is forced to travel for business purposes, the travel would be considered non-excludable. It would be difficult to determine if a rival exists since there are alternatives.

There is a long history of wage inequality in the airlines industry; in the recent years there has been a decline. In order to address the growing issue nationwide of wage inequality, many states introduced a living wage ordinance, which was an effort to control wage inequality. Analyzing the statistics of how much airline employees are making concludes wage inequality. The living wage ordinances are determined by the cost of living where the airline employee is employed. According to the Association of Community Organization for Reform Now, about 78% of employees at the San Francisco Airport made under $10 per hour. In 2004 when the living wage ordinance was passed in San Francisco and 99 other cities (Zabin, 1999), the legislation permitted a wage increase of 33%. Not all employees benefited from this wage increase, because in cities like San Francisco where a base was set of $10, some of the employees were making minimum wage prior to this increase therefore they may not of been included in this raise. After changes were applied, less than 6% of employees were making less than $10 per hour, and 96.7% were making under $14 per hour (Zabin, 1999). The airline industry has benefited from living wage legislation because the wage increase encouraged a decrease