Airline Industry Development

Introduction

The airline industry has undergone major changes particularly after the deregulation of the airline industry and its controls. There has been a short decline in traffic immediately after the terrorist attacks. But that trend has reversed. While the airline industries reduced the intake of new aircraft, the demand for seats has consistently been rising. This has put pressure on more seats. Apart from this, the increase in traffic has also caused widespread resentment in terms of pollution control while at the same time an increased load has made the employees look for higher wage packets. While every one of these factors affects the monetary and fiscal policies of the company, there is a strong interlink between them. The following paper is the outcome of the research done on the above topics and presented below.

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Price Elasticity

Price is a factor dependent on supply and demand. The accepted fact in the economic scenario in the world is to corroborate supply with demand and identify that any large scale supply increase over and above the demand would generate a price reduction while the increase in demand would result in an increase in price that would act in such a way as to reduce the demand. This is reflected in the airline industry as well. When the number of passengers decreases the flight rates also decrease and vice versa is held valid when the number of passengers increases. This price elasticity is noticed during the recession immediately after the terrorist attacks. Now when the markets have picked up the ticket fares have been increasing consistently. This indicates the nature of price elasticity that is in vogue.

This shortage in seats has mainly happened because the airlines had stopped taking in new aircraft. Therefore, when the number of people who are traveling went up, the airlines were not ready to take the load. Aircraft take years to manufacture and they are done to order. This would mean that the airline companies need to wait for a long to get their aircrafts delivered. The shortage of seats will continue to exist as a result of this for some time at least. Therefore, the increase in fares would continue to grow as a result of this shortage.

At the same time, air cargo is poised for major growth and the companies are vying to take a share of this market. Since there is a larger supply of service than the demand as of date, the prices of cargo transit are bound to fall. This would increase the cargo movement through the air in the short term future. There are also more luxury and vacation travelers in the airlines compared to what it was four to five years back. All this has increased the number of people who would travel in an airline and this, in turn, leads to an increase in the airfare rates. Both the airfare and air freight charges are bound to increase with the increase in air traffic.

Externalities

A number of externalities have been noticed due to the airline industry. There are a number of negative as well as positive externalities due to the industry. Typical negative ones include the following:

  1. Noise Pollution
  2. Air Pollution

The positive externalities are:

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  1. Benefits to stockholders
  2. Overall economic growth in the society.

The positive externalities improve the economic growth of the society due to an increase in business and trade. A swifter business would improve the lifestyle of the location. With the airline industry growing at a swifter pace, the tourism industry has also grown and has resulted in the development of a multi-billion dollar industry in many locations across the country and the world. This in turn has brought about the positive externalities realized to a high. In addition to this, almost all the industries feel the impact of the growth in the airline industry since it brings the world closer. This contributes to economic growth. This happens in both cases of positive externalities. In the case of the negative externalities, it is important to note that the effect of the airline is felt throughout every inhabitation today. With the increase in the number of airports as well as the increase in the number of aircraft running over the head, the air is polluted with both noise and other chemical pollutants. The chemical pollutants would increase the nature of pollution that is occurring in the atmosphere since it burns and exhausts almost four times the fuel than any other normal engine would. Locations close to the airport experience very high levels of turbo engine noise. There are cases reported to have had heart failure because of the intensity of the noise levels faced by residents close to the airport. Noise pollution has been a major worry for the airport authorities.

Wage Inequality

The effect of deregulation of the wages in the airline industry is in line with the current trend in salary raises for the executives for other industrial segments. After the deregulation of wages in the airline sector, there has been a drop in wages by over 10%. This has gone down for both industry-specific occupations as well as general occupations. In the case of pilots, following the deregulation, there is an inter-firm wage inequality introduced. This has also resulted in an increased inequality across the sector. As a matter of fact, there was not only wage loss; there were also job losses that increased in the due course after deregulation. While there was a reduction in wages for the cabin staff, the executive packages have been going up. The airline staff and the flight attendants feel that they have been given a hard deal with the pilots and the executives cornering the share offers as well as wage rises. This has given rise to a large-scale increase in inequality over a period of five years.

The inequality has happened in two ways. One, between the companies that make up the industry; while some of them who were making fiscally sound policies could afford to pay higher salaries to rope in better talents, the others found it all the more difficult to provide such high wages. This led to a disparity during the downturn in the industry. Two, within the same company too, there was a disparity of wages between the ground crew and the flying crew. While the flying crews were earning more than three times what the ground crew could, they also got better positions in the company and responsibilities too. This also brought about large-scale discontent among wage earners in the industry. All this bred inequality among the staff of the airline industry.

Monetary and Fiscal Policies

With the airline deregulation, the airlines are able to drop routes that were not profitable and could lead them to a loss. However, the government still retains the Essential Air Services clause of the law. This makes sure that the companies do not drop air connectivity to locations that are remote and could very well mean a loss to the airline. But in case they do so, they might be dropping off connectivity to the location. This would ensure that the companies are in a position to choose specific sectors that could ensure their profitability at the same time bring out a service in certain sectors. Though after deregulation there was a loss of jobs, it is not true that people did not get jobs. There were new companies that were coming up (Sandra Arnoult May 2005). These could provide jobs for people in the airline industry. More and more restrictions were getting removed for these new companies. They could easily turn profitable.

Airlines were offering cheaper fares prior to deregulation. With deregulations, prices started rising. However, with the terror attack, the prices fell sharply resulting in a major drop in fares. But now they started rising again with the increase in the number of passengers and the markets picking up. Some of the freebies given on flights like the free meal have been cut to save cost even though it is minor.

Conclusion

The airline industry has lived through the deregulation; it has also lived through the fall in business after the terror strike of September 11; even though the economic recession after that. The airline industry has responded to the changes effectively and the forces of the market have come into play. The price elasticity has taken care of the changes in the prices. Though it continues to fluctuate the customer has not to be given a raw deal. The fares have followed the supply-demand criterion. In the same way, wages have also followed the theoretical dictums and have responded to the market situation with little interference from controlling agencies. Though in the case of wages, there could have been more control in the way the salaries of the executives are allowed to rise and the compensation that the rest get could have been matched to reduce the gap and the inequality among them (Penton Media 2005). The overall monetary and fiscal situation of the airline industry is changing for the better.

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References

  1. ATW Media Group. (2005). Evidence on Wage Inequality in the Airline Industry.
  2. ATW Media Group. (2007). Betting Big on Cargo Growth.
  3. ATW Media Group. (2007). AA, UA, SWA flight attendants unite to decry executive pay.
  4. ATW Media Group. (2005). Evidence on Wage Inequality in the Airline Industry.
  5. Economists View. (2006). Is Talking on Airplanes Noise Pollution? Web.
  6. Penton Media (2005) Cost, Customers & ‘Adam’s Rule’. Air Transport World, 2005, p 71.
  7. Sandra Arnoult (2005) The Shape of Things to Come. Air Transport World, 2005, p.32.
  8. Time. (2005). Airline Pollution: The Sky Has Its Limits.

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