Factors that cause effects on the airline industry

Factors that cause acts on the air hose intentness admissionAirlines all overcome substantial strategic, financial and operational risks. In particular, the foodstuff changes in general economic conditions live influenced considerably the air duct industry. Carriers guard suffered blemishes of $50bn over the past 10 years1is the most specific evidence. Thus, this paper studies changes in four major fields confronting the airline industry including market forces, financial risks, governance policies and global events as well. Simultaneously, this study illustrates different revenues to be derived from these points.Structure of this paper seeks to contribute in this way. After introduction, section 2 provides a theoretical epitome of market forces. Section 3, 4 and 5 describe the effect of financial risks, global event and organization policies respectively. Finally, section 6 concludes the study.AnalysisMarket forces prototypic at all, the global airline industry faced in tense impact as a result of the market forces of supply and make.In fact, the change in demand is angiotensin-converting enzyme of the most grievous factors which affected to the airline industry. The initial variant that can shift demand curve is income. In a nonher(prenominal) words, if the passengers have the high income, obviously they pass on be able to get the tickets to a greater extent in replacement of choosing car, train, etc. As a result, their demand to go by plane will definitely rise. However, over past 10 years, due to the global economic crisis, income has been decreased substantially which brings in the decline in demand of customers. This is illustrated by the Figure 1 below.Figure 1 Decline in demandSimilarly, the wage of employees in the airlines industry has been varied considerably in the upstart years. For instance, approximately 78% of employees at San Francisco Airport made under $10 per hour but this amount gaind of 33% when there was a high livin g wage ordinance2. All things said, the airline industry has been influenced frankly by incomes of their passengers and their own employees wages.In term of supply, input equipment casualty is the essential variable to shift the supply curve. Indeed, burn expense is one of clear example. Because jet fuel costs comprise a significant component of airline operational cost, the airline industry also has been affected. While short term cash flows atomic number 18 related to changes in the fuel equipment casualty which make revenue be slow initially, much of the determine effects are likely to be passed on as all airlines face similar fuel costs in the desire term. Indeed, there was an argument that airlines also face an underinvestment problem whenever breadable investment opportunities arise during times of high jet fuel costs.3About technology, due to the stronger development of technological system, the supply of world airline industry also rises. As a result, there are a hu ge number of two new and old airlines can provide the demand of customers.In term of competitors, if an airline sets up the higher price, they will obviously loss a macroscopic number of passengers at the same time which results in a lower revenue. The specific example is the differences in percentage of passenger seats sold (load factor) of 9 U.S airlines including Delta, American, United, Continental, US Airways, Southwest, Alaska, Jet Blue and Air Tran since they are competitors of each other. This following figure 24describes thisFigure 2The rest variables also play an important role which affect to the demand curve of airline industry including tastes, expectation, technology and number of buyers or sellers but the most necessary factors are still the offshoot two variables.Elasticity of demand is also the essential factor that influenced the airline industry. Indeed, competition consistently affects the price of airline tickets because it gives customers other options. When the demand is elastic, price and number revenue will be negative and when the demand is inelastic, price and total revenue will be positive. And this explains why the loss and earnings of world airline industry vary substantially. Hence, the table 15below suggests the annual loss and earnings of airline industry from 1990 to 2005 and figure 3 describes the annual can profit of the world airline industry6.AnnualLoss and Earnings1990$ 3.9 one thousand thousand loss1991$ 1.9 billion loss1992$ 4.8 billion loss1993$ 2.1 billion loss1994$ 0.3 billion loss1995$ 2.3 billion profit1996$ 2.8 billion profit1997$ 5.2 billion profit1998$ 4.9 billion profit1999$ 5.4 billion profit2000$ 2.5 billion profit2001$ 8.3 billion loss2002$11.0 billion loss2003$ 2.4 billion loss2004$ 7.6 billion loss2005$ 5.7 billion lossFigure 3 Annual Loss and EarningsFigure 4Financial risksThere are three factors that cause financial problem for airline industry fuel price, interest rate, currency rate.Fuel priceIn general, fuel price always plays an important role in the world economy. That is the reason why either increasing or decreasing of fuel price affect deeply on airline industry. It is easy to see that fuel and airline are complements. Airline cannot operate without the existing of fuel. Gasoline, inunct, or other products from rude oil are utilized as irreplaceable fuel in airline industry. According to the theory, complements are two goods for which an increase in the price of one leads to a decrease in the demand for the other7. A change in price of fuel will shift the demand curve. In the other hand, assume that fuel is input and airline transportation is output. Rising in input price leads to a leftward shift the supply curve. The following diagram describes how fuel price causes a change in both demand and supply.Figure 5 Changes in both Demand and SupplyBased on the diagram, when price of fuel increases from P1 to P2, the quantity demanded and quantity supplied decreased an amount computed by (Q1 Q2). As the result, both demand curve and supply curve shift to the left. Airline market reaches a new equilibrium E2.Applying those theories into the reality, the annual report 2009 of IATA stated that the surge in fuel prices in the first half of 2008 meant fuel represented more than 50% of many airlines operating costs8. By year-end 2009, crude oil prices had risen 85%, to $74 a barrel, as economic recuperation began to raise demand and as futures markets, anticipating strengthening economic recovery, added to upward pressures9.Figure 6 Fuel price throughout the year, 201010higher(prenominal) jet fuel prices mechanically eat into airlines profits meanwhile improved economic conditions are boosting passenger numbers. For instances, in 2004, many nations including British Airways, had already added fuel surcharges to ticket prices or raised fares to counter higher fuel costs. Many of Asias major carriers, including Singapore Airlines, Australias Qantas, Ma laysia Airlines and Indonesias Garuda had also introduced surcharges11.Fuel price cannot remain a stable status for a long run period then airline industry should be flexible to react quickly.Interest rateInterest rate is other factor that effect on market economy in general and airline industry in particular. The interest rate connects the price of goods today and their price in the future. Higher interest rate increase expected cost of distress and this is particularly so for the airline industry where leverage is high and distress costs are substantial.Exchange rateExchange rate risk is important as airline profit faculty is related to currency values. Tourism demand is one of reasons that show how exchange rate cause changes of airline industry. Both inbound and outbound are influenced by exchange rate levels. When the exchange rate is high, tourist will receive benefits. The result is they are willing to spark off more, thus, quantity demanded of airline tickets will be incre ased. In contrast, the depreciation of domestic currencies make tourists consider whether they should travel or not. Travelling in recessive period is a typically example. If the exchange rate falls down, customer might save their expenditure by not travelling or they might wait for promotion tickets. It means that foreign demand for international and domestic flights move inversely with the value of the base currency12.Global eventsThe airline industry in the world has many changes every year. The more global event has happened, the more the affection has an effect on the airline industry. In 2001, after the terrorization 11/9 happened, the industry of airline decreased very quickly. Follow the number of airline industry, US airline posted they have net loss $7 billion. 20% staffs and employee lay off by US airline. The number of passenger reduce continuous and have criterion recovered in 200313Figure 7 US Airline industry passenger revenues 1999 2004Beside, the price of oil have effected on this industry. When the price of oil increase, the fees for material grow up .If the airline do not rise up the price of ticket, they will decrease their net profit. If the price of oil falls off, there are more than promotion tickets for passengers.Moreover, the disease can be affected to the industry .Example, when the SARS disease happened, many countries have not allowed passengers to come to place where SARS disease has.Government policiesThe government policy is another factor what can be effect on the airline industry. Because the government policy control on price, so the airline industry have 2 legal price such as price ceiling and price floor .The price ceiling is a legal maximum on the price at which a good can be sold14. For example, a airline has good quality, so they want increase fees. The price ceiling applied to fees to help people can be paid. When the airline wants to attracted passenger, they create promotions intimately the price their ticket. So t he price floor is the price minimum at which ticket can be sold and the company airline still has net profit.P Surplus SED0 QFigure 8Taxes is a important factor of the government policy .When the taxes of the passenger increase ,the price of ticket rise up , so if the airline industry want to grow up, they need decrease another fees in ticket. When the taxes of the airline industry increase, the price of ticket will increase or the industry will cut off something to protect their profit.ConclusionThe above analysis showed that factors like market forces, financial risks, global events and government policies cause effects on airline industry. In order to overcome and continue develop own airlines, carriers should seek a suitable way. In details, by successfully managing opportunity cost, and adapting to an ever changing economic environment, airline industries can have economic success. However, the well-being of the nations economy will have a direct impact on the level of success experienced in the airline industry. During economic shortfalls in the nations economy, travellers will have fewer resources available to travel for pleasure. Contributing to the negative economic influences in the airline industry, future and existing policies targeting the airline industry will continue to hinder the industrys ability to recover losses in periods of economic hardships.