Microeconomics: Principles, Problems, and Policie
McConnell and Brue in their book, Microeconomics: Principles, Problems, and Policies define price elasticity of demand or price elasticity as the measure expressing the rate of responsiveness in quantity demanded arising from a change in price. The price elasticity of supply on the other hand is the measure or the rate of responsiveness arising in quantity supplied due to a change in price. The price elasticity of demand in the airline industry can be said to be elastic as a change in price will result to a greater proportionate change in the quantity demanded. (McConnell C and Brue S, 2004).
The demand for air travel is largely affected by the price and people’s income. When the prices are lower and affordable to many the demand will definitely go up. Again, if people have higher incomes it means that they have a higher purchasing power. High prices when the incomes remain unchanged will have a negative effect on the demand for air travel In his article, ‘Why Airline Mergers Don’t work, Competing for customers, Cook suggests that the demand for air travel is very price elastic and for this reason merging the companies would not yield significant positive effects.
Merging of companies would lead to lowering of air travel fares but the rate at which the demand for them would increase would not be worth the venture. (Cook J, 2008). This would be attributed to the fact mergers may not necessarily achieve their goal of reaching a wider market share as would be the objective. The airline industry is very price sensitive and given the fact that the revenues earned could be static and the fuel prices high then merging in this industry is inappropriate. There are other vital factors to consider when increasing the demand for air travel for instance increasing the level of employee and consumer satisfaction.
Cook also cites the nature of products involved in the airline industry as another reason behind the airline mergers being ineffective. (Cook J, 2008). The high competition in this industry ensures that the prices are regulated. In an effort to increase the demand in the airline industry it is appropriate that airline industries invest in increasing the satisfaction of employees and the passengers. Ensuring a positive relationship with the partners, shareholders as well as the suppliers will also be a vital aspect to take into consideration.
In his article, US Airline Industry Headed Towards catastrophe at Current Oil Prices, Reuters points out that the increase in oil prices will negatively affect the entire economy. With the high oil prices and the high air travel prices it is unaffordable to most people. A low demand for the air travel tickets translates to reduced revenues for the airlines and this affects their debt repayment ability. Other industries will also be affected for instance the manufacturers and suppliers of aircraft related tools and equipment are affected when business is not good.
The airline industry as Reuters observes is ailing precipitating the need for government intervention. (Reuters T, 2008) According to Farrokh in Macroeconomic Policy: Demystifying Monetary and Fiscal Policy both the monetary and fiscal policies have a significant effect on the wages, employment, output, inflation, interest rates as well as the exchange rates of any economy. He further argues that fiscal policies are those measures undertaken by government and they include changes in the tax rates as well as changes in the government spending.
On the other hand, monetary policies are carried out by the central bank in a country and aims at influencing the money supply to the desired levels. Monetary policies also affect the short term interest rates. (Langdana F, 2002). Implementation of unpopular fiscal policies can be harmful to the affected industries. As the Reuters article, Airline says jobs at stake if fee hike approved points out, a fiscal policies that would ensure that passengers cater for an additional $1. 5 billion due for security issues would harm the airline industry.
(USA Today, 2005). This is attributed to the fact that the airline industry is a very price sensitive industry where merges cannot work. Most airlines try to attract passengers through fare competition that only work to see them incur massive losses. Imposing excessive taxes results to high fares and denies the airlines a chance to lower the fares as an incentive to increase the demand. Low demand will lead to minimal revenues and to cut on costs the airlines will be forced to lay off some of their employees.
The White House aim was to compensate for the security screening costs that intensified after the September 11 attack but the policy would only worsen the condition of the airline industry. As the chief executive officer (CEO) of the Air Transport Association noted the policy placed the jobs of approximately 20000 people at stake. Such policies place the airline industry in an awkward position given the ever fluctuating oil prices which also affect its operations. (USA Today, 2005). A country’s security has a very significant effect on the airline industry.
People will tend to shy away from air travel when incidences that jeopardize their security arise. The US airline industry bears this witness as after the September attack was followed by an intense decline in the demand for air travel. In the Economist article ‘How big a blow? It is clear how a weak economy has a negative effect on the airline industry. In an effort to alter the economy to the desired levels the Federal Reserve introduced monetary policies to boost the money supply in the economy. It introduced $100 billion of liquidity or money in the economy and it succeeded in lowering the economy to a 3% rate.
The government also came in by increasing its expenditure as it spent $40 billion as recovery cost and it was ready to spend more. The government assisted the airline industry with a tune of $24 billion. Although the fiscal policies can help revive an economy care must be taken as when done in long term it can be a threat to a countries resources. (Economist, 2001). Other factors must also be addressed as the monetary and fiscal policies are not a guarantee that an economy will be successful as Beck in ‘No Bail out for the US dollar’ established.
Even after reducing the borrowing rate by seven times the economy still dwindled. The housing slump, mortgage industry crisis, tightened credits as well as the high inflation all work for the downward trend in the US economy. (Beck R, 2008). Attractive interest rates in the face of a weak and unstable dollar discourage investment. Investors prefer investing in countries with a stable currency even when they offer higher interest rates. Weak currencies are a disincentive to investment and the constant fluctuations kill or rather reduce the consumer confidence levels.
To ensure that the airline industry is in operation and makes profit important considerations need to be put in account. The prices quoted by the airlines must be reasonable and affordable to the travelers. Reliability in the shipping process must also be ensured to make air travel attractive. Ensuring that both customer and employee satisfaction are maintained would also go a long way to making air travel attractive. It would also see to it that the industry register a sustained growth. Delays must by all means be discouraged as they displease the customers and they could end up using alternative means of transport.
The Airline industry is favored by several factors like globalization that makes the world a global village. This paper has by and large explained the organization of the US airline industry. It has given a comprehensive economic analysis of the industry in terms of negative and positive externalities, monetary and fiscal policies as well as how the economy affects the industry.
Air Transport Association. 2007. Economic Report. Balancing the aviation equation. Washington DC. Airports Council International. 2002. The Economic of the US Airports.
ACI. North America. Airline says jobs at stake if fee hike approved. (2005, February). USA Today. Retrieved July 23, 2008, from http://www. usatoday. com/travel/news/2005-02-11-airline-security_x. htm Beck R. 2008. No Bailout for U. S. Dollar. Hartford Courant. Associated Press July 2008, Retrieved July 23, 2008, from http://www. courant. com/business/hcallbusiness0722. artjul22,0,5285659. story Campbell McConnell and Stanley Brue. 2004. Microeconomics: Principles, Problems, and Policies. McGraw-Hill Professional Publishers. Cook, Jr. V. J. 2008.
Why Airline Mergers Don’t Work. Competing for Customers and Capital. Retrieved June 10, 2008, from http://www. customersandcapital. com/book/2008/03/why-this-merger. html Card, D. 1996, July. Deregulation and Labor Earnings in the Airline Industry. Regulatory Reform and Labor Markets. Retrieved July 10, 2008, from National Bureau of Economic Research Working Papers database, http://www. nber. org. ezproxy. apollolibrary. com/papers/w5687. pdf? new_window=1 Farrokh K. Langdana. 2002. Macroeconomic Policy: Demystifying Monetary and Fiscal Policy. Springer Publishers.