Overview of the Airline Industry Essay Example

instead of luxury items. Shifts in Price Elasticity of Supply and Demand: As mentioned earlier the goods and services provided by the airline industry are dynamic in nature according to perception resulting in the airline industry having the characteristic of harboring both elastic as well as inelastic demand.The definition for the elasticity of demand states that the price affects the demand of the goods. This is true for the airline industry as when airfares are reduced or discounted packages are offered, the travel via that airline increases showing the demand for the airline industry is elastic in nature. However the elasticity of demand is limited to only the economy class and the luxury/ first class.

The business class offered by the airline industry is not affected by these price changes and as a result is inelastic in nature specially pertaining to demand as for a business traveler it is much more important to make the meeting and catch the flight in order to make it to the important meeting. The goods and service provided by the industry become normal goods for the customer resulting in price inelasticity of demand for the airline. On the supply side the industry faces elasticity and inelasticity both as well.The reason for this is that when the fares for the tickets rise the supply of the seats a by the airline does rise as well. But due to the nature of the good and the external factor which limit expansion to long term the supply of seats in the airline industry does not proportionately collaborate with the change in the price resulting in elasticity as well.

This is because it is

not possible for the industry to respond with more tickets and seats beyond the capacity of the plain in the short run. The Positive and Negative Externalities for the Industry:Externalities basically occur when the business activities of the company or the industry result having an impact on the general population or the society as whole. This can also include competition and fellow business association and as well as related industries. A positive externality therefore is an externality having a positive impact and proving to be advantageous while the negative externality is when the impact is of adverse nature.

In the economic the market is not said to be in perfect competition if there exist externalities which is actually the case in real life wit the airline industry.A study conducted on the airline industry by Lazzarini in 2003 was based on evaluating and examining the corporate constellations and how a membership in such constellations effects the airline industry. In this context the constellations are groups and affiliations being formed amongst corporate operations. The research depicted that “while constellation-specific attributes determine the total value generated by the group, member-specific attributes determine how that value is distributed among members.A firm can benefit from joining a constellation when it can capture positive externalities emanating from the presence of other firms in the group.

” (Lazzarini, 2003) This has resulted in an increase I the performance of the constellations as the customer base of the constellation has increased due to expansion as well as the passage of time. Specific to the airline industry the airline companies have to plan their flight routes and choose the fares for different distances traveled

and destination.The process of finalizing these in the presence of competition results in externalities. “In many real world situations, location is not the only variable controlled by the decision makers: price is also another important strategic instrument. Many networks are perceived as more or less attractive as the number of customers who are linked to them increases.

In the former case, economists speak of a positive externality and in the latter of a negative externality. ” (De Palma & Thisse, 1993)Aside from the above the airport noise is a negative externality which is born by the society and for which the government and the airports have to pay significant charges. The noise is considered an externality as it tends to adversely affect the population residing in the surrounding areas of the airport therefore disturbing their natural well being. The airlines and airports as a result have to pay according to the effluent change scheme if they don’t comply with the standards and technologies which need to be implemented in aircrafts to prevent this negative externality.

Another negative externality which is a by product of the activity conducted b the airline and aviation industry is the change in the climatic conditions pertaining to the specific region as well those surrounding where the operations are taking place. These negative externalities take the form of global warming and global dimming as well as the emissions of pollutants in the atmosphere which effect the health of animals as ell as human residing in the areas.