The aviation industry is particularly susceptible to external economic factors because it affects and depends on a substantial number of industries. Also, because the industry involves operating between borders, then economic factors from other parts of the world other than the domestic market also affect it. Issues such as fiscal policies (both within and without the countries of destination), wage inequality and positive and negative externalities have a way of changing operations within this industry.
How shifts and price elasticity of supply and demand affect the aviation industry
Supply and demand price elasticity of airline carriers may vary depending on the nature of the industry. For new and emerging industries such as the Indian aviation sector, then price elasticity of demand and supply is near perfect. The number of carriers being added into their markets are largely affected by the nature of demand for the commodity the country underwent rapid economic growth in the late nineties thus setting the stage for a shift in the country’s business arena. Many people within India had a renewed need for utilizing aviation services because of internationalizing their businesses. This demand for the commodity led to rapid expansion within the sector and increasing numbers of carriers. (Keller & Buttler, 2000)
However in traditionally developed countries such as the US, supply has exceeded demand. Consequently, air tickets go for much lower prices than they should. Besides that, aircrafts are reducing their capacity to cope with decreasing demand for the service. They are even trying to cut down on labor costs so as to cope with this low demand in the service. This also makes it very difficult for new entrants to do well in the industry and severely impedes their success. (Doganis, 2002)
Effect of positive and negative externalities
One of the major positive externalities that one has to consider when examining the aviation industry is its effect on the economy. Many experts have asserted that the aviation industry has numerous effects on the GDP of the country under consideration. For instance, a carrier provides employment to a substantial percentage of its country’s unemployed. This means that the aviation industry reduces unemployment rates. Also, it boosts the tourism sector and the hospitality industry in general.
The aviation industry has the capability of exposing a certain country to new markets. The overall effect of this is an increase in the following
- Trade improvement
- Business efficiency
- Increasing number and quality of growth sectors
- Boosts investments
- Improves other aspects of the economy
It should be noted that there are some negative externalities as well. Top on this list is environmental emission. The aviation industry utilizes the highest amount of fuel in the transport sector. Consequently, it is also responsible for the rising amount of carbon emissions into the atmosphere. This is the reason why many governments have passed laws intended on regulating the quantity of emissions emanating from aircrafts. The UK has been very keen on these factors, as they have passed stringent laws to curb excess emission. The country has established carbon limits for the industry and those who stay within their limits can sell their carbon balances (virtually not literally) to other airline companies that fail to stay within their limits. This goes a long way in encouraging airline operators to operate within their limits thus causing them to substantially reduce their output of harmful emissions.
Aircraft companies are responding to increasing concern for environmental sustainability by changing the designs of the engines. Due to technological changes, many carriers can now access engines that use as much as seventeen percent less fuel than they did in the past. On top of this, it is now possible to create aircrafts that encourage laminar flow thus utilizing less fuel. However, these technological changes do not come with a price. Most of the airlines that have embraced these changes have had to dig deep into their pockets to accommodate those changes. (Keller & Buttler, 2000)
Another aspect that is instrumental to the aviation industry is the issue of terrorism. The airline industry is particularly vulnerable to this issue owing to the fact that an aircraft transports a large number of passengers. Consequently, terrorists who want to attract the attention of the world can easily do so through this avenue. On top of that, aircrafts usually carry a multicultural mix of clients and it is therefore possible to communicate to variable governments through the airline industry. Airlines provide the means that enable potential terrorists to enter target countries. The worst incident in this regard is the September 11 attacks. After this incident, the US government decided to beef up its security measures in all entries into their country especially the airports. The airline industry was affected by this because they were the ones that had to cover costs of these improved security measures.
Another externality affecting the aviation industry is the issue of noise regulation. Airports are known for their noise because aircraft engines have to burn a lot of fuel in order to take off from their respective destinations. The consumption of fuel energy has to be countered by another form of energy i.e. sound. This is what constitutes that heavy noise. Many airports built near residential areas have a tendency of disrupting lives in residential areas. This is especially so during nighttime. Consequently, airlines have had to purchase aircrafts that make less noise during take off or build their airports in areas that are far away from residential areas. Since noise is considered a source of pollution, government bodies have passed legislations to minimize that pollution. This is especially true in environmentally conscious states such as Britain. (Keller & Buttler, 2000)
Effect of monetary and fiscal policies
Taxes within any country have a direct bearing on the performance of domestic or foreign carriers. This is because whenever the government chooses to impose higher taxes on the industry, then these additional costs are carried forward to the consumer in terms of ticket prices. On the other hand, airline operators may choose to minimize their labor costs by reducing the number of employees that operate under their wing. (Doganis, 2002)
In the United Kingdom, the aviation industry fell victim to overall fiscal policies after government realization that the aviation industry was not taxed as duly as it should be. After institution of more stringent taxation laws within the aviation industry, it was found that the number of cargo operators went down. Similarly, UK passenger outputs drastically reduced.
The airline industry is also particularly vulnerable to charges made by government bodies. These include issues such as air traffic control charges and track access charges. Most of the costs incurred with regard to the type of scheme under consideration have affected the aviation industry negatively since these contribute to higher production costs.
Countries in which airline companies are operated by the government tend to under-perform. These carriers are not susceptible to market forces and passengers have very little say in the sector. However, when governments decide to liberalize their aviation industries, then this creates a very positive impact upon airline operators. It encourages privately owned airlines who compete on the basis of their quality of service rather than on monopolistic forces. A perfect example of such a fiscal policy was in the Asian continent in India specifically. India made the choice to liberalize their aviation industry and hence witnessed tremendous growth within the sector. The country now boasts of seventy-five percent share attributed to private carriers. It has also grown by a whooping twenty percent this year. (Doganis, 2002)
The amount of infrastructural investment within the aviation sector has a substantial effect on the performance of the industry. For instance, if the government makes large investments in infrastructural facilities that support airlines such as building more airports or improving the ones that exist, then chances are that such an industry will perform well. It should be noted that monetary policies are determined by governments and directly affect allocation of resources. This is the reason why infrastructural development is usually likened to government policy. Besides this, the government should also goes out of its way to ascertain that most of the infrastructure necessary to make the aviation industry successful is available for instance, building access roads to airports.
Wage inequality and the aviation industry
The airline industry has some characteristic wage inequality issues currently. Experts indicate that due to this wage inequality, the aviation industry has been recording negative performance in terms of employee turnover. Most of the employees affected by these inequalities tend to look for other alternatives outside of the aviation industry. Generally, workers are not happy with what they are making in the aviation sector and the situation is particularly evident in the United States.
Within the US, almost eighty percent of the employees in San Francisco’s airline industry get less than ten dollars per hour. These wage inequalities have caused the federal state to intervene in this situation. They have decided to pass legislations that would require air carriers to increase their minimum wage by a whooping thirty percent. (Doganis, 2002)
However, it should be noted that airline wage costs were deregulated by most western states. Consequently, wage payments have been left in the hands of airline operators themselves. Some of the problems faced by workers in the airline industry today were largely determined by deregulation of these labor costs. Research studies on employee earnings in the nineties (after wages were deregulated) indicated that employees began earning less. This was true in almost all sectors, more especially in aviation. For instance, it was found that secretaries, managers, pilots and flight attendants all registered lower earnings at that time.
Wage inequality between firms was largely evident in certain professions. For instance what pilots earn in one particular company differs tremendously from what they will earn in another company. This trend is especially highlighted when one analyzes some of the union data available within the country.
Employees within the aviation industry are just as susceptible to job losses as other workers in the country. In the nineteen nineties, the US underwent rapid retrenchment in almost all sectors of the economy. The aviation sector was not left behind. Most of the personnel had to deal with the same issues that their respective counterparts were undergoing. Those that lost jobs lost them as result of the overall employment climate within the country.
Overall summary of how the economy affects airline industry / Conclusion
The aviation industry causes positive externalities such as; encouraging tourism, heightening employment and boosting investment within any one country. This could bring about an overall increase in the GDP. However, some of the negative externalities associated with the industry include emission of noise, excessive emission of harmful gasses into the atmosphere thus causing pollution. (Keller & Buttler, 2000)
The aviation industry is affected by monetary and fiscal policies in that government decisions to tax airlines eats into their operating costs. Also investments in infrastructure have a large role to play. It can also be asserted that the decision to liberalize the aviation industry can bring about many positive effects into the industry. Closely linked to fiscal and monetary policy is the issue of wage inequality. Companies that operate in countries with job losses are likely to witness the same within aviation. However, statistics show that inter-firm disparities in wages are quite high especially with regard to pilots. Lastly, the aviation industry is affected by elasticity in supply and demand depending on the size of the industry and how long it has been in operation.
Keller, R. & Buttler, G. (2000); Handbook of Airline Operations – Aviation Week;
Doganis, R. (2002); Flying off Course- Economics of International Airlines, New York, Routledge