Economic Analysis of the Airline Industry

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Economic Analysis of the Airline Industry
Tisha Smith
Axia College of UOP
ECO 305 Economic Theory
George Harris
March 18, 2007

Economic Analysis of the Airline Industry
Introduction
The airline industry is one that is both costly and necessary to the economy. Costly because of the funding provided by the government, recent layoffs; which has a hand in rising inflation, dealing with negative externalities and high security risks; necessary because the ease and speed of air travel is needed to keep countries productive and competitive. It is a key component to the economy. Many businesses rely on air transportation as well as consumers and individuals employed within the industry. Without this form of accelerated transportation, production necessary for economic growth would decelerate. Businesses would not be able to meet supply demands. The slump in the demand for airline travel has been caused by events such as terrorist activity; war related issues as well as infectious disease outbreaks such as SARS (Leary, 2003).

Even before these issues, the airline industry faced financial struggles after the enactment of de-regulation which caused an increase in competition. “The Airline Deregulation Act enacted by Congress in 1978, has allowed the U.S. airline industry to become the primary intercity mass transportation system in this country (Duke & Torres, 2005)” Deregulation eliminated governmental interference in setting the price of fares in the industry. Labor Supply and Demand

Wages in the airline industry have been an issue for many years because they continue to fluctuate up and down depending on current events such as bankruptcies, increased competition, a decline in air travel and terrorist activity. Higher wages in the airline industry could be attributed to the presence of a Union. When unions are present, representatives are able to negotiate higher wages for employees as well has initiate strikes and withhold labor until a desirable wage is offered. Because the industry is currently turning a profit, due to an increase in the demand for airline travel, union leaders are in a better position to negotiate better wages for airline employees.

The unions are only able to do so much. Eventually, wages of airline workers will and have been cut. If an airline is bankrupt, the goal of the airline is to save the business and do what is in the best interest of share holders, at the workers expense. Benefits have been cut as well.

Union members argue that the airline industry is using the events of 9/11 as the prime factor creating wage inequality. It is using the crisis as an excuse to cut jobs and lower wages, while accepting funding from the government to dig them out of a debt that they were in before any tragedies following 9/11 occurred. An increase in the demand and supply for airline personnel has affected the equilibrium wage. Air travel is on the rise, so the industry offers higher wages to attract quality applicants. Because wages have slightly increased, the labor supply and demand curve shifted to the right. Supply and Demand

Supply and demand can be measured by the market for air travel, that is, supply and demand can be measured based on how and what air travel is used for such as business or leisure. Use of air travel is also impacted by the distance that needs to be traveled. The demand for air travel should be slightly higher for people needing to travel longer distances.

After September 2001, there was a long stretch in which the supply exceeded the demand for air travel, causing a surplus. To compensate for lack of demand, prices were cut and jobs were eliminated. The idea was to increase the demand for air travel by decreasing fares.

Currently, prices are on the rise again as the demand for air travel increases (Reed, 2006). Consumers feel safer with increased security, government intervention and...
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