Current Economic Analysis of Virgin Atlantic

Topics: Airline, British Airways, Avianca Pages: 6 (1897 words) Published: December 29, 2010

Similarly, the economic issues in the industry are also mostly concerned with deregulation. The evolution of industry structure plays an important role in determining the robustness and stability of lower airfares in unregulated markets (2000). Deregulation also keeps airline fares so low as compared to that of other countries. The reason for this is because despite the failure of most entrants since deregulation, investors continue to create new airlines. There is substantial evidence that entry, particularly by low-cost, low-fare airlines, has a substantial effect in constraining fare levels in markets served by the new carriers (2000). The second reason is that some in the industry have argued that financially marginal carriers may act in ways that depress prices below competitive levels, inducing contagion in financial distress (2000). In addition, some industry participants have argued that financially distressed carriers have cut prices in an effort to raise short-term cash, depressing market prices below efficient levels and threatening the financial security of healthy carriers. Another economic concern is the fact that the airline economy of the US is in a huge upset after the September 11 attack. Some of the companies declared bankruptcy while others are still struggling to survive (2003).

The contribution of the airline sector to the local and world economy is also another economic issue that should be noted. In UK, one of its contributions to the economy is its role in increasing jobs, whereas it was reported that aviation directly provided 180,000 jobs in the UK in 1998 - 0.8% of total employment. 40% of these jobs were in Greater London, where the industry accounted for 2.1% of all jobs (2002). This has increased over the years as attested by DfT. It reported that the aviation industry now directly supports around 200,000 jobs, and indirectly up to three times as many (2006).

The airlines industry also greatly contribute to the GDP of the UK economy as the (2002) reported that the “total value-added (i.e. the value of its output less the cost of inputs bought in from other industries) by the UK aviation industry in 1998 was estimated to be £10.2 billion in 1998 prices, equivalent to 1.4% of GDP”. It contributes specifically by region, as it makes a direct contribution as a source of output and productivity growth in its own right (2002). The Oxford Economic Forecasting (2002) also argued that good air transport links are important to encouraging inward investment into the UK and to encouraging firms already located here to base new projects in this country. Furthermore, because it is part of the transport infrastructure, it helps make business transactions faster, creates more options, and provides a boost to the tourism of the country. As transportation infrastructure theory posits, improved transport systems can boost productivity growth across the rest of the economy.

The economic prosperity that UK currently experience also have some implications on the airlines industry. According to (2003), “Economic prosperity brings with it greater demand for travel. As people get wealthier, they can afford to travel further and more often”. Currently, half the population of the UK now flies at least once a year, and freight traffic at UK airports has doubled since 1990 (2003). It has been forecasted that air travel in the UK will continue to increase over the years, but (2003) warns that this is somewhat uncertain as they may be negative factors that the industry may encounter along the way. For instance, DfT forecasted that market for air travel might mature more rapidly than expected, causing the rate of growth to slow more quickly than forecast. Furthermore, other economic concerns of the industry include the possible increase of flying costs, for instance, due to rising oil prices or due to the costs of tackling global warming.

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