Economic Analysis of the Airline Industry
Axia College of UOP
ECO 305 Economic Theory
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
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