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The Aviation Economy Essay Sample

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Introduction of TOPIC

             The economy today is a very complex entity. There are a lot of flourishing industries and industries yet to be developed. One of these flourishing industries is that of aviation. General Aviation encompasses flying operations excluding military and scheduled airline operations. Although it is not that popular as industries such as real-estates, stock trading and others, it has become a quite important issue because of the globalization and the need for air transport.

            As said above, the necessity of air transport is growing. In 1990, there were only 465 million passengers in need of air transport. It surged up to 650 million passengers in year 2000. The increase in the number of passengers is still ongoing. According to the Federal Aviation Administration (FAA), it will increase up to 982 million, about 51% more compared to the number of passengers in 2000. Together with the increasing need for the transport, not all airlines have done the task efficiently. Airline delays were reported to have gone as much as 450,000 in year 2000. It is about 47% increase compared to that of 1998. Although, the blame could be put on the FAA old traffic system, it will become a very serious problem if not resolved immediately. After all, airport congestions have been rampant in this generation. (Andersen, 2001)

            Air transport is also a very crucial business aspect. As of the moment, a businessman will already lose a lot of hours, instead of being productive if the person takes a flight from the busiest airports. After all, air transport does not minimize traveling costs but the costs incurred by the company. It is a business industry anyway. Also, air transport fares have increased. However, the quality of the flights have not been counterbalanced with the said air fares. (Andersen, 2001)

             As economies grow, the need for air transport follows. However, growth spurts and fluctuations have direct correlation with the growth in air transport demands. However, in September 11, 2001, the demand for air transport decreased dramatically. Passengers were traumatized by the impending doom of terrorism. Nevertheless, after sometime, enough for the trauma to subside, and strict security measures, the demand went back to somewhat normal. (“Aviation in California: Benefits to Our Economy and Way of Life”, 2003)

            General Aviation is very important to businesses. It has the capacity to improve the productivity, in terms of profits. It also makes businesses competitive because of the improved way of transportation. In addition, General Aviation composes 1% of the United States Gross Domestic Product. Consequentially, it covers the 1.3 million high-skilled employees employed in professional services and manufacturing receiving high wages. (“General Aviation Flying Plays a Critical Role in the U.S. Economy”, 2007)

            Commercial Aviation Sector’s Impact on the U.S. Economy in 2004
Economic Impact Gross
Output
Personal
Earnings
Jobs
Direct $247.4 billion $72.5 billion 1.05 million
Direct + Indirect + Induced $1,246.9 billion $379.9 billion 11.39 million
Ratio of Total to Direct 5.0 5.2 10.8
Share of U.S.Total (%) 5.8 5.0 8.8

Source: (“Smart Skies – Benefits”, 2007)

            Although the industry has been improving through the years and the financial outlook is positive, the general financial status of the aviation industry is quite unstable. There are still debts to be settled and the ever-changing fuel prices also contribute to his instability. Pandemics, terrorism and natural disasters are also things to look out for in the industry. It has yet to attain a stable and sustainable profit while battling different kinds of turbulences. (Heimlich, 2007)

            As of 2006, the Air Transport Association of America (ATA) released an index of the status representing the leading United States Airlines. This encompasses 90 percent of all United States airline passengers and cargo traffic. The composite cost index rose to 180.4 (up by 17. 4 percent) relating to a 4.0 percent rise in the Consumer Price Index. The bulk of the costs of Airlines include: fuel, labor and transport-related expenses. 25.5 percent of the cost is allocated to fuel, 23.8 percent for labor and 14.7 percent is allocated to transport-related expenses. As said before, fuel changes makes the airlines unstable, the fuel prices increased from $1.51 to $1.97 per gallon, increasing by 31.1 percent. However, the efficiency

of fuel use increased. In a way, this increase in efficiency offset the increasing fuel prices. The

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efficiency rose from 50.5 revenue passenger miles per gallon to 61.7 available seat miles per gallon. Also, the cost of employing a full-time worker decreased by $248, making the cost only $72,301. The overall operating unit cost also increased. Instead of 11.82 cents per available seat mile, it increased by 6.3 percent, making it 12.56 cents per available seat mile. Also, the average break-even load factor dropped to 76.7 percent, dropping 3.4 points. (“ATA News Release: ATA Releases Enhanced Quarterly Airline Cost Index”, 2006)

            The year 2005 has experienced extreme increases in fuel prices and numerous hurricanes. However, the demand for air transport was still strong and grew up to 738.6 million passengers. It is a 5.1 percent increase compared to that of 2004. Enplanements, both domestic and international, increased by 4.6 percent. Furthermore, passenger traffic, determined by revenue passenger miles grew to 6.2 percent. Domestically, it grew to 5.0 percent in 2005, surpassing the average annual growth rate of 4.0 percent. In the international level, it increased by 9.7 percent. It also surpassed the average annual growth rate of 6.0 percent. The growth can be attributed to the Latin region. It was in that location where the traffic growth was very significant. (“Smart Skies Annual Report”, 2006)

            Since the fuel prices were very unstable in 2005, it was a big hurdle for airlines. Despite such predicaments, the available seat miles did not rise as much, only a 3.3 percent increase, as compared to the 8.7 percent increase from 2003 to 2004. In addition, the increasing fuel prices did not wither that much because of current trade liberalization and economic expansion of countries. Such countries include China and India. There also has been an increase in the demand for leisure flights because of the increase in leisure demands. (“Smart Skies Annual Report”, 2006)

            The percentage change in quantity divided by the percentage price is the definition of the price elasticity of demand (Varian, 2003). Given that a good is normal, that is the demand for the good increases if the income of a person increases and decreases if the income decreases, an increase in the price of the good will mean a decrease in the quantity demanded of the same good. The other type of good is an inferior good. It is a type of good wherein the increase in income yields an abnormal result. An increase in the income decreases the consumption of the good, in this type of good. Also, the unchanging demand for the goods falls under this category. However, in the case of airlines, even an increase in the price of fuel and in the airplane fares does not change the consumption and demand for the good that is the fuel and the airplane tickets.

For both goods, fuel for the airlines and airplane tickets for passengers, the abnormal behavior of quantity demanded may be observed. In the case of the fuel, the demand of the airlines of fuels is perfectly inelastic.  This is so because no matter what the fuel costs, the airlines must still spend on the commodity because the airplanes cannot function without it. Thus, the airlines cannot do anything but spend if the price of the fuel increases although it will be able to save if the price of the fuel decreases. On the other hand, the demand for airplane tickets is not the same as above. It is because the demand of people for flights is not the same. For example, a businessman who is always on the go may have an inelastic demand for the airplane ticket. Even if the price of the fare increases up to an unreasonable amount, the businessman will still demand it. But, another person, say a stingy vacationer, the fact that the person is stingy, the demand of the person will greatly be affected even if there is only a slight change in the price. So if the airplane ticket’s price increases, the stingy vacationer will opt for another location to relax and enjoy or find another means of transportation of the least cost. There may also be other cases of only a slight change in demand for a change in price.

Source: (“Demand and Elasticity”)

The demand behaviors of the cited examples may be observed in this graph. The point E signifies an elasticity of positive infinity, a perfectly elastic demand. Thus, the consumer in this case is like the stingy vacationer. The slightest of changes makes the consumer change the quantity being demanded. E1, on the other hand, is a person with a relatively elastic demand. A change in the price may affect the consumer’s demand but not as extreme as that of E elasticity. The point E2 is the unit elastic consumer. This means that the increase in price can only affect the consumer with a certain decrease in demand or increase in demand if there is a decrease in price. This is the behavior of a normal good. The last two points are on the inelastic side. Point E3 represents the relatively inelastic consumer. Like the relatively elastic consumer, the change in prices can only affect the consumer in a minor amount. And the last point is the representation of the on-the-go businessman for airplane tickets and the airlines for the fuel. No matter what the cost of the good being consumed in a perfectly inelastic manner, the consumer will still purchase the good because it is necessary.

References:

Andersen. (2001). Business Aviation in Today’s Economy [Electronic Version], 49. Retrieved April 25, 2007 from http://web.nbaa.org/public/news/stats/AndersenPart02.PDF.

ATA News Release: ATA Releases Enhanced Quarterly Airline Cost Index [Electronic (2006). Version]. Retrieved April 26, 2007 from http://www.airlines.org/news/releases/2006/news_10-31-06b.htm.

Aviation in California: Benefits to Our Economy and Way of Life [Electronic (2003). Version], 92. Retrieved April 25, 2007.

Demand and Elasticity [Electronic Version]. Retrieved April 26, 2007 from http://www.cba.ua.edu/~helder/Demand%20and%20Elasticity.pdf.

General Aviation Flying Plays a Critical Role in the U.S. Economy [Electronic (2007). Version] from http://www.gaservingamerica.com/our_economy/economy.htm.

Heimlich, J. (2007). 2007 Outlook: “Reaching for the Skies?” [Electronic Version]. Retrieved April 26, 2007 from http://www.airlines.org/economics/review_and_outlook/ATA2007EconOutlookOpEd.htm.

Smart Skies – Benefits [Electronic (2007). Version]. Retrieved April 25, 2007 from http://www.smartskies.org/LearningCenter/Benefits/default.htm.

Smart Skies Annual Report [Electronic (2006). Version], 32. Retrieved April 26, 2007 from http://www.airlines.org/NR/rdonlyres/905B6DE0-4E5C-402E-829E-A9CAA23C4DD1/0/2006AnnualReport.pdf.

Varian, H. R. (2003). Intermediate Microeconomics (6th ed.): W. W. Norton & Company, Inc.

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