Introduction to Air Transport Economics: From Theory to Applications


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Introduction to Air Transport Economics: From Theory to Applications

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Please verify that you are not a robot. Would you also like to submit a review for this item? You already recently rated this item. Your rating has been recorded. Write a review Rate this item: 1 2 3 4 5. Preview this item Preview this item. In one comprehensive textbook, it applies economic theory to all aspects of the aviation industry. Find a copy online Links to this item Table of contents Table of contents Table of contents Table of contents Table of contents.

Show all links. Allow this favorite library to be seen by others Keep this favorite library private. Find a copy in the library Finding libraries that hold this item Introduction to air transport economics. Merges the institutional and technical aspects of the aviation industry with their theoretical economic underpinnings. This book includes articles and institutional developments that have characterized the field of airline economics. Read more Reviews User-contributed reviews Add a review and share your thoughts with other readers.


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Be the first. Add a review and share your thoughts with other readers. Airlines -- Deregulation -- United States. Airlines -- United States -- Cost of operation. Aeronautics and state -- United States. Aeronautics and state. Aeronautics, Commercial -- Finance. Airlines -- Cost of operation.

Airlines -- Deregulation. United States. Verkehrswirtschaft Luftverkehr Flygtrafik. In the early chapters the reader is introduced to the elementary ideas of demand and supply and market equilibrium. This is followed by an in-depth presentation of costs and their key applicability to managerial decision-making.

The basic economic principles are then applied to a unique analysis of the effect of air traffic control and the governmental ownership of airports on the industry. Following this, there is a thorough discussion of market structures and how they affect the industry. In particular, this section introduces the idea of contestability theory which appears to be particularly applicable to this industry. The international aspects of the industry and global alliances are then discussed in detail.

The final chapters are devoted to what might be called applications of the earlier theoretical chapters. There is an elementary overview chapter on the various types of forecasting that are prevalent in the industry. The next chapter ties together the basic principles of demand that were covered earlier in a somewhat more sophisticated xxiii. Clear numerical examples are presented, tying this mainstay of the industry to the theoretical idea of elasticity of demand.

This discussion is followed by another unique chapter that is entirely devoted to the phenomenon of so-called low-cost carriers. Finally, the book presents a decidedly nO l-conventional approach to the controversial topic of safety within the industry. That is, rather than the conventional safety at any cost approach which is in reality not followed anyway , the text adopts a more balanced cost-benefit approach to this important topic. As economists in a university that specializes in the aviation industry, our preferred approach is to apply economic principles to the industry, and this is the area where we see the unique need.

Therefore, we feel that this book will be the first to bring all of these areas together under one cover. In summary, and as discussed above, our approach follows a more or less standardized format. That is, we first present the necessary economic principles that will be used to analyze the industry. We follow this with a discussion of institutional arrangements, particularly in the international area, that make the aviation industry a truly global enterprise.

Finally, the closing chapters are devoted to practical applications and comparisons within the industry. It is our hope that the text will appeal to interested readers within the industry, as well as students who intend to enter the industry. If you want to be a millionaire, start with a billion dollars and open an airline. Soon enough you As the comment above implies, in the last 30 years the airline industry's earnings have fluctuated wildly mostly downward. The purpose of this chapter is to describe the evolution of air transport industry, including airlines and airports.

The airline industry The financial condition of the airline industry Airline industry consolidation Factors affecting world air traffic growth The economic impact of the air transport industry The outlook for the air transport industry. It is the case that makes me the proudest. Since the US Airline Deregulation Act of , the US airline industry and, to a certain extent, the global airline industry has been characterized by volatility. Periods of high revenues are followed by periods of economic drought. The most recent economic. This volatility produces airline bankruptcies, extensive layoffs or employee pay cuts, loss of shareholder wealth, and great uncertainty in the market.

Prior to deregulation, the airline industry was relatively stable with minimal losses and healthy profits; however, it was also clear that this state of affairs was due mainly to government regulation that virtually eliminated any meaningful competition between airlines and certainly prevented new competitors from entering the market. The biggest loser in all of this was of course, the passenger, who had to pay ticket prices that were Bet to cover average airline costs with no competitive discounts permitted. Therefore, while deregulation may seemingly have caused huge financial losses, it also reflected the fact that airlines were faced with their first bout of meaningful competition and some did not measure up.

On the other hand, deregulation also opened up the opportunity for some airlines, such as Southwest Airlines and Ryanair to post some of the greatest profits in the history of the industry. Figure 1. The major reason why the deregulation of the US airline industry had such a large impact on the global airline industry is that the North American airline industry has been the most dominant aviation industry in the world. As Table 1. Europe, with a Other aviation markets, in addition to Europe, have also emerged - in particular, the airline industries of Asia-Pacific and the Middle East.

In Boeing projected that by China will require nearly 2, new airplanes, making China the 2 largest commercial aviation market outside the United States. Airbus now forecasts that both Asia-Pacific and Europe will surpass North America in terms of seats being flown Airbus, It is interesting to note that in terms of international passengers, both the Asia-Pacific and Europe markets already surpass the United States Table 1.

Europe's dominance in international air transportation is mainly a result of its historical ties to former colonial countries and its relatively small geographical area. Because of this small area and significant government support for other surface transportation mainly railroads , most. Economic growth in Eastern Europe will also undoubtedly increase that region's share of international travel. Thus, the growth in international traffic is certainly a dominant trend in the air transportation industry. Another trend in the air transportation industry is the growth and expansion of the cargo industry.

Tables 1. The Asia-Pacific region is the dominant region for cargo especially international cargo and its year-by-year growth rates are quite high. Much of this growth is a result of China's burgeoning economy and the large and growing amount of exports that come from the region.

North America's share of total cargo was still the highest as of May , but the negative growth rate indicates that the industry has probably reached a plateau. According to lATA predictions, intra-Asia freight will be 8. Table 1. While the North American market contains the highest number of commercial aircraft, it also contains a relatively high percentage of older aircraft 24 per cent. For aircraft manufacturers, this is attractive as many of these older 3. Europe, on the other hand, does not have very many older aircraft 7 per cent , probably as a result of the stringent noise regulations implemented by the European Union that effectively banned many older generation aircraft.

Finally, some correlation can be made between the number of new aircraft and a region's economic growth. For example, both Africa and Latin America have high percentages of older aircraft 54 per cent and 44 per cent respectively , while more prosperous regions such as Europe and Asia have low ratios 7 per cent and 12 per cent respectively.

This means that North America has now become an attractive market to aircraft manufacturers because of replacement requirements , whereas regions such as Latin America and Africa are less as attractive since airlines in those regions continue to renew their fleets with secondhand aircraft. A final way of analyzing the composition of the air transport industry is to analyze traffic data on an airport-by-airport basis. The rankings of the top airports mirror the distribution of passengers by regions as evidenced by the two largest airports in terms of passengers.

Since North America is the largest market in terms of passengers, it is not surprising that Atlanta and Chicago are the top two airports. Conversely, since Europe is the top region for international passengers, it should come as no surprise that the top four airports, in terms of international passengers, are in Europe. Also, many ofthe airports on the international passenger traffic list are airports located in countries that have small or non-existent domestic air travel markets. The impact of the growth of China's economy is clearly shown through the Moreover, the development of Dubai and Emirates Airlines as an international hub is reflected in Dubai's The division of airports by region in terms of cargo volume is not so clear-cut, but both North America and Asia-Pacific airports are well represented in the top Memphis is the busiest cargo airport in the world, and this is a direct reflection of the fact that FedEx has its main hub there.

A similar situation occurs for Louisville with UPS. In the Asia Pacific region, the large volume of export trade has spurred cargo growth, especially in Hong Kong and Shanghai. Source: Compiled by the authors using Airports Councillnternational data. Note: Data ;s based on the 12 months preced;ng and indud;ng May Most of these guys are smoking ragweed.

The US Airline Deregulation Act of dramatically changed the global financial condition of the airline industry as other countries began to follow suit and deregulate their own industries. Also, as mentioned earlier, prior to , the industry was relatively stable, chiefly as a result of the government's enforcement of non-competitive regulation and pricing. During the post-deregulation era the industry took on the more cyclical nature of a competitive industry, in which periods of robust financial profitability could be followed by periods of severe economic distress.

As in other competitive industries, the financial condition of the airline industry is highly related to economic growth, so it is not surprising that it suffered when the economy stalled. In the early s, shortly after US deregulation, the airline industry suffered a minor crisis as the economy slowed and competition soared. More specifically, the US domestic. The result was four years of global net losses for the industry, largely based on the situation in the United States.

A similar situation occurred in the early s as the economy once again experienced a downturn, but this downturn was aggravated by political uncertainty from the first Gulf War and increased fuel costs. While the early parts of each decade following deregulation have proved to be troublesome for the airline industry, the industry recovered sufficiently to post record short-run profits in the late s and again in the late s. This was partly due to the overall improvement in the global economy, but financial distress and competition also caused airlines to be more innovative and conscious of controlling costs.

Tools such as revenue management and frequent-flyer programs were created and developed during these periods. In addition, technological innovations allowed the airlines to improve their profit margins. For example, simpler cockpit design has enabled the reduction in the number of flight-crew members, better engine design has reduced the number of engines required to fly long distances, and fuel costs have been reduced as a result of more fuel-efficient engines.

A more recent technological innovation has been e-ticketing, which allows airlines to reduce their ticket distribution costs. The post-deregulation airline profitability cycle continued into the twenty-first century, with the global industry experiencing its worst downturn in the history of commercial aviation.

Added to this were rising jet fuel costs, increased airline operating costs stemming from overcapacity in domestic markets, and increased security costs at commercial airports. With the resurgence of economic growth, the global airline industry returned to profitability in However, political instability in various parts of the world, rising fuel prices, and persistent competition between network and low-cost carriers has meant that the road to recovery has been slow for the airline industry.

This situation has been most evident in the North American market where the high-profile bankruptcies of US Airways, United, Delta, and Northwest highlighted the increasing effects of fierce competition from lower cost airlines and the bloated cost structures of the more traditional airlines. Globally, we see some different patterns. In , the US airlines returned to profitability after many years of losses. There have been some bright spots in the industry as bankruptcy protection has in some cases enabled carriers to restructure their costs and receive wage concessions from labor groups.

Moreover, the overcapacity issue has been addressed, with carriers not only reducing capacity as a whole, but also shifting capacity to international markets that are less competitive. Only recently, in , has capacity reached preIevels. Several low cost carriers have also remained successful and profitable by continuing to expand while.

Innovations such as e-ticketing and fleet rationalization have been instrumental in helping airlines achieve cost reductions, and these reductions have narrowed the cost gap between network airlines and low-cost carriers LCCs. Source: Compiled by the authors using lATA data. Excluding US restructuring costs. As shown by Tables 1.

This highlights a trend in the global airline industry where the cargo industry is thriving because of the increased globalization of the business marketplace. Network carriers did well, especially in Europe and Asia-Pacific. Interestingly, Air Canada was the only major North American airline to make the list, while regional.

Low-cost carriers, such as Southwest, Gol and Ryanair, had a very successful , with three low-cost carriers, all from different continents, ranked as the highest commercial airlines, based on operating profit margin. The global airline industry is well on the road to recovery, with lATA forecasting a global net profit in the first since This global profit is largely spurred by a forecast that the North American market will break even.

This is critical to global profitability because this market represents roughly 40 per cent of the world's aviation. However, threats to profitability are ever-present, with fuel costs constituting the largest threat. In fact, for many airlines, fuel costs are now higher than labor costs, and airlines have few options in dealing with them. For example, the Therefore, as this extra cost is passed on to the consumer, the relative price structure should remain proportionately the same. In this case, the ultimate question of profitability depends to a large extent on the elasticity of demand for the product and the cost containment ability of the airline's management.

In , Southwest Airlines overtook Delta Air Lines to become the largest domestic carrier in terms of passengers flown in the United States. This highlights the fact that low-cost carriers are capturing more of the domestic market share while legacy network carriers are losing theirs.

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This is mainly due to the low-cost carriers' continual expansion and the advantages they possess because of their lower cost structure. Another major trend in terms of market share is the emergence of regional carriers. In ExpressJet, American Eagle, and Skywest had less than 1 per cent combined market share, yet in early they had acquired 7. In this case, the reason was the increased use of regional jets by legacy carriers to open up new markets and combat low-cost carriers.

In fact, an American Express travel survey has shown that average US domestic airfares have steadily declined since Amex, Historically, mergers rapidly increased following deregulation in For the ten years following deregulation there were 51 airline mergers and acquisitions Dempsey, The result of these mergers and acquisitions was the creation of six legacy carriers from the 15 independent carriers that had close to 80 per cent US market share in Dempsey, Although the number of mergers reduced during the s, critics argue that most mergers were still part of well-planned strategies to reduce competition in various markets.

To approve the merger, the DOT must now balance the consumer benefits resulting from mergers against the possibly negative effects of increasing concentration Dempsey, On the other hand, the extraordinary financial problems of legacy carriers suggest that reductions in capacity, whether through mergers or alliances, may be inevitable.

Some economists argue that less intense competition, through consolidation and coordination, can actually benefit. While mergers and acquisitions have slowed in the United States, the relatively low HHI and the poor financial condition of the legacy carriers indicates that there is still the potential for additional mergers and acquisitions within the industry. Moreover, airline mergers are not limited to the United States; they have played a large part in international aviation. A few recent international mergers include:.

Historically, mergers have not been very successful in the aviation industry. Many mergers do not realize the benefits envisioned when planned, and one-off merger costs, such as aircraft painting and IT harmonization, end up being far more costly than planned. Airline mergers also bring difficulties in dealing with labor groups, especially with regard to such issues as merging seniority lists.

Corporate culture can also be a. Many of these stakeholders are suspicious of the mergers because they fear lessened competition and. Many potential mergers have been thwarted by regulators, and one of the key measures that regulators use in analyzing potential mergers is the planned mergers' affect on the HHI. However, there are, as mentioned, potential benefits from airline mergers. The principal benefit of mergers is cost rationalization. Since the airline industry exhibits large economies of scale, merged airlines are able to spread their high fixed costs over a greater network.

Another major benefit of mergers is network harmonization.

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This can include a variety of things, but in the final analysis the merged airline's route network is greater than that of the individual airlines. America West was predominantly a west-coast airline while US Airways was primarily an east-coast airline, but the merged airline had a strong route network on both coasts. Without a merger either carrier would have found it difficult to in increase its presence on the opposite coast. The economies of scope that resulted from the merger allowed US Airways to widen its customer base and strengthen its market power throughout the United States.

Another way to look at consolidation in the domestic US industry is to look at it at the airport level. After deregulation the major carriers adopted a hub-and-spoke system, funneling passengers through a few airports Dempsey, This in tum led to some carriers holding dominant positions at certain hub airports throughout the United States.

The general trend in airport consolidation from through is one where the largest carrier has become less dominant. This has occurred for all the airports presented in Table 1. In Dallas, Delta's withdrawal left American Airlines as the only major airline still operating; this also left Dallas as the most consolidated airport of the top 10 domestic US airports in The general reduction in consolidation at US airports can largely be attributed to two factors: first, increased competition, particularly from low-cost carriers; and, second, major carriers pushing more lying to regional affiliates.

Low-cost carriers such as Frontier and AirTran have situated themselves in the dominant hubs of Denver and Atlanta, and have been successful at taking away market share in those airports. With the emergence of regional jets, major carriers have been pushing capacity towards regional carriers in an effort to reduce costs. These new CRJ NextGen aircraft have featured Significant operating cost improvements and the increased use of composite materials.

Since the Form41 data used in Table 1. For example, ExpressJet operations at Houston are separate, even though the flights are marketed by Continental. This could potentially distort the level of consolidation at airports with large regional carrier presence. As shown in Table 1. This mirrors a similar trend when consolidation is analyzed on an airport basis.

However, it is important to remember that the level of consolidation at major US airports is much greater than the level of consolidation of the airline industry. The least. Therefore, in at least a few markets, potential airline mergers could have a much greater and controversial effect on the level of consolidation at some major airports. This complexity helps explain why air travel can be growing significantly in one country or city and why it is stagnant or floundering in another-chief among these factors is the level of prosperity in the region.

This amount of economic prosperity is measured by such indicators as gross domestic product GDP or gross national product GNP. GDP is the total market value of all final goods and services produced in a country in a given year. Increased prosperity derives increased demand for air travel in two separate, but concurrent, ways. First increased economic activity helps generate employment, which ultimately causes an increase in business travel, the most important segment of travelers for airlines. Business travel is the primary reason why world financial centers such as London and New York have experienced strong air traffic growth.

In addition, increased economic activity also spurs air cargo growth. The second result of economic prosperity is a decrease in unemployment and a concurrent increase in household income. People have more discretionary income and are able to afford more leisure travel trips. A good example of this has been China where a growing middle class has fueled a large expansion of air travel within the country.

A decrease in the real cost of air travel will also create air traffic growth. This was first experienced in the s when deregulation resulted in a dramatic decline in the cost of air travel. A greater number of people could now afford air travet and they took advantage of the opportunities. Low-cost carriers generated increased air travel with low fares, and airports experienced tremendous growth in their passenger statistics as soon as a low-cost airline initiated service. This phenomenon has been coined the "Southwest Effect".

Ryanair is accomplishing similar feats in Europe where almost everyone can now afford weekend getaways. Another factor influencing world air traffic growth is population growth rates. Strong population growth rates in developing countries such as India and China have helped spur air travel growth. However, population growth must generally be accompanied by income growth for this factor to significantly affect air travel. Economic liberalization is another major factor impacting on air transportation.

Government restrictions on an economy, such as wage and price controls or excessive regulation, ultimately constrain demand. When such artificial barriers are lifted, the marketplace dictates demand for goods and services, and increased air travel is almost always the result. The reason for this is the fact that government regulation in the aviation industry usually involves ticket prices and market access - that is, favored air lines usually a national airline are granted monopoly access with some sort of a fare structure that is structured to cover average costs.

This effectively eliminates competition and restricts the growth of air traffic.

Introduction to air transport economics : from theory to applications

A good example of economic liberalization is the United States itself. Following deregulation, airfares plummeted and air traffic growth increased significantly. Moreover, the freedom for airlines to fly to whatever destination they wished made flying more convenient for passengers by providing more non-stop flights with greater frequency.

Recent air transport liberalization in Europe and India has led to a tremendous growth in air traffic in these countries. Politics and political stability also play a role in air travel. It is not surprising that countries that choose extremely protectionist and radical policies do not experience great air traffic growth; in these cases, the government restricts air travel as a matter of political policy. Political instability can also greatly influence air travel; since people do not want to. It is likely that political instability can be blamed for the poor air traffic growth rates in those parts of Africa where governments are in constant turmoil.

Terrorist attacks can also affect air travel. After the tragic events of 11 September , air travel dropped off drastically as passengers no longer felt safe traveling. In addition, many felt that it was also unsafe to travel to other international destinations in case some other terrorist attack should occur.

Finally, the amount of leisure time people have can affect the demand for leisure flights. Tourism promotion can also help spur an increased demand for air travel to a particular destination. Generally, the commercial airline industry has closely followed the movement of the domestic economy. Since deregulation, the large US commercial air carriers have averaged an annual growth of 4. And, as has been mentioned, international aviation continues to grow with lATA forecasting higher growth rates than the US industry pearce, This growth has been largely spurred by the soaring economies in the Asia-Pacific region.

So, what economic impact is the growth of air transportation likely to have on the economy? Economic impact can be divided into three categories: direct, indirect, and induced. Direct impact represents economic activities that would not have occurred in the absence of air transportation. In the air transportation industry, both airlines and airports provide the economy and local communities with a direct economic impact. Examples of direct economic impacts include the salaries of airline personnel, fuel purchased, landing fees, salaries of airport personnel, and other similar purchases and expenditures.

Examples of indirect economic impacts for air transportation include hotels, restaurants, and other retail activities. There is usually a causal relationship between the industry and indirect impacts. For example, if a community experienced a reduction in air travel, the hotel industry in that community would most likely suffer a fall in room occupancy rates as well. Finally, induced economic impacts are the multiplier effects of the direct and indirect impacts. Induced impacts account for the increased employment and salaries that corne from secondary.

The total of these economic impacts measure the importance of an industry in terms of the employment it provides and the goods and services it consumes. The following sections explore the effect of air transportation on each of these economic impacts. Direct Impact Direct economic impacts are the consequences of what might be termed first-tier economic activities carried out by an industry in the local area. In the air transportation industry, airports provide the greatest direct impact to local economies. The reason for this is the more or less obvious fact that the economic activities that take place at the airport directly involve the local economy.

Most direct impacts, like airport employment and fixed-based operations, occur at the airport; others, like the local production of goods and services for use at the airport, may occur off-site. Expenditures by airlines, fixed-based operators and tenants also generate direct impacts, but only those expenditures thatlead to local business activity are relevant for a regional economic assessment.

For this reason, it is important to distinguish between the local value-added component of expenditures and the regional import component. Thus, airline expenditures on fuel generate local fuel storage with distribution systems and also contribute to the importation of fuel into the region. In most parts of the country, only the former component is relevant for any local economic impact analysis. Therefore, the direct economic impacts of air transportation for a community are usually measured on the basis of the airport's immediate economic activity.

In addition, large aircraft manufacturers can generate a huge direct economic benefit by locating their production facilities in a given community or state. There are, of course, numerous other examples of large direct economic impacts provided by the air transportation industry. Indirect Impact Indirect impacts derive from off-site economic activities that are attributable to air transportation activities. For example, indirect economic impacts include services provided by travel agencies, hotels, rental car companies, restaurants, and retail establishments.

These enterprises have a strong relationship to the air transportation industry and, like airport businesses, employ labor, purchase locally produced goods and services, and invest in capital projects. Indirect impacts differ from direct impacts because they originate entirely off-site. Typically, indirect economic impacts are generated by visitors to the area, who are traveling by air. A good example of an industry that has a strong indirect economic impact relationship with air transportation is the hotel industry. Airlines provide economic benefits to the hotel industry by requiring hotel rooms for passengers who have business, or are vacationing, in a city.

This increased demand for hotel accommodation in the city creates employment and may require the construction of more hotels, thereby creating more economic impact. The large demand for hotel accommodation caused by air transportation is one of the main reasons why areas around major airports almost always contain numerous hotels. Induced Impact As mentioned earlier, induced economic impacts are the multiplier effects that are caused by the increases in employment and income generated from the direct and indirect economic impacts of air transportation.

A simple example will help make this concept clear. Imagine a new airline employee who purchases a house in the local community. The builder of the house then uses this income to purchase other goods and services, and the income to the suppliers of these goods and services is also spent. This framework of expenditures is the basis behind the multiplier effect-that is, one transaction leads to multiple economic transactions.

More economically self-sufficient regions tend to have higher multipliers than do regions that are more dependent on regional imports, since more of the spending and re spending is done within the region. Therefore, the larger the region under consideration, the higher the multiplier will be.

Total Impact Total economic impact is defined as the sum of direct, indirect, and induced impacts. It is usually expressed in terms of economic output, earnings, or employment sometimes full-time equivalents. The report for each airport was done independently and at different times, but the methodology used for each is similar. Although the six they all provide strong economic impacts for their communities. When airports vary in normalized in terms of commercial departures, Wichita and Memphis both generate one job for every departure. In Memphis one additional daily flight would generate approximately new jobs for the region.

Wichita's extremely high ratio is probably attributable to the large manufacturing and maintenance facilities for Cessna and Bombardier. The presence of FedEx in Memphis explains its high economic impact to departure ratio. And, finally, much of Seattle's total economic impact can be attributed to the simultaneous indirect economic impact of the presence of aircraft manufacturing giant, Boeing, and of tourism. These disparate examples highlight the diversity cargo operations, manufacturing, and tourism and strength of the economic impact of the aviation industry.

Therefore, the air transport industry is expected to grow significantly in regions where economies are developing, such Asia-Pacific, while other regions' air transport outlook is expected to be steady. GDP and economic growth are strong leading indicators of the air transport industry's growth, so, in the short term, these measures can be used to assess the industry.

However, direct correlations between GDP and air transport growth are never exact, due to a variety of issues. For example, structural barriers in the air transport industry can cause drastic differences between economic growth and the growth of the air transport industry. A good example of this was the effect of deregulation in the United States; deregulation was a major structural change that caused a rapid increase in the air transport industry's growth compared to overall economic growth. Airport capacity and, in the US, antiquated air traffic control are also potential structural barriers.

Major international airports in the United States and Europe have severe capacity issues with relation to the number of aircraft that they are capable of handling. As these capacity limits are reached, delays at these airports tend to increase exponentially. These delays, especially if they are on an ongoing basis, discourage demand and constrain growth.

This capacity barrier to air transport growth is a prime reason why Airbus embarked on the creation of its new super-jumbo A aircraft. The two major sources for the long-term air transport outlook are Boeing and Airbus. Each aerospace giant has published its forecasts for the future of the aviation industry. They have similar growth estimates for world air traffic growth, with Boeing forecasting that world revenue passenger kilometers RPKs will grow at 4.

Airbus forecasts a greater annual growth rate 5. These global RPK forecasts mimic the historical global growth rate of 4. However, the key to understanding the global air transport industry is on a regional basis Boeing, a. Both Airbus and Boeing also forecast worldwide demand for new aircraft for the next 20 years. Not surprisingly, each company's forecasts vary slightly, highlighting each company's strategic plan and product offerings. Boeing a estimates that there will be a demand for 23, aircraft seating over 90 passengers in the next 20 years, while Airbus forecasts a worldwide demand for 21, similar-sized aircraft over the same period.

Although both companies agree that roughly 70 per cent of the demand for 6. Airbus forecasts demand for 1, very large aircraft s and As , while Boeing a only forecasts aircraft in this segment. Furthermore, the firms differ on where demand for new aircraft will be, Boeing a still forecasts that the North American market will be the largest market for new aircraft mostly narrow-body aircraft , while Airbus forecasts the Asian Pacific market will order the most aircraft in the next 20 years.

In addition, Airbus foresees greater low-cost carrier growth in this region to spur narrow-body sales. One other sector of the air transport industry that should be mentioned is the air cargo market. Both Boeing b and Airbus forecast world air cargo to grow by about 6 per cent per year for the next 20 years. This worldwide forecast growth outstrips passenger growth forecasts, and this situation is especially true in international markets where the air cargo industry has not developed to the extent of the passenger industry.

As a result, demand for cargo aircraft new or secondhand is expected to be strong, especially for wide-body aircraft. China is expected to lead the way in air cargo growth, both domestically and internationally. The US domestic air cargo market appears to be mature, with Airbus forecasting a modest 3.

SUMMARY As the preceding discussion and statistics amply demonstrate, the air transportation industry is a large and growing segment of the domestic and international economies. As such, it is an important area for economic analysis. Although the industry is similar in some ways to other large industries, it has some peculiar characteristics that can best be understood in the context of standard economic analysis. The following three chapters will introduce basic economic theory, including demand, supply, costs, and production analysis.

These concepts will be presented in the context of the aviation industry with applicable examples. Global Market Forecast Boeing a. Boeing b. World Air Cargo Forecast Center for Economic Development and Business Research Deloitte Dempsey, P. Retrieved on 13 September from: www. John C. Martin Associates Paul International Airport. The Economic Impacts of the Part of Seattle. Making Mergers Work.

Airline Business. Retrieved on 31 August from Air Transport Intelligence. Pearce, B. New Financial Forecast. Retrieved on 31 August from: www-iata. Sparks Bureau of Business and Economic Research Wilbur Smith Associates This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics, or medicine-the special pleading of selfish interests.

Henry Hazlitt. The example of price controls illustrates how mistaken casual analysis can be and that any calculation of costs must consider opportunity costs, such as waiting in line when artificially low prices create shortages.

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The chapter also demonstrates how prices efficiently allocate resources and motivate appropriate behavior in the framework of Adam Smith's "Invisible Hand. A short section on public choice explains how government policy can sometimes go awry through the impact of rational political ignorance, undue special interest influence, and bureaucratic inefficiency. In this chapter we discuss the following topics: Fundamentals of economics The economic way of thinking, including:.

Once ancient astronomers had proven that the sun, rather than the earth, was the center of the solar system, several centuries passed before this truth was commonly accepted by people who weren't experts in astronomy. Economists can relate to this. However, we will soon see that common misperceptions about the economy are often more harmful than the mistaken belief that the sun revolves around the earth.


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Perhaps common economic myths are more comparable to the old notion that illness was caused by "bad blood" and that slicing open a vein to drain off some blood could increase someone's chances of recovering from pneumonia or other serious disease. In reality, of course, blood-drained patients are all the more likely to die. Errors in economic reasoning often have similar results.

Today, fortunes are sometimes destroyed, businesses driven to liquidation, and entire economies plunged into depression because of the common belief in errant economic theories-economic fallacies that have been clearly exposed in textbooks for decades and, in a few cases, for centuries. Our aim is to help you avoid many of these self-inflicted wounds, to point out the error of some common economic myths and to provide a foundation for applying economic reasoning to whatever problems are encountered.

When one observes two economists on television, most of the time, it seems, they disagree. One insists, say, that the price of oil, and hence jet fuel, has peaked and will soon decline, while the other seems certain that oil and jet fuel prices are headed much higher. Given such media appearances, many people assume that economics is a wildly controversial, unsettled field where one opinion is as good as another.

In fact, as is often the case, the popular media is extremely misleading in this regard Swartz and Bonello, Although there are, of course, some continuing controversies, there is also a widely accepted body of economic knowledge. Indeed, most of the economic principles we will discuss and apply in this text have been settled for a century or more. So, why does economics seem more controversial than it actually is? One key reason is the emphasis on economic forecasting.

Predicting the exact future behavior of human beings is extremely difficult and therefore inevitably controversial. Knowledge of economics will help you make better predictions of future jet fuel prices, but an educated guess is still a guess. However, the ability to foresee the future in exact detail is an unfairly high threshold. Doctors cannot always predict what diseases a patient might contract in the future, and different doctors might offer different predictions of how severe the symptoms might eventually be, but that doesn't mean that doctors are powerless to help you if your arm is broken.

Similarly, economists can't reliably tell you what the price of jet fuel will be four years from now, but they can layout the key factors that will determine that price. Returning to the case where two economists offer two very different forecasts, if you asked the two of them to explain the key factors that determine jet fuel price, you would probably find them in complete agreement. They would certainly agree, for instance, that economic growth tends to raise the price of all oil products because a rising standard of living.

They would also agree that some easing of environmental restrictions on oil drilling will tend to reduce the price since this will increase supply. Of course, both economic growth and environmental regulations are affected by government policies and hence political elections. So, to be certain of the future price of jet fuel, one would have to know the outcomes of future elections and exactly how politicians will affect environmental regulations and economic growth-an obvious impossibility.

However, there are problems that go beyond the complexity of forecasting. To put matters very bluntly, economists are not always completely straightforward, particularly in the context of public policy issues. The same may be said, of course, for any other profession. When, for instance, a lawyer proclaims the innocence of his client we all recognize that the lawyer is paid to make that claim and may not believe it at all. When a scientist knows that taking a certain position on global warming will garner an outpouring of favorable media attention and increase the likelihood of obtaining lucrative government grants, we understand that the allure of fame and fortune may trump integrity and scientific objectivity Agin, Alas, some economists, often very prominent in the profession, succumb to the same sort of temptation.

It is not difficult to find economists employed by politicians sometimes saying things that they know to be untrue. Indeed, economists will sometimes do this even if they are not employed by the politician they defend but in hopes of gaining future employment or just to help the politicians who they believe to be a lesser evil than their opponents Rubner, Thus, just as it's possible to find some lawyer to proclaim the innocence of any guilty criminal, it is also possible to find some economist somewhere willing to make false claims against any known economic fact.

No wonder most of the public thinks that, no matter how many economists you lay end to end, they can never reach a conclusion! There is, however, some good news. Economic truths are a good deal easier to understand than quantum physics. It isn't necessary to accept economic principles on the basis of someone's word; with a little work the average person can follow the trail of logic and reach the same conclusion that objective economists reach -to a large extent, you can learn to be your own economist. And that's why it's so essential to preserving individual freedom. Milton Friedman.

Economics takes as given that people respond to incentives in a generally predictable manner. Though this is sometimes referred to as the fundamental assumption of economics, economists believe that it is not an assumption at all but a simple fact confirmed by common empirical reality. Students spend more time studying material that is guaranteed to be in the test than material that is unlikely be in the test.

They are more likely to do an extra credit project if the project is weighed more heavily in determining their grade. If, other things being equal, the price of air travel increases, then people will fly less. People engage in any given activity more if the cost of that activity falls or if its benefits rise. The economic way of thinking is simply to take this idea of predictable response to incentives and relentlessly follow it to its logical conclusions.

We will see that many surprising insights follow from this basic idea. Demand Consider the demand for air travel in, say, the continental United States in one week. Figure 2. That is, all else being equal, people will demand more air travel at Price P2 then at the higher Price PI' Thus, if the average fare is initially PI and is then cut to P 21 the quantity demanded increases from QD1 to QD2 - an example of people responding to incentives in a generally predictable manner. The seller of any product can reliably cut price to increase sales-we'll consider exactly how much sales might increase for a given price cut in later chapters.

You might question how a slight change in price would change quantity demanded. To understand this it's useful to think of a decision-maker who is on the margin-that is, one who is almost indifferent as to whether they take a given flight or not. Consider someone, for example, who is planning a trip and choosing between flying or making a four-hour drive by car. Suppose this individual decides to drive but nearly decided to fly. News that the price of air travel has fallen, even by a slight amount, could tip this person into flying instead.

Given large numbers of diverse people, it's a virtual certainty that some decision-makers will be in this sort of position and will therefore respond to very slight changes in incentives. Note that the entire curve shifts to the right so that, for any given legend. Movement along a given air travel market demand curve: a price decrease causes an increase in quantity demanded.

Shift of an air travel market demand curve: demand increases, shifts rightward from some change other than the price of air travel. If price remains constant at PI the amount of air travel bought increases from QDa to QDb' Demand has increased because of some factor other than price; an increase in disposable consumer income, for instance, would trigger such an increase in demand Colander, Factors, such as consumer income, that cause the demand curve to shift are referred to as determinants ofdemand.

These can be various, but the most common ones include:. Any change in these determinants that make consumers willing to fly more for a given price will trigger such a demand increase. Likewise, an adverse change-such as rail travel becoming cheaper or hotels becoming more expensive will cause a decrease in demand-a leftward shift of the demand curve McGuigan, Moyer, and Harris, Supply The supply of air travel, or any other good, is based on production costs.

Long-run supply curves can vary tremendously, but short-run supply curves are reliably upward. We have the same sort of distinctions between movements along the supply curve versus shifts in supply as we had with changes in quantity demanded versus changes in demand. In Figure 2.

This is reliably the case because many factors of production can't be readily changed in such a short timeframe. For instance, an airline would typically be unable to recruit, hire and train a large number of employees that fast. Thus, to increase, say, available seat miles substantially, the airline would have to pay existing workers overtime; the consequent higher labor costs per available seat mile would mean that the airline would indeed require a higher average fare to be able to cover the higher costs.

An increase in supply occurs when the entire supply curve shifts to the right, as in Figure 2. That is, it is evident from the figure that airlines are willing to supply more air travel for the same price.

Introduction to Air Transport Economics: From Theory to Applications Introduction to Air Transport Economics: From Theory to Applications
Introduction to Air Transport Economics: From Theory to Applications Introduction to Air Transport Economics: From Theory to Applications
Introduction to Air Transport Economics: From Theory to Applications Introduction to Air Transport Economics: From Theory to Applications
Introduction to Air Transport Economics: From Theory to Applications Introduction to Air Transport Economics: From Theory to Applications
Introduction to Air Transport Economics: From Theory to Applications Introduction to Air Transport Economics: From Theory to Applications
Introduction to Air Transport Economics: From Theory to Applications Introduction to Air Transport Economics: From Theory to Applications

Related Introduction to Air Transport Economics: From Theory to Applications



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