Economic Impacts on the Airline Industry

Essay by crabbxx1College, UndergraduateA, January 2009

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Economic Impacts on the Airline IndustryOver the years we have been able to see how airline travel has changed. From the deregulation in 1978, to the terrorist attack of 2001, government regulations have created much of the changes (2007). How has these changes affected the supply and demand in the airline industry? Has this created positive or negative externalities? How has this changed the wages for the workers? Have monetary and fiscal policies affected the changes?With airline industry being a luxury to most of its customers the supply and demand shifts as prices change. At the present time the price elasticity of demand has been very elastic. We can see this when the prices of an airline ticket goes up, the demand for airline travel decreases, and in contrast when prices of airline tickets go down the demand for airline travel increases. But the price elasticity of supply is inelastic.

This is due to the long time it takes to increase the amount of planes within the airline. With the understanding of how prices can affect the airline, we can see why over the past few years the airline industry has been taking losses. According to the Air Transport Association the airline industry has been trying to find ways to cut cost to increase profits (2007). One way the airline increased sales was by lowering standard passenger ticket rates. The airline then increased the rates of the first class and business customer to cover the cost of the decrease in the standard passenger ticket rate. The business class customer had seen the highest rate increase since they require airline travel to meet business requirements. But the increases in the economy have other effects.

The airline has many positive and negative externalities that also affect cost in the airline industry.