How the Aviation Industry Is Affected by the Economy

I have chosen this topic because the airline industry in the economy of any country plays a very important role. Today’s airlines face many long standing problems. The historical trends show the true story of what is happening in the airline industry. There are many factors that contribute to these problems and Increase in fuel rates/cost is one of them. The value of a barrel of oil has a direct impact on airliners within the World’s aviation industry, at the present moment the price of a barrel of Oil has held at about “$89 a barrel”, this figure however, is very unstable.

To emphasize further, in mid July 2006 a barrel of oil had broken the “$78 mark” and has since stabilized, the long term issues however, suggest the value of oil could rise even further which can of course have cost complications for airliners. With the current political disputes in Eastern Europe and the unrest in the Middle East, the cost of oil is likely to rise, as is the unstable nature of this resource and industry in general.

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According to the latest statistics from the General Aviation Bureau, due to the fuel price surge, the cost of fuel has accounted to 41% of the cost of major business of airline companies. The whole airline industry has an additional cost expenditure of 1. 27 billion. Why does the airline industry which is always sensitive to price change take no action this time? The South-west Airline Company said “if we raised the ticket price at this time the passengers would scare away”.

Several transportation companies also mention that the domestic transportation is steady but not rising, and it would be further overwhelmed if the airline raised prices now. Therefore under the present condition of fuel price surge, the airline should lessen costs through management strengthening, cost lowering and efficiency improving, but not simply raise the price. Passenger carriers have reported over $10 billion in 2005 net losses. Industry debt now exceeds $100 billion, while the industry’s $15 billion total market profit continues to decline.

Our ability to borrow to support continuing losses is lessening. The few airlines that have been able to achieve a profit are doing so under tremendous difficulty. The reasons for the dangerous condition of the industry are clear. Profit has declined dramatically following the 9/11 attack on America. Although carriers are aggressively reducing costs where possible, stubbornly high fuel prices and escalating security and insurance costs, among other things, have combined with a particular vengeance in an under-performing economy.

The industry has already achieved annual savings of over $10 billion in capital and operating expenses. Issues such as fuel prices, however, are obviously beyond our ability to battle alone The industry was suffering from the softening economy in early 2001. The events of 9/11, however, drove losses that year to $7. 7 billion, despite the $5 billion in government compensation for the costs of the terrorist shutdown of our aviation system. A few years back the picture darkened when despite industry cutbacks in spending, losses topped $10 billion.

And analysts predict that the industry will lose another $2 to 4 billion this year, meaning that airlines are on target to lose about $25 billion in the 2008 to 2013 period. Increases in fuel prices affect the airlines in two ways; the cost of fuel has an obvious and direct impact on the cost of operation, and fuel cost increases have repeatedly triggered economic recessions, which in turn result in a decline in demand for air travel and air cargo.

Fuel price increases have a negative impact on airlines because even in good time fuel costs account for roughly 10-12% of our operating expense. Every penny increase in the price of jet fuel costs the airline industry $180 million a year. In the absence of pricing power – the ability to pass these costs along in the form of higher airfares – these increases come right off the bottom line. An even more hurtful aspect of the fuel price increase is the relationship between the economy and air travel. The link between fuel prices and the health of the economy is clear.

Three of the major recessions of the past thirty years can, in large measure, be attributed to the steep increases in fuel prices that accompanied the 1973 Middle East oil embargo, the 1980 Iran Crisis, and the1990-91 Gulf War. The airline industry is undeniably tied to the overall economy – even minor recessions result in reduced demand and increased sensitivity to prices for leisure as well as business travelers. Past fuel spikes and attendant recessions have brought about widespread hardship in the airline industry. As analysis shows, airline profitability suffers as a direct consequence of a weakening economy.

During the first Gulf War, almost half of the major airlines filed for protection under Chapter 11 of the Bankruptcy Code, long-standing airlines went out of business, more than 100,000 airline employees lost jobs, and the industry went into a financial tailspin from which it took years to recover. We all have much at stake – it is not simply a matter of airline finances; it is the national economy. Civil aviation has a profound impact on the U. S. economy.

A recently completed analysis found that in calendar 2009: · Civil aviation’s total impact on the U. S. economy amounted to 9% of GDP. $343 billion and 4. 2 million jobs were produced in civil aviation or in industries related to civil aviation such as travel and tourism. · Combined direct, indirect, and induced economic impact of civil aviation totaled $904 billion and 11. 2 million jobs. Without question, the financial situation of the airlines has had a negative effect on the U. S. economy. Of the jobs lost in the United States since 9/11, according to the Bureau of Labor Statistics – nearly half have been in the travel and tourism sector. As airline pain spreads, communities across the country are dramatically affected.

Forced contraction in the industry means less service or no service to some communities, increasingly isolating them from the economic mainstream. The airlines are doing everything they can to conserve fuel. Throughout the history of commercial aviation, airlines have insisted upon the most fuel-efficient aircraft possible and have worked with airframe and engine manufacturers to reduce fuel consumption. In fact, our fuel conservation efforts have resulted in a fuel consumption rate of almost 40 passenger miles per gallon in today’s aircraft – a rate that compares favorably with the most fuel-efficient automobiles.

Changes in cruise speed, use of flight simulators, sophisticated flight planning systems, increasing load factors and the introduction of newer, more aerodynamic aircraft designs combined with modern engine technology, are all recent success stories. Airlines continue to look at every possible facet of their operations to further improve fuel efficiency through measures like taxiing on one engine, delaying startup and push back, removing all discretionary eight, and using ground power instead of on-board auxiliary power units while at the gate. These and similar measures are increasingly being used where commensurate with safety considerations to save fuel and, not incidentally, to reduce emissions. However, as of today our options for further dramatic improvements on the order of what we have been able to achieve over the past few decades are limited; leaving not only the aviation industry vulnerable but also all other services dependant upon air travel for a profitable living.