Economic of the Airline Industry Essay Example | Topics and Well Written Essays - 2000 words

Economic of the Airline Industry - Essay Example Changes in investment activity, employment, and prices may be a recurring and frequent manifestation of economic development in a competitive and dynamic economy. Kanter (1995:71) on his work of "Mastering Change" argues that success in the present day business is not for those companies that re-engineer the way they do things, or for those fixing the past. According to Kanter (1995) such an action will not constitute an adequate response. This is so because success is based on an organisation's ability to create, rather than predict the future by developing those products that will literally transform the way the world thinks and view it self and the needs (Kanter 1995:71). This report looks at the industry environment of the airline industry, the microenvironment, and the global environment. This report draws primarily on Porter's interpretation of the literature on industrial organization economics to identify competitive forces. The central theme in the paper is that, if an airline company is to survive and prosper, its management must understand the implications that environmental forces have for strategic opportunities and threats. Focus on the paper is on the determinants of demand of air travel. The paper also looks at the nature of competition of the low airline industry. According to Jayathi (2005), competition in the airline industry has been fierce since the industry was deregulated in 1978. Under the believe that through deregulation more competition would improve efficiency and reduce prices and bring overall benefits to the consumer. Jayathi (2005), postulates that, while practices like monopolies, cartels, price discrimination, are considered inefficient allocation of resources in other industries, it can actually be beneficial in the case of the airline industry in bringing about an efficient equilibrium (Jayathi 2005). All things being equal, the demand of air travel will be affected by a number of important change drivers. Using Porters five forces and the PESTLE framework the factors affecting the demand for air travels will be explained inline with the demand and supply graph. Figure 1 and Two According to Johnson et al (2005), in the macroeconomic environment changes in the growth rate of the economy, interest rates, currency exchange rates, and inflation rates are all major determinants of the overall level of demand. Adverse changes in any of these can threaten profitability in an industry. For example, Johnson et al. (2005) states that a fall in the interest rate will increase consumers desire to borrow , and consequently more financing options for air travel. Where interest rates are high, this will affect the airline industry negatively. From Figure one above, an increase in the prices of air fare tickets from D1 to D2 increases demand for air travels from Q1 to Q3. In addition, the PESTLE model further refers to technological factors as important change drivers in determining demand in the airline industry. In the post-World War II period, the pace of technological change has accelerated, unleashing a perennial gale of creative destruction (Johnson et al 2005). Technological change can make established products obsolescent overnight, but at the same time, it can create new products and processes. Thus technological cha