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Write 8 page essay on the topic Economic Profile for the Airline Industry.

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In the end the paper observes the influence of governmental policies on the success and failure of the airline industry.

The deregulation of the US airline industry preceded that in the European market by approximately 10 years (Alderighi et al, 2004, p. 2). Still, on both continents the process of deregulation and privatization induced important structural changes. Deregulation allowed many carriers to sign alliances to exploit economies of scale (Alderighi et al, 2004, p. 2). reduced price levels and expanded the number of services. It affected the industry structure and dynamics both on the supply and demand side.

In the airline industry there are two types of companies – traditional carriers and low cost firms (Alderighi et al, 2004, p. 7). Traditional companies offer products with different quality – economy and business – at different prices and can provide a full range of products and services at a higher cost. Low-cost carriers offer a restricted range of services at much lower prices. This is so, because traditional full-service carriers “with hub-and-spoke systems” have a high cost business model, while low cost carriers have a low cost business model (Gillen et al, 2004).

Price elasticity of supply measures how the supplied quantity responds to changes in prices (Mankiw, p. 100). In the light of the airline industry, elasticity of supply means the extent to which airline companies can adjust the number of flights for the different airline segments. Given the high maintenance costs, intensive capital structure within the industry (Skapinker, 2001), also the strict regulations and reduced flexibility in market behavior, there are not many opportunities for quick changes in airline travel supply, meaning that in the short-run supply is inelastic. Over the long-run period, though, as history has proven, the industry can adapt to changing demand. One example is the deregulation in the industry that significantly increased supply over the past 20 years (Alderighi, 2004).

5. Industry demand

The process of globalization has increased mobility of goods and people (Alderighi et al, 2004, p. 3). On one hand expansion of cargo transport has significantly increased the demand for airline transport. On the other, tourist travelers increasingly enjoy the comfort of airlines. It can therefore be concluded that the airline market demand comprises of different market segments, based on consumer type, distance and location. Business travelers form the so called “strong market” (Adlerighi et al, 2004, p. 7) whereas the weak market comprises of leisure travelers. Additionally, the travel market is divided into long-haul and short-haul travel, and international, and North American long haul travel (Gillen et al, 2004).

6. Price elasticity of demand

Price elasticity of demand measures the degree of responsiveness to change in prices of fares (Mankiw, p. 90). Because the airline industry demand is formed by two very different types of consumers – business and leisure – there is no single elasticity value for the airline travel demand (Gillen et al, 2004). Price elasticity of demand is also influenced by time and distance aspects.