External Issues in Aviation Economics

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Table of Contents

Airline Competition
Tourism Demand
Jet Fuel Prices
Pilot Shortages
Exogenous Shocks
Conclusion
References

Aviation is a complex industry that depends on many different factors, both advantageous and problematic. In particular, it is sensitive to a variety of external pressures, many of which can be unpredictable. As an example, the current situation regarding the COVID-19 pandemic has developed in the space of months and led to the shutting down of many critical airline routes. The unpredictable disaster has caused severe damage to the airline industry, and similar events will likely continue happening in the future.

To maintain a level of preparedness that would enable the industry to withstand such large-scale issues, one has to understand various problems and their effects. To that end, this essay will discuss five prominent external issues: airline competition, tourism demand, jet fuel prices, pilot shortages, and exogenous shocks.

Airline Competition

Before deregulation, competition among different airlines was low, and companies were free to charge high prices. Regulatory agencies would protect companies that entered the market early and forbid newcomers from flying the same routes (Forsyth, Gillen, Mayer & Niemeier, 2018). However, eventually, this system was abandoned in favour of a more permissive approach where companies only needed a government license to begin setting up routes.

According to Gross and Lück (2016), the action coincided with the development of space-efficient aircraft such as the Boeing B747 and other advancements. Low-cost carriers (LCCs) emerged, which used new approaches and drove their expenses down, offering affordable services that traditional companies could not duplicate (Cook & Billig, 2017). Unused to compete, traditional companies struggled to adapt, giving up market share to the newcomers amid a general increase in traffic.

Generally, competition is healthy in an industry, as it forces the participants to keep improving and deliver the best experience to the customer. However, as Moore (2016) notes, airlines can generally only compete on price, which drives their profit margins down into minimal numbers and making investment unattractive. As a result, airline companies try to stifle competition out by forming mergers and alliances rather than compete traditionally (Dempsey & Jakhu, 2017). As Walulik (2017) states, such formations can deliver superior services that are not possible for an individual business, eventually driving smaller participants out of business. As a result, alliances present the danger of turning their local industries into monopolies or oligopolies.

Tourism Demand

As airlines became accessible to middle-class flyers, tourism traffic began growing, eventually becoming a significant source of airline revenue. According to Camilleri, Camilleri and Acocella (2018), there were 25 million tourists globally in 1950, 674 million in 2000, and 1186 million in 2010. New developments, such as alternative accommodations, have further increased the demand, and companies struggle to adjust (Taneja, 2018). Moreover, customer interest is shifting from the traditional destinations of Europe and America to regions such as Asia (Graham, Papatheodorou & Forsyth, 2016). Companies that serve markets there struggle to meet the increased demand, hurting themselves and these countries.

The relationship between tourism demand and airline traffic is complicated, as each factor affects the other in some manner. Fu and Peoples (2019) claim that LCC seat capacity increases can drive visits to the nations where the flights in question go. However, Graham and Dobruszkes (2019) posit that this factor cannot generate a sufficient improvement on its own and needs the assistance of other factors. On the other hand, Duval (2016) provides a list of carriers that serve tourist destination and suffer from undercapitalisation and low demand. Airline companies have to be careful to improve tourist traffic without overextending and ultimately struggling to survive.

Jet Fuel Prices

Jets consume large amounts of fuel, which, consequently, constitute a significant portion of an airline company’s expenses. According to Chuck (2016), fuel expenditures represent up to 40% of an airline’s operating costs due to a 262% price increase between 2001 and 2012. As a result, businesses in the industry depend on fuel prices, and crude oil indexes affect their stocks directly (Kathiravan, Selvam, Maniam & Venkateswar, 2019).

The reason is that the rate at which an airline buys fuel is usually set to an index price with a set margin added (Hughes, 2020). Contracts in which the business buys fuel at a fixed price for some period exist, but they are associated with another set of risks (Vasigh, Fleming & Mackay, 2017). As such, airlines are subject to significant volatility because of their dependence on a historically turbulent value such as the crude oil index.

Biofuel is generally considered a viable alternative, as it has a variety of advantages. However, airlines tend not to show any interest until it becomes more economically feasible than traditional fuel, which is rising in price (Rhoades, 2016). Even with this increase, fossil fuels are cheaper than the current variations of biofuel, which are still in the early stages of development (Riazi & Chiaramonti, 2018). With that said, Gutiérrez-Antonio, Gómez-Castro and Hernández (2018) propose a variation of biofuel that can compete with fossil fuels in price. The stability of biofuel prices and its other advantages should drive widespread adoption by airlines once inexpensive, large-scale production begins.

Pilot Shortages

Airline travel is inherently dangerous, necessitating the usage of extensively trained pilots, who also operate in pairs. As a result, it is challenging to teach new professionals, and the amounts of passengers continuously outpace those of the pilots (Arvai & Schonland, 2017). Older professionals retire, and there are not enough new pilots to replace them and accommodate the rising demand (Bor, Eriksen, Hubbard & King, 2020). According to Hammond and Czaban (2018), small airports are affected by this phenomenon the most, as airlines tend to assign pilots to routes with the most traffic. Overall, the situation is concerning, particularly with its future implications in mind.

In theory, the increased demand for pilots should drive their pay up, making the profession more attractive and bringing in new workers. However, according to Meyer (2015), company requirements tend to be too stringent for recent graduates, who do not attain enough flight experience in schools to qualify for a job as a commercial pilot. Another issue is that women have traditionally had problems in their career paths as airline pilots (Opengart and Ison, 2016). Airlines are starting to consider single-pilot flights, though current technology does not support such a practice yet (Cummings, Stimpson & Clamann, 2016). Unless companies lower their pilot requirements, develop ways to develop professionals, or improve their technologies, pilot shortage issues will escalate in the future.

Exogenous Shocks

An exogenous shock is defined as some event that is caused by non-economic factors, such as a natural disaster. Halpern and Graham (2018) describe these as events such as terrorist attacks, wars, and health concerns. According to Vasigh and Rowe (2020), the airline industry is particularly vulnerable to exogenous shocks due to the volatility of demand. Moreover, an exogenous event can start companies on a spiralling downward trajectory, even if it ends quickly (Cronrath, 2018). The severity of seemingly small-scale shocks can be demonstrated by the Eyjafjallajökull eruption, which led to the cancellation of 17,000 flights (Cusick, Cortes & Rodrigues, 2017). This topic is particularly important at present due to the ongoing COVID-19 pandemic.

Terrorism and epidemics are two factors that can influence the performance of a specific nation’s airlines significantly. Vasigh, Fleming, and Tacker (2018) claim that the 9/11 attacks reduced traffic in the U.S.’s biggest airport, leading to the loss of $1 billion. The SARS outbreak in the early 21st century was considerably more severe, totalling a loss of $7 billion (Jaffe, 2015). The reason is that airlines are known to facilitate the spread of disease, dramatically reducing the willingness of passengers to use them and prompting governments to cancel flights (Heng, 2016). The same consideration can be applied to the current situation, suggesting that it presents a significant risk for the airline industry.

Conclusion

There are numerous issues of which one should be aware when considering an airline’s future. Firms are forced to operate at small profit margins, which takes away from their flexibility and punishes any misjudged move severely. As a result, the industry is highly volatile, a trait that is exacerbated by its reliance on fluctuating factors. The situation that surrounds pilots indicates that the sector will also jeopardise itself in the future unless it can adjust. Lastly, exogenous shocks can be devastating for airlines because they are vectors for the spread of epidemics, have been used for terrorism in the past, and are generally more affected by risks than other modes of travel. This volatility is likely to continue unless a significant reorganisation of the industry takes place.

References

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Camilleri, M., Camilleri, M. A., & Acocella. (2018). Travel marketing, tourism economics and the airline product. Cham, Switzerland: Springer.

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