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Economic Profile of the Airline Industry
January 27, 2008

The airline industry is deeply impacted by the elasticity of supply and demand, externalities, wage inequality, and monetary, fiscal, and federal policies. The elasticity of supply and demand shifts depending on what is happening in the world. The externalities affecting the industry are many, from the state of the economy, to the events on September 11th, to the weather, all play a role in the industry’s success. As the industry fights to keep afloat, it is the employees that bare the brunt of the financial crisis that plagues the industry. The increased pressures felt by an increase in monetary and fiscal policy has leads people to wonder about the stability of the vital industry.
The elasticity of supply is elastic based on the airlines ability to add or subtract flights fairly easily. The prices of available seats are affected by the adjustments in the number of available flights. Airlines also have the ability to increase or lower prices whenever they see fit however fare increases will not work unless fares are raised by all of the airlines. If all airlines do not raise fares at the same time one airline will undercut another and the rate increase will fail. This was the case when American West increased their fairs by 5% and the other airlines did not (Airline, 2001). The rate increase was a failure due in part to the rate decrease Northwest implemented at the same time (Airline, 2001). The elasticity of demand is also considered to be elastic because consumers have many choices of airlines, seating options, and the choice of other transportation methods. One reason demand for air travel is elastic is because it considered a luxury because not all people can afford to fly. Another reason air travel is elastic is because of the unpredictable nature of the business and how it easily it is to being effected by externalities.
Externalities have a vital role in the...