Assignment 2: Final Report Example Paper Strayer Univ 552903

Assignment 2: Final Report Example Paper Strayer Universit

The US airline industry is on a winning streak following seventeen consecutive productive quarters. Even with its most significant operational costs, labor, and fuel spikes, persistent demand on increasing capacity, the airline industry remains in the black. This paper will focus on critical areas such as the assessment of favorable growth rates up through 2036, government taxation and its impact and trends on the airline industries. All signs point to growing demand for global connectivity.

Alexandre de Juniac, Director General, and CEO of the International Air Transport Association (IATA) said, “The world needs to prepare for a doubling of passengers in the next 20 years. It is also a huge challenge for governments and industry to ensure we can successfully meet this essential demand” (1).

Size and Growth Rate Assessment

The IATA, in its latest press release, updates that the airline industry is expected to see roughly 7.8 billion air travelers in 2036, almost double the 4 billion air passengers anticipated to fly this year. This latest update comes from the most recent release of the IATA's 20-Year Air Passenger Forecast, which is based on a 3.6% average Compound Annual Growth Rate (CAGR) (2).

Global air travel is expected to sustain favorable growth rates up to 2030, notwithstanding hurdles faced within the industry. High jet fuel prices and slow economic growth worldwide caused strains within the industry. Although challenging, improvements in passenger totals offset tense economic circumstances, which quickly translate into increased financial performance of the airline industry. Strong representation in passenger patronage supports an impressive GDP growth of 3.5% (the strongest since 2010). Subsequently, the global aviation industry is predicted to reach up to 33.8 billion US dollars in profits by the close of 2018, up from barely 8.3 billion in 2011.

Annual growth reports show that between 2017 and 2036, the number of airline passengers is expected to increase at a combined annual growth rate (CAGR) of 4.7 percent (2).

Key Indicator to Monitor: Inflation

In the airline industry, important macroeconomic indicators are unemployment, inflation, and the business cycle. Inflation, in particular, influences both the business cycle and unemployment rates and must be monitored closely. Inflation impacts airline earnings by increasing the costs associated with goods and services, including fuel, which leads to steeper ticket prices and potentially canceled routes to lower costs. Economic theory describes an inverse relationship between inflation and unemployment, known as the Phillips Curve, where high inflation can reduce unemployment in the short term but may lead to long-term economic instability (3).

Inflation decreases the purchasing power of customers, which adversely affects demand for air travel. Additionally, increased fuel costs due to inflation lead airlines to raise prices, decreasing customer demand further. Since 1996, the inflation-adjusted price of air travel to consumers has halved; nonetheless, the overall spending on air travel by international tourists increased by 15% in just over two years to over $750 billion in 2018 (4). This suggests that despite inflation, the travel industry continues to grow, albeit with increased costs transferred to consumers.

Financial instability caused by inflation influences industry employment levels and service quality. Elevated inflation and fluctuating interest rates contribute to the ebbs and flows of the business cycle, which consists of periods of economic expansion and contraction (5). The long-term nature of the airline industry's business cycle makes it susceptible to inflationary pressures, which can induce periods of low earnings and affect stockholder value.

Trends in the Airline Industry

Recent trends indicate that profits within the global airline industry declined in 2018 due to rising fuel, labor, and interest rates, which significantly increased operating expenses. The International Air Transport Association (IATA) lowered its profit forecast for 2018 by 12%, forecasting a profit of $33.8 billion, down from an earlier estimate of $38.4 billion (6). Fuel costs have surged, with jet fuel prices estimated to reach $84 per barrel—exceeding earlier forecasts that projected $70 per barrel. CEO comments from industry leaders, such as Douglas Parker of American Airlines, highlight that fuel prices have spiked dramatically, impacting profitability (8).

Moreover, inflation has directly impacted airline ticket prices, which increased by approximately 10.01% from 2000 to 2018, translating to a rise of about $10.01 on an average $100 ticket (9). The increase in fuel costs has forced airlines to pass some of these expenses onto consumers, influencing ticket revenues and profitability. United Airlines' income statements from 2017 to 2018 demonstrate the tangible impact of rising fuel costs on net income and revenue growth efforts (10).

Conclusion

Inflation is a critical macroeconomic indicator that significantly influences the airline industry. Its effects extend to increased operational costs, altered consumer purchasing power, and changes in demand. Although global GDP and other factors like tourism, trade, and productivity also drive industry growth, inflation remains central to understanding market dynamics and pricing strategies. The airline industry responds to inflationary pressures by adjusting ticket prices and operational costs, impacting profitability and growth prospects.

Government regulations on security, taxation, and infrastructure development further shape industry outcomes. As the industry continues to expand, primarily driven by rising demand for global connectivity, airlines must adapt to economic fluctuations, fuel price volatility, and regulatory challenges. Maintaining profitability amid these factors will require strategic management, cost control, and innovative pricing mechanisms to sustain growth in an increasingly competitive global market (11).

References

• 1. International Air Transport Association. (2017). 2036 Forecast Reveals Air Passengers Will Nearly Double to 7.8 Billion.
• 2. Statista. (2018). Annual growth in global air traffic passenger demand from 2005 to 2018.
• 3. OpenStax. (2015). The Phillips Curve.
• 4. International Air Transport Association. (2018). Air Passenger Market Analysis – April 2018.
• 5. OpenStax. (2017). Tracking Real GDP over Time, OpenStax CNX.
• 6. International Air Transport Association. (2018). Economic Performance of the Airline Industry, Mid-Year 2018 Report.
• 7. Reid, D. (2018). Airline profits to slump in 2018, industry body says.
• 8. Cameron, D., & Olson, B. (2018). Companies Feel the Impact of Rising Oil Prices.
• 9. Bureau of Labor Statistics. (2018). Consumer Price Index – Airline Fares.
• 10. Hepher, T., & Brown, V. (2018). Global Airlines Issue Warning Over Trade Tensions.
• 11. International Air Transport Association. (2017). Strong Airline Profitability Continues in 2018.