Summary: The Airline Industry

According to the encyclopedia, the airline industry is “the business of transporting paying passengers and freight by air along regularly scheduled routes, typically by airplanes but also by helicopter.” (Airline, 2016). The airline industry is constantly growing and is central to the expansion of other industries taking place (The Airline Industry, 2016). It is a major industry that many people rely on. The recent changes in the airline industry have greatly impacted our economy and our spending habits when flying. Through the introduction of shorter routes, and alleviation from the government, the airline industry is constantly changing and enforcing a greater impact to our economy as a whole. Many people perceive the airline …show more content…
Generally, lost cost operators are smaller airlines that offer cheaper fares but reduced luxuries. Low cost airlines have also been affecting and revolutionizing the performance of the airline industry with low fares that appeal to consumers. For example, Southwest is a relatively new airline that is gaining in popularity amongst consumers (Gowrisankaran, 2002). Unlike most airlines, Southwest is different from their competitors because they do not use a ‘hub and spoke system’ (Gowrisankaran, 2002). This system refers to, “a system of airline routes that allows for efficient use of airplanes to cross into other airports to distribute passengers along international flights” (TOH, 1985). This offers a large range of destinations for consumers and allows the airline industry to flourish. With more variety for consumers, low cost operators can boost their services and increase overall profits. Low cost operator’s air fares are typically lower than larger airlines because they do not offer many of the luxuries other airlines include; meal service, movies, etc. (Gowrisankaran, 2002). Another reason their air fare is relatively cheaper than their competition is due to their short routes; short routes equal less oil being consumed, which ultimately leads to lower prices for consumers (TOH, 1985). Through these effective tactics low cost operators have now made their way into the market …show more content…
Studies have shown that within the past 25 years, there has a significant relationship in demand regarding the change in airfare prices and passenger demand (Estimating Air Travel Demand Elasticities). Increase in prices correlates to a decrease in consumer consumption: thanks to low cost operators, more customers are flying to further destinations for tourism and thus, improving air fare sales overall. The increase of low cost operators in the airline industry have also increased competition all together and increased price sensitivity on customers (Pearce). However, lower airfares imply that the airfare is becoming a smaller part of the time spent on the average journey, this implies a reduction in the consumer’s sensitivity to price (Pearce). Passengers who use air travel for tourism are more likely to be sensitive to the cost of travel than those who travel for business purposes because tourism is a luxury, however; this does not mean business travelers are insensitive to changes in airfare prices. Therefore, low cost operators have become favorable with frequent fliers. As you can see in the graph, business travel has also expanded the demand for air travel because more companies are investing internationally (The Airline Industry, 2016). International trade has contributed