AV630 AIRLINE OPERATIONS MANAGEMENT

CAPT. ELNIEZER JOHN DULAY

October 1, 2022

SUPPLY AND DEMAND FOR AIR TRANSPORTATION

I. Importance of Air Transportation:

a. The air transport industry is a vital component of the global transportation network.

b. Aviation provides the only means of rapid, long-distance travel which makes it essential for the
conduct global business and tourism.

c. A study produced for the International Air Transport Association asserts that “By facilitating tourism
and trade, air transportation generates economic growth, provides jobs, improves living standards,
alleviates poverty and increases revenues from taxes.”

d. Africa, has long been plagued by inadequate or non-existent surface transportation, which has
hindered economic growth, but the recent expansion of airline service provided a springboard for
growth after decades of stagnation.

e. Aviation supports business operations and efficiency, improves productivity, encourages

investment, and allows companies to attract high-quality employees.

f. Aviation is also essential to tourism, which is an important part of many national economies, often in
developing countries.

g. Aviation offers a vital link to communities that lack adequate road and rail infrastructure. This
contribution is most apparent when aircraft deliver life-saving supplies in the immediate wake of
natural disasters.

h. Aviation support millions of jobs worldwide through tourism, while tourism also supports airline
jobs.

i. Aviation contributes to globalization, which generates economic growth, provides jobs, improves
living standards, and alleviates poverty.

II. Factors Driving Global Air Transportation Growth:

a. Globalization

i. Affects the demand

ii. It broadly refers to the increasing integration of world economies and societies.

iii. The growing interdependence of the world’s economies, cultures, and populations, brought
about by cross-border trade in goods and services, technology, and flows of investment,
people, and information.

iv. The cultural, political, and environmental dimensions are important on economic aspects of
globalization.

v. Long-distance trade has existed for thousands of years and shaped much of world history, but
globalization accelerated after World War II as countries reduced tariffs, subsidies, and other
restrictions on trade in goods and services.

vi. Four Aspects of Globalization:

1. Trade:

a. The buying and selling of goods and services between different countries
around the world.
 b. Goods that are brought into a country are called imports and those that are
sold to another country are called exports.

c. Air freight is mostly used to deliver goods that are light, compact, perishable,
and have a high unit value.

d. An estimated 6.5 trillion dollars in cargo value was sent by air in 2019.

2. Capital Movement:

a. Refers to the movement of money for the purpose of investment, trade, or

business operations. Inside of a firm, these include the flow of funds in the
form of investment capital, capital spending on operations, and research and
development.

3. Migration:

a. Is the movement of a person or people from one country, locality, place of

residence, etc., to settle in another country.

b. Increased migration is one of the most visible and significant aspects of

globalization; growing numbers of people move within countries and across
borders, looking for better employment opportunities and better lifestyles.

4. Knowledge and Technology:

a. Technological progress is a key driver of improvements in incomes and

standards of living. But new knowledge and technologies do not necessarily
develop everywhere and at the same time. Therefore, the way technology
spreads across countries is central to how global growth is generated and
shared across countries.

vii. Summary:

1. The global expansion of each requires extensive international travel by executives,

managers, engineers, a host of other business specialists, and laborers.

2. In the European Union, for example, laborers commonly travel on Europe’s new low-
cost airlines to work in other countries but return regularly to their homeland.

3. As the world has outsourced much of its manufacturing to China, India, and other
low-wage countries in Asia, managers need to travel to manage their far-flung
businesses.

4. Components for the Apple iPhone are made in the United States, Europe, Japan, and
South Korea and are assembled in Taiwan and China

5. Firms throughout the world are suppliers for the Boeing 787 Dreamliner, with the
main components built in the United States, Japan, Italy, Korea, Germany, the United
Kingdom, Sweden, and France, and shipped to Everett, Washington, and Charleston,
South Carolina.

6. The production of these and countless other products is dependent on global air
transportation.

b. Demographics

i. Affects the demand

ii. These are the characteristics of a population that have been categorized by distinct criteria—
such as age, gender, and income—as a means to study the attributes of a particular group.
iii. Four Factors of Demographics

1. Population Growth

a. Population growth refers to the increase in the number of individuals in a

population in a particular year.

b. Population growth expands the potential market for air travel.

c. The current world population of approximately 7 billion is forecast to grow to

9.5 billion by 2050.

d. With two-thirds of the world’s population living on less than 10 dollars per
day (Airbus, 2015; Kharas & Gertz, 2010), most people have never flown and
cannot afford to do so, but the 6 billion people in developing countries
represent a huge potential market.

2. Urbanization

a. This is the increase in the proportion of people living in towns and cities.

b. It occurs because people move from rural areas (countryside) to urban

areas (towns and cities).

c. The world’s poor are mostly subsistence farmers scattered across vast reaches
of land. In recent decades, however, these farmers have been moving to large
cities in search of a better standard of living, and this migration is expected to
continue.

d. Airbus defines a mega-city as supporting 10,000 daily long-haul passengers

(Airbus, 2015).

e. It counts 47 mega-cities today, but expects this number to more than double
to 91 by 2032.

f. It’s the growth of mega-cities in developing countries that provides for vast
future markets. Indeed, this rapid urbanization is the major rationale for
Airbus’ flagship A-380 aircraft.

3. Diaspora

a. A group of people who spread from one original country to other countries,
or the act of spreading in this way.

b. Members of an ethnic or religious group that originated from the same place
but dispersed to different locations.

4. Per Capita Income

a. A measure of the amount of money earned per person in a nation or

geographic region.

b. Per capita income can be used to determine the average per-person income
for an area and to evaluate the standard of living and quality of life of the
population.

c. The figure illustrates the relationships between per capital income and air
trips per year. As per capita income passes 20,000 dollars per year, the rate of
air travel increases markedly.

d. Note that income in the two largest countries, China (PRC) and India,
currently falls well below this level, so air travel is still restricted to the
 relatively rich, but as tens of millions of people move into the middle class,
air travel demand will surge.

e. The middle class today comprises 37% of the population, which Airbus
forecasts will nearly double to 55% by 2032, but in the Asia-Pacific region,
the middle class will quadruple (Airbus, 2015).

iv. Summary:

1. Business travel will continue to increase, but discretionary travel from expanding
middle class with sufficient disposable income to choose air travel for holidays will
provide most passenger growth. As ethnic groups disperse across the world, travel to
visit or reunite with relatives, known in industry jargon as visiting friends and
relatives, will also contribute to leisure travel growth.

c. Liberalization

i. Affects the supply

ii. It is the removal or loosening of restrictions on something, typically an economic or political

system.

iii. Globalization and demographics drive increased demand for air travel but liberalization, or
the reduction in rules and restrictions on airline competition, enables more supply of air travel
available to consumers.

iv. As the regulation of international air services is relaxed, air services expand, fares drop, and
new airlines emerge. The largest airlines reorganize their networks and hubs, often in
coordination with partner airlines in global airline alliances, providing more flight frequency
and improved connections.

v. New airlines, mostly following a low-cost model, emerge, some as subsidiaries of existing
network carriers and others

vi. Airline Deregulation spurred air travel growth as airlines provided service according to
market demands rather than what the CAB estimated was required for public convenience and
necessity.

vii. Increased competition, especially from new entrant LCC’s, reduced prices, inducing more
people to travel by air. In the 30 years following deregulation, revenue passenger miles grow
by an average of 18.3 billion per year, more than double the 7.3 billion RPM annual growth in
the 30 years preceding deregulation.

viii. Led by U.S. Open Skies, initiatives begun in 1978, countries worldwide have gradually
liberalized restrictions on air travel, allowing freer access to their airways and markets. As
competition increased and service expanded, fares have fallen, allowing more people to afford
air travel.

d. Factors of Production

i. Affects the supply

ii. Liberalization reduces the legal restrictions on the addition of airline service to meet
passenger demand. Factors of production, on the other hand, determine the cost of
providing air transportation.

iii. The two largest airline expenses are fuel and labor.

iv. Fuel prices are volatile and difficult to predict.

 v. Lack of infrastructure may also restrict airline growth in some world regions. Many European
airports are operating at or near capacity.

vi. India must invest in airports and other aviation infrastructure if it is to meet its airline growth
potential.

vii. While high fuel cost, infrastructure, and environmental regulation could potentially impede
airline growth, improved technology will partially mitigate all three. Between 1978, and
2013, airline fuel efficiency more than doubled, and new aircraft models such as the Airbus
320neo and Boeing 737 Max promise an additional boost in efficiency that will reduce both
fuel costs and lower emissions.