The factors effecting airline business

Fuel

Fuel cost is a major factor impacting the airline industry, influencing everything from
profitability to ticket prices and even flight operations. Though the airlines try to mitigate the
impact by employing various methods.

Source. Transport of geography.org

Here's a breakdown of the key effects:

Financial Impact:

 Profitability: Fuel is typically the single largest expense for airlines, accounting for around 30%
of operating costs (source: IATA). Fuel price increases directly squeeze profit margins, forcing
airlines to find ways to cut costs elsewhere or raise fares.
 Hedging Strategies: Airlines use fuel hedging usually 30-60% of their fuel expenses for next year
to mitigate the risk of price fluctuations. This involves buying contracts to lock in fuel prices at a
 certain level for future purchases. However, hedging can be expensive and sometimes falls
short of eliminating the impact of price swings.
 Fuel Surcharge: At times of surging fuel prices one response by airlines has been to impose fuel
surcharges on top of the base fares for flights. The actual surcharge paid by the traveler on a
given route will depend on several variables, including but not limited to operating carrier,
cabin, and country of origin.

Operational Impact:

 Route Optimization: Airlines might adjust their route networks to focus on more fuel-efficient
routes or destinations with higher passenger yields (revenue per passenger) to offset fuel costs.
This could involve cutting less profitable routes or using smaller, more fuel-efficient aircraft.
 Flight Operations: Airlines may implement fuel-saving measures like optimizing flight paths,
reducing taxi times, and using single-engine taxiing on the ground whenever possible.

Passenger Impact:

 Ticket Prices: The increase in oil prices creates a considerable hurdle for airlines due to the
difficulty of adjusting ticket prices to cover the additional expenses. When passengers purchase
tickets in advance, the prices are typically fixed and may not account for fluctuations in fuel
costs at the time of travel. Consequently, airlines find it challenging to accurately reflect these
current fuel prices in the ticket prices, making it harder to offset the rising operational costs
caused by the surge in oil prices.
 Airline Consolidation: In extreme cases of high fuel prices, some airlines might struggle
financially and be forced to merge or go out of business. This could lead to reduced competition
and potentially higher fares for passengers.

Industry Trends:

 Focus on Fuel Efficiency: Airlines are constantly investing in newer, more fuel-efficient aircraft
with advanced engine technologies. Additionally, research and development efforts focus on
alternative fuels like biofuels to reduce reliance on traditional jet fuel.
 Environmental Concerns: Fuel consumption also contributes to greenhouse gas emissions.
Airlines are under pressure to implement sustainable practices and reduce their carbon
footprint, which aligns with the overall goal of fuel efficiency.

Overall, the impact of fuel on the airline industry is significant. Airlines constantly strive to
manage fuel costs while maintaining profitability and offering competitive fares to passengers.
The fuel price fluctuation does bring discipline in selecting routes with higher profit margins and
operationally selecting ATS routes and times of arrival and departure that minimize holding in
the air or on ground. The industry is also looking towards new technologies and practices to
reduce fuel consumption and lessen the environmental impact.
GDP
In total, 1 percent of the country's GDP is supported by inputs to the air transport sector and
foreign tourists arriving by air. (IATA)
The air transportation sector exerts a significant economic influence, both through its direct
operations and its facilitation of other businesses. The contribution of the air transport sector
includes direct, indirect, and induced impacts that are interconnected with the overall revenues
generated by the industry.

Number of air travel trips Vs GDP

Source: ourworldindata.org

In general, a higher level of GDP per head of population is associated with a higher level of
penetration of air travel (the correlation is quite strong, as indicated by the R squared value of
0.7). That said, there is also a huge range of different levels of penetration even within a narrow
band of GDP per capita, and so there are also other factors affecting the propensity to fly.
Vales(2015)
Source:CAPA

inferred that income elasticity was the most important factor in determining the demand for air
travel.
The Study by Suryan (2017) , indicates the GDP per capita has substantial impact on air travel
demand with the elasticity 2.23 for time-series analysis and 1.889 for panel estimation. In India
and China, there was also a positive association between GDP per capita and air passenger
traffic
The density of the chart in the bottom left corner highlights that there are a large number of
countries with below average levels of wealth and of air travel penetration. Only 34% of the
countries on the chart have GDP per capita above the global mean, but these countries account
for 70% of the total number of seats. Only 45% of the countries have more airline seats per
capita than the global mean, but they account for 70% of total seats.
The disproportionate impact of the wealthier and higher penetrated countries drags up the
global averages, but many of the world's nations are still playing catch-up when it comes to air
travel.