The consumer demand for a specific product will vary as the price for the product changes. The demand for a ticket to fly with United Airlines varies with price while keeping all other factors constant. Some issues that affect consumer demand and the price of a ticket include; the individuals’ budget, meaning the individual can only afford a certain amount of money for a ticket. Next is the substitution effect, where the consumer buys what is cheaper. There is rational behavior used by the consumer, who tries to use their money to get the most amount of satisfaction, or the most for their money (McConnell et al, 2002). Lastly, there are preferences that the consumer has. They may choose to fly another airline they like better instead of United Airlines even if United has the lower ticket price. United Airlines is still trying to derive a strategy to enhance their revenue and emerge from bankruptcy.
Suggestions for United Airlines to increase their revenue mainly deal with catering to the customer. With the aviation industry growing bigger each day, it is paramount for United to spoil all passengers whenever they can. With the low cost carrier stealing many of United passengers, United must concentrate on customer satisfaction, on timely departures, easier boarding procedures, and easy ticket purchasing to remain competitive. Unfortunately for United, their business is directly hit when the economy declines, so they must go above and beyond what they normally would do for the consumer.
When the issue of “supply and demand” is associated with the aviation industry, there seems to be more of a supply than a demand. This excess of supply has bankrupt many airlines like United. Some airlines had no choice but to go out of business. United Airlines in the past would show the utility of their service by pampering their business and first class passengers with champagne and steaks. Complimentary and substitute goods have direct effects on tickets prices whether it is higher fuel costs or other modes of transportation. The demand for a ticket depends on the ticket being price elastic or price inelastic. In the end, the consumer will take all of the previous in account along with their own preferences to determine their own consumer demand for the product. United Airlines has to decide what kind of customer they are going for and what they are doing above and beyond the rest of the competition. A hard task to accomplish is to get the consumer to use a product when it is not the cheapest offered on the market. United must find a way to make that happen or they may not make it out of bankruptcy.
Cost Component
In order to operate any business, it is important to control the cost as much as possible. The airline industry is hit hard with a lot of costs that are associated with the economy. After labor, fuel represents the largest cost component in airlines operations. Fuel has become one of the main cost concerns to the aviation industry, especially since the tragedy of 9/11. There are many issues that affect the overall cost to the airlines. To help cut some of these costs, technology has helped raise productivity and lower the average total cost.
An effective and efficient way of reducing costs is to use less fuel. On average airlines spend approximately $100 per minute/flight in total operating costs (labor, fuel, maintenance, etc.) (Fuel Conservation). As the war continues to linger in the Middle East, fuel costs continue to soar. Airlines that were not prepared for this increase in price are really starting to feel the pinch, and this is apparent by the bankrupt filings that have occurred thus far. Even the slightest savings in fuel costs can be the difference of an airline surviving or filing chapter 11. A 1% improvement in fuel efficiency across the industry can lower fuel costs by $700 million per year (Fuel Conservation). Fuel is a big cost component to the airlines as well as labor and maintenance.
Maintenance accounts for a significant portion of an airline's direct operating costs. In an environment where many expenses are beyond the company's influence, such as fuel costs that fluctuate with the market, and labor costs that are set by national regulations and labor contracts; maintenance is one area in which an airline does have the ability to exert some cost controls. As a result, airlines are being challenged to increase their overall maintenance efficiency. At the same time, a number of new technologies are emerging that promise to change the way that airline maintenance is performed.
One of the primary bottlenecks preventing airline organizations from rising to these challenges is a dependence on outdated IT systems. These legacy applications are designed around the old way of doing business and cannot easily be adapted to a changing business model, nor can they easily be modified to make use of emerging technologies. Maintenix is a modern, best-in-class maintenance and engineering software package that has been specifically designed to meet the needs of today's airline maintenance organization. Maintenix can help airlines streamline their maintenance program in order to take advantage of modern aircraft and engines that are designed for easier accessibility and maintainability (The Aviation Maintenance Management Software Specialists). Maintenix also provides advanced monitoring techniques, manageability of the entire maintenance process for the line, heavy and shop maintenance environments, wireless support, and also help airlines manage the maintenance work that they insource from other airlines, and manage the technical records for maintenance that they outsource to third party facilities (The Aviation Maintenance Management Software Specialists).
Cost Component comes in many different varieties when dealing with the aviation industry. Higher fuel cost couple with rising labor and maintenance costs is the biggest factor facing the airlines today. Technology has been developed, and is still being developed to help ease the burden of higher costs, and also to bring the IT department up to date with today’s sophisticated equipment. The road (or sky) is still a bumpy one for the airlines; only time will tell how these cost components are dealt with.
Market Structure Component
The Airline industry has had to restructure their whole market plan since September 11. United Airlines (UAL) has had harder troubles than most of the other airlines. UAL falls into a very specific market structure where the economy is driving the price of the ticket sales. With rising fuel costs and a flat economy, there are many implications of the market structure that have a direct effect on pricing. In order to enhance the sales of tickets, a non-price strategic plan has to be in place to enhance the sales. Also there are some suggestions on how UAL can move into a more optimal competitive position. Before that can happen, UAL has to first realize what market structure they are in and go from there.
The commercial airline industry in the United States would be considered an oligopoly. This is because of the sizable investment required to enter the market and the presence of few market participants (e.g., United, American, and Delta). An oligopoly is where an industry is dominated by a few firms (McConnell et al, 2002). The shape of a demand curve depends on the market structure, whether pure competition, pure oligopoly, monopolistic competition, or pure monopoly. The price and quantity information contained in a demand schedule permits a price setter to calculate the revenue associated with each price under consideration (McConnell et al, 2002). Changing a price is always a dangerous practice for an oligopoly. If the firm lowers the price, its competitors are also likely to lower theirs, and then all will suffer from lower profits. On the other hand, raising prices may lead to a loss of market share unless competitors also raise their prices. The safest thing is to never lower prices and only raise prices when there is abundant evidence that the other firms will also raise prices. Strategic games can explain why firms have a hard time colluding to set higher prices, which is good for consumers but detrimental to UAL.
Non-price competition focuses on other strategies for increasing market share. In the case of UAL and other airlines; this may one of the most important strategies in this tight oligopic market. UAL must employ a mass media advertising and marketing scheme to get the attention of the public. UAL can announce the enhanced seat room they now offer and their consistent on-time performance. UAL has lush sleeper seats in the first class cabin that can be used in a non-price strategy to get the wealthy, or the business traveler interested in their product. Another way UAL may use non-price competition is to offer more non stop flights to the major cities. Also UAL may offer flights to cities that are not serviced by many other airlines. These are just a few ways UAL may use non-price strategies to enhance their customer load.
For UAL and any other airline to be in an optimal position a Hub-and-spoke system must be in place. Hub-and-spoke systems allow higher traffic densities that would not be possible in a system of direct flights. This is because channeling passengers through a hub airport concentrates passengers onto a limited number of routes, and hence generates higher densities. The alternative would be to spread passengers over the larger number of aircraft that may be required in a system of direct flights. As the marginal cost to an airline of a passenger on a flight with unallocated seats is very small, any arrangement that increases traffic density reduces average cost per passenger-trip. Also, for routes where there is no competition from the low cost carrier, (international), airlines have to capitalize on the ability to charge a higher ticket price for their services. Unkind to the consumer, but imperative to the struggling airline. Acquiring as many gates and routes is another way to achieve an optimal competitive advantage over the other airlines. The system fluctuates rapidly, and it is important for UAL and the other airlines to keep their competitive edge.
Under oligopoly, a firm's profits depend on its own actions and the actions/reactions of rivals. Firms must engage in interactive and strategic thinking. With a handful of firms responsible for most of the output in each industry, avoidance of price competition becomes almost automatic. If one firm were to lower its prices, it is likely that its competitors will do the same and all will suffer lower profits. On the other hand, it is dangerous for any single firm to increase its prices since the others might hold their prices in order to gain market share. The safest thing is to never lower prices and only raise prices when there is abundant evidence that the other firms will also raise prices. The best way to gain market share is use of non-price strategies to entice the customer to fly on their airline. United can do this with the use of advertisements and the announcements of little extras like more leg room. UAL must use strategies to achieve an optimal competitive advantage. The use of hub and spoke flying to channel passengers into certain areas in order to fill seats is very important to the overall performance of UAL. Also UAL must take advantage of the routes that offer the least amount of competition. With the use of these techniques along with other strategic advertising campaigns, UAL may be able to compete with the other airlines long enough to once again become the overall leader in the aviation industry.
Economic Forecast Component
Trying to forecast the future of the airline industry is becoming near impossible these days. The industry relies so heavily on the economy resulting in a bad position for the aviation industry in the recent future. One must first forecast the economy before taking a try at the future of the airlines. There are many factors that affect the economy that impact the demand for the services UAL offers. Also there are indicators that reflect those factors. To try and make a forecast, there has to be a forecast for each of the indicators that affect the industry. The confidence of the forecast analysis for this industry has many mixed emotions, especially because of the income elasticity of demand for the pricing strategies used in recent years. This industry is still trying to recover from economic devastation.
The price of oil has a tremendous effect on the U.S. economy. The United States is the largest consumer of crude oil in the world. Jet fuel prices have climbed even faster than crude oil prices. Next to labor costs, jet fuel is the second largest operating cost for an airline. Airlines have made several attempts to recoup profits lost to higher fuel costs, including increased airfares and imposing surcharges. Instability in the Middle East and turmoil in the Russian oil industry have raised fears about world oil supplies, driving the price higher. UAL has been encountering major losses because of fuel charges. Higher ticket prices to recoup some of the lost money will only drive the customer to other airlines that have cheaper tickets. Fuel continues, and will continue to be a major factor for the cost associated with offering the servivce UAL offers. With fuel being a big concern, there are still other factors that play a role in the demand for UAL and their service they offer.
After the attacts of September 11, the economy began to take a turn for the worst. As that happens jobs start to dissapear, thus contributing to a higher unemployment rate. As unemployment rises, there is less money in the economy to be spent on luxury items like an airline trip to a vacation destination. Even businesses start to scale back on flying clients and employees to other cities because of their own finnacial distress. With the emergence in video conferenceing, there is a less demand for doing business face to face. This hurts UAL for many reasons. At one time UAL was considered the premier airline for the business traveler. Now times are changing to the point that businesses are using low cost airlines in order to save money for themselves. Unemployment rates have been higher in recent years and the direct effect on the aviation industry is evident. Employees of the airline industry is amongst the hardest hit and contribute many of thousands of people to the unemployment number. The industry is hit so hard that the government has set up programs for laid off airline workers to help them educate themselves in order to find a new field to work in. With the uemployment rate at a high percentage, it means less money in the economy to be spent, thus adding to the crisis UAL finds themselves in.
Unless investors enjoy layoffs and bankrupsy, then there will not be much success for business investment for the aviation industry. UAL had a stock price of over $100 a share in 1997, and now in 2005 it is hovering around $1.20 a share. On top of the stock tumbling to almost a “penny” stock, it has been rumored that if and when UAL emerges out of bankrupsy, they will change their symbol from UAL to something else, and all the UAL share holders will have nothing. Investment is a big part of any companies well being. The lack of investment shows a lack in confidence in the product. This also shows a lack of trust in the industry. Investors just expect a negative rate of return on their investment, so that pushes the investor into anther sector.
Senior executives of UAL use economic indicators and forecasts to make strategic decisions. They understand how each of the indicators affects their company and how to make the necessary decisions to increase profits or minimize losses. Organizations or companies such as the Congressional Budget Office, the Conference Board, and the Federal Reserve publish economic indicators based on economic trends and historical data. Although any company can use many of the indicators, such as the Gross Domestic Product (GDP), inflation, the unemployment rates and employment growth, many only apply to specific industries and not affect the aviation industry at all.
The Congressional Budget Office provides current economic projections covering a wide range of indicators. These include Nominal GDP, Real GDP, GDP Price Index, unemployment rate, three-month Treasury Bill Rate, ten-year Treasury note rate, and tax bases (Congressional Budget Office, 2005). The CBO examines and analyzes recent economic developments, major econometric modes, and commercial economic forecasting services. It has been determined that the current projections affecting Vital Processing Services electronic POS Check processing was Real GDP, which is estimated for 2004 at 4.4 percent and forecast for 2005 and 2006, respectively, at 3.8 and 3.7 percent. The unemployment rate is also crucial to check processing as it can affect the amount of disposable income consumers are willing to spend. The CBO estimated the unemployment rate for 2004 at 5.5 percent. A projection for 2005 and 2006 is 5.2 percent for each year. These projections show the economy on a continual growth pattern. It is believed that interest rates will also climb to prevent inflation.
Another institution offering economic forecasts is the Conference Board. This company provides information that serves the interests of Conference Board Associates and other senior executives by assessing economic conditions that directly impact their markets (Conference-board, 2005). The Conference Board’s forecast for Real GDP for 2004 was the same as the CBO of 4.4 percent. However, they forecast 2005 at 4.3 percent, which is 0.5 percent higher than CBO. The unemployment rate is also projected to be lower than the CBO rate. The Conference Board believes that 2005 will see the unemployment rate down to 5.0 percent. Two indicators published by the Conference Board but not the CBO are the Consumer Confidence Indicator and the Chief Executive’s Confidence Indicator. The consumer confidence indicator is a useful tool to determine how consumers feel about the economy and whether they are willing to spend their disposable income. Although the last half of 2004 saw a steady decline of almost 15 points, December and January 2005 has seen a modest increase of approximately two percent. This indicator is derived by sampling 5,000 U.S. households. The Chief Executives’ Confidence in the nation’s economy declined throughout 2004. This survey includes nearly 100 CEOs in a variety of industries.
Confidence in the forecast for the aviation industry is little to none. If there was any certainty in the forecasts then the business investments would be a lot higher. Like mentioned earlier, the aviation business relies heavily on the economy. So the forecast must be made for the economy before it can be made for the aviation industry. Consumer confidence is a key indicator because consumer spending accounts for many activities in the United States. The improvement in the job market as well as in personal income has contributed to better consumer confidence in the economy, but has shown little effect on the aviation industry. The falling dollar value as compared to other currencies is hurting the confidence in the economic forecast especially because the falling dollar is expected to edge up inflation and interest rates.
Price changes may have many different results for the company. The best case scenario would be no change, or a rise in demand with an increase in price. This only happens in rare situations. To determine how a price change will affect the company, United must first determine if the demand for their product is price elastic or price inelastic. If the price is elastic, then the price change will cause a large change in the quantity demanded (McConnell et al, 2002). In essence, if United had a high price of elasticity of demand, a ticket price increase would result in a revenue decrease since the revenue lost from the resulting decrease in tickets sold is more than revenue gained from the price increase. Conversely, the price is said to be relatively inelastic if a price change will cause less of a change in quantity demanded (McConnell et al, 2002). If United has a ticket price that is inelastic then the price increase of the ticket would result in a revenue increase since the revenue lost by the relatively small decrease in ticket prices is less than the revenue gained from the higher price. Unfortunately for United Airlines, their ticket prices a very elastic, meaning an increase in ticket price would result in revenue lost situation. The emergence of the low cost carrier really affects the demand for the higher ticket price that United Airlines would like to market.
UAL has a bumpy flight ahead of them for the next several years. The economic forecast for the airline is a guess at best. With such as fuel costs, unemployment rates, and lack of business investment contributing to the problem; UAL will have to be very precise with their spending. Organizations or companies such as the Congressional Budget Office, the Conference Board, and the Federal Reserve publish economic indicators based on economic trends and historical data. And like mentioned earlier, the forecast for the airlines is a guess at best. Confidence is getting better when directed to the economy, but still remains dismal for the aviation industry. Finally, whether UAL has an elastic or inelastic price, the bottom line is; there is a slight increase in demand, but there is still a decrease in price. That is a situation that is not good to be in, especially if the future in uncertain in the way it is for UAL.
References
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International Air Transport Association, (n.d.). Fuel conservation. Retrieved
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