Determinants of demand and supply of UK Airline Industry

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The Airline Industry

This report serves to paint a picture of the airline industry with regards to the

determinants of demand and supply within the industry and the way in which this affects strategic decision making and prospects of future profitability. One could approach this by analyzing a multitude of factors, both on demand and supply sides, as well as government regulatory and international shock sides, including income and price elasticities, terrorist attacks, environmental factors, oil shocks, retirement ages, labour mobility and so on.


        With respect to the airline industry, one can notice particular developments of interest following the new millennium. First, there is a higher degree of competition amongst airlines, with a weaker barrier to entry than before, especially for the popular budget airlines such as Easyjet and Ryan Air. Secondly, the September 11 attacks left an almost irremovable scar in people’s minds and attitudes towards flying, especially North America and countries that supported the consequent war in Iraq. Political factors have an indirect, yet driving effect on this industry, with this respect. Finally, the issue of climate change and the push by consumers, regulators, and certain producers for cleaner fuel technologies also has an effect on supply and demand dynamics. These all rotate around the core fact, that is, that the Airline industry is a cyclical industry, and demands are subject to seasonal changes. The volatility of ticket prices is one consequence of this. Airlines are therefore also very sensitive to economic growth, since their cycles are closely linked to the macroeconomic business cycle. 

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        Since price and therefore demand side is more volatile, it is more desirable especially for financial institutions funding airlines, to observe what’s going on at the supply side, since it is more rigid. This enables easy forecasting of cycle changes, as well as enabling to forecast aircraft manufacturers business.

        Airline industries can change across time as well. Looking at the Canadian industry for example, it generated $ 7.6 billion in 1991, and employed 53,000 people, as well as carrying 32 million passengers. The industries suffered major losses however in recent years. In the USA alone, since 2001 (due to ...

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