Another cost factor which may affect destination choice by UK residents is the purchasing power. It can be defined as the relation between relative prices and exchange rate movements. Most countries have become cheaper for UK residents as their pound has great “power”. However the UK has become more expensive for foreign counties. Relative prices appear to be more important than the exchange rate for business travel. That is happening because those kinds of travelers are more sensitive to the changes in exchange rates and relative prices rather than the leisure travelers.
During the (IPS) it has been made the followings graphs (chart 1) which shows the number of trips by UK residents to twenty different destinations either for business or for leisure.
Chart 1
Comparing the two graphs we see there is a significant difference between the leisure and business markets. For leisure trips UK residents prefer to go most in Spain rather than in the business trips where most of the residents choose France for their destination.
2.1 Determinants of demand for travel on a particular low cost airline
Flying on a low cost airline and paying cheap airfares has both advantages and disadvantages. Starting with the disadvantages and making an assumption with logical sense we can see that when we are traveling with cheap prices we can not expect either a great service during our flight or good quality of plane such the one which we could have with normal airline prices. A lack of reliability will appear between us and the airline company as the plane will might have more delays from those which we were expected. That might cause trouble to people who travel as they might thought that the plain could be a faster way to reach in their destinations and finally to realize the opposite. So we can understand that people demands when traveling cheap must not be many as most times in reality you are receiving what you are paying.
The advantages of traveling with cheap flights are also many. Air traveling all around Britain has grown in a significant level as the low fare airlines carried out millions of people the last few years. Smaller airports all around Great Britain which were not that busy, since the low airfares appeared they got more traffic and the number of passengers rise by a high percentage. Although many people believed that the low airfares would attract more the people who travel for leisure rather than the business market they have turned out to be wrong. Those people who were traveling for business tend to be more as their companies bought many cheap tickets and saved more money from their staff traveling. On the other hand leisure travel has changed too. Traveling with cheap flights make people decision different as it is not a big deal any more to travel wherever you like without thinking the money anymore. So people now travel to different countries easier and also through traveling the economy of those counties is increasing as everyone pays taxis when visiting a country.
2.2 Estimating results
Fares have a negative impact on demand as a change of them can create changes in the demand as well. While the air fare prices increases, the demand will decrease more than the increased price. Trade has a greater impact on the business market than has income on the leisure market. In all cases income is prime determinant although relative price levels exchange rates also play an important role. Final the strength of the pound is responsible for the high increase of the growth in UK resident’s air travel but a smaller decline in travel to the UK.
3. The importance of demand in air travel and the reason of being highly elastic
At first we will begin with the definition of demand in order to understand better the meaning of our subject which we are going to analyze in this part of our essay. Demand shows the various amounts of a product that consumers are willing and able (as people can not afford every product which they like) to buy. Demand shows the quantities of a product that will be purchased at various possible prices. The low of demand can be explained with common sense. Is the inverse relationship between price and quantity demand as if a price of a product will decrease, then the demand for this product will definitely increase. In order now to explain the reason why the demand for air travel is highly elastic we will begin with the definition of the elastic demand. Demand is elastic if a specific percentages change in price results in a larger percentage change in quantity demand.
Highly elastic demand means that a decrease, for example, in the airfares by a specific percentage will cause an increase in the demand by a higher percentage than the decreased one. Since the percentage fall in demand is greater than the percentage rise in price, total spending on the good will decline, and the demand for it is said to be “elastic”. Demand for air travel is highly elastic. That means that if we bring down the price the sales will rise sharply. This could happen because on a variety of factors such as:
- Alternative transportation modes (road and rail). Many people prefer to travel with other transportation services such as the bus and the train rather than traveling by plane. That fact creates a competition between those services. In order for the airline companies to attract as many as they can of those people are reducing the airfares. By reducing the airline tickets the demand for air travel will increase.
- The level of consumers’ income. A lot of people can not afford to travel by plane as they do not have the indispensable income. A decrease in the airfares will cause an increase in the airline tickets demand.
- Prices of different airline companies. Air travel demand can be affected by changes in the prices and service quality of other modes. Except from the competition between the different transportation services, a competition can also exist between different airline companies. For example if an airline company decides to reduce the airfares that will also affect the other airline companies as they will now have to reduce their prices as well. That will cause a general decrease in the tickets and also a wide-ranging increase in the demand of people to travel by plane.
Since the availability of alternative modes of transportation that are reasonably close substitutes for air transport diminishes with distance travelled, it is expected that the demand for air transport will be less elastic for longer flights than for shorter flights. That is caused because people who travel faraway from their countries or just a long way from their homes will definitely travel by plane as it is hard for someone to travel a long distance either by train or by buses and cars. On the other hand people who travel inside their country, in places where are not far from where they are living they will consider the prices of the airline tickets as they can also travel with alternatives transportation services. It is also expected that the demand for air transport for leisure reasons will be more elastic than business travel. That will happen because the people who travel for leisure are more sensitive to price changes as they can travel at any time they wish in any destination they like. On the other hand business travellers does not care that much about the price changes because they can not cancelled their businesses or their meetings just because the prices are high, and also because they are not paying those prices as their companies are paying the airfares for them. So we can understand that elasticity values differ significantly by type of traveller and travel distance. We can realise that the demand for air transport should be less elastic for business than for leisure travellers, and less elastic for flights of longer distances.
4. The impact of the terrorist actions of 11 September in USA on the air transport industry.
The airline industry suffered major losses as a result of the terrorist attacks in the United States. Air traffic was completely shut down for four days in the United States and demand for air transportation services fell sharply in the following months. Although the air transport industry was already experiencing declining and even negative growth rates due to an economic downturn, the events of 11 of September did sharply magnified this slowdown.
4.1 The impact on the US air transport industry
As we can realise the major impact among all industries all around the world had been in the US air transport industry. Before the 9/11 the industry was profitable as millions of people who were travelling to or from USA were most preferred to travel by plane rather than with other transportation services. Since then the industry has incurred massive losses more than forty billion US dollars. The biggest annual loss was thirteen billion dollars in 2001. As the years were passing efficiency increases have seen an improving bottom line. American airlines are expected to lose 1.7 billion dollars in 2006. All those which just has been mentioned above can be shown in the following graph (chart 2).
Chart 2
To continue with the negative impact of the terrorist actions in the industry many statistics shown that the price of air travel has fallen over the past five years and passenger yields in US domestic market have fallen by 25%. International markets have seen only a 7% decline over the period as they do no not affect that much as the domestic markets which are inside the country. Finally the overall yields have fallen by 15% globally. In the following chart (chart 3) we can see the real passenger yields which are separated into global airline yields, after adjusting for inflation and the US$, and US domestic yields from 2001 until 2006.
Chart 3
The main impact had been on the US domestic airline traffic where passenger numbers have never fully recovered from 9/11. As we can see in the following graph (chart 4) in July 2001 50 million passengers flew within the US. In July 2006 only 44 million passengers flew which is a 12% drop. Passengers on shorter journeys have switched to road or rail.
Chart 4
However international traffic, where people have not any alternative form of transport, has increased 37% since 2001. As we can see from the graph below (chart 5) the number of passengers from about 535 million in 2000 has increased to an estimated 740 million in 2006, but this is still 5% below from the pre-9/11 expected trend.
Chart 5
4.2 The impact on the European air transport industry
The terrorists attack had also a huge impact on the European air transport industry. First of all at this period many flights with destination the United States have been cancelled as a result there was a huge loss of revenue for all airlines and airports all around Europe. In Europe it has been a significant fall in traffic and demand for air travelling was down by 15-30%. As a result the reduction in traffic by around a 7.7% and a 4.7% reduction in capacity revenue losses amounted 3.6 billion €. Many airlines have announced they are suspending all recruitment of staff although some have already gone ahead with major redundancies. The crisis was hurting European airlines at a time when they were already feeling the effects of last year's increase in the price of aviation fuel. The current crisis adduced a decrease on the demand for travel by planes by around a 75%. Last but not least the airlines have grounded 108 aircrafts and the jobs of 17000 employees in the airlines themselves were under a threat.
4.3 The positive impact of the 9/11 to both European and US air transport industries
One of the positive impacts of the terrorist action and probable the main one which came from the aftermaths of the terrorist actions of 11 September was that the security improved considerably.
First of all, the governments all around the world mobilised to improve on the highest level which they could the air transport security. After the terrorists action we have a more secure transport system. The system is working and sometimes the terrorists are stopped before even go to the airport. So we can understand that nowadays travelling by plane is safer than it was seven years earlier, before the “big attack”.
5. Conclusion
In this essay we have written most about the demand for air travelling. We are also referring to the impact of the events of 9/11, which took place in USA, to the air transport industry.
At the end of this essay we can conclude that the demand either for air travel by UK residents or for traveling on a particular low cost is totally connecting with the elasticity of demand. That is happening because the changes on reducing the airfares are related with the elasticity of demand as they can attract more people in order to travel by plane. We can also conclude that demand for air traveling has been influenced on a significant level since the 11th of September for the following years.
APPENDICES
Osama Bin Laden was the leader of the terrorist action on the 11 September and he was the one who was giving the orders to his accessories in order for the success of the attack.
On September 11, 2001 two hijacked passenger jets crashed into the towers of the World Trade Centre in New York City. Both WTC towers collapsed, releasing a massive cloud of dust and debris. This terrorist attack on the twin towers killed nearly tree thousand people.
Bibliography
Demand and Elasticity definitions are available from: Economics McConnell/Brue (sixteenth Edition).
Useful notes about understanding the demand for air travel are available from:
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Chart 2 is available from:
Useful notes about the impact of the terrorist action in USA are available from:
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