Financial Forecast

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Pierce in IATA Industry Outlook: Financial Forecast, Stagflation Threatens the Outlook projected that the industry would register losses in the year 2008. To him, the main reason for these losses would be due to the raising fuel prices. The oil prices are estimated to cause losses ranging from 2. 3-6. 1 billion dollars. (Pierce B, 2007). Slight changes in fuel prices have immediate effects on the airline industry and are soon reflected in the prices for air fares. He points out how other sectors are also affected by the fuel costs.

The high fuel cost coupled with the reduced availability of credit or loans that would enhance people’s purchasing power hinders their consumption and expenditures and it leads to a decline in demand in the airline industry. The consumer confidence in the US has dwindled drastically and although the airlines operating without the US borders may experiencing a different scenario altogether, those within the US are experiencing difficult times. The US airline industry is operating in excess capacity as the supply by far outdoes the demand. (Pierce B, 2007).

The only option that the industry has at its disposal if it is to remain in existence is to ensure that it has increased its efficiency which will also be a challenge given the high fuel prices. The high air travel prices are attributed to the economic situation which has not only declined in the US but in the world as a whole. (Pierce B, 2007). Despite the changing prices due to the oil prices some years recorded a positive effect according to IATA.. In the years 2003 to 2007 the consumer confidence levels rose precipitating a strong growth in the world economy and consequently the airline revenues increased.

However, the current situation is different as the consumer confidence levels have now collapsed. There are various externalities associated with the airline industry. Air transport has been listed as one of the human activities responsible for global warming. The US Environmental Protection Agency argues that the airline industry emits greenhouse gases which cause global warming. In the year 1990 the greenhouse gases emitted by both the commercial as well as other aircrafts was 181 but five years down the line this dropped to 176. From the year 2000 to 2006 these emissions were 198. 5, 188. 5, 179.

8, 176. 5, 178. 9, 183. 1 and 172. 4 in that order. (US Environmental Protection Agency, 2008). The harmful effects of global warming have started to be felt and the industry must be keen to respond to these concerns. Noise pollution is another negative externality associated with the airline industry. It is therefore the role of the federal government to regulate the noise produced by the airline industry. Although it has been keen in accomplishing this responsibility there are concerns raised that it has not done it effectively. Noise concerns increase when the idea of airport expansion is raised.

The issue is also expected to gain much momentum as the years pass by and the need to expand the airline industry is felt. According to Girvin in ‘Economic analysis of aircraft and airport noise regulations’ noise pollution has reduced significantly over the years as the new aircrafts are quieter. Production of such crafts is of course at a cost as their production is more expensive. Other means of ensuring that noise pollution is reduced is through noise taxation where airlines pay a tax according to the emissions made but this approach is not applied in US.

Operational curfews, noise quotas and noise surcharges or cumulative noise constraints are also used to check noise pollution. (Raquel G, 2006). Raquel also argues that there has not been a comprehensive economic analysis to establish the effect of noise regulation on the quality of airline services as well as the air travel fares and this hinders the effective analysis of the of the optimal noise regulation that maximizes social welfare. Social welfare would be established if the costs and effects of noise on the passengers and the noise victims are identified.

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