Economics of the Airline Industry

For the airline companies, revenue generation always remains a challenging issue. Volatile scrip prices and investor losses are regular occurrences. In the recent years, the number of air planes has increased while the number of passengers has not increased. The result is a glaring imbalance between the supply and demand in the aviation sector. This has affected the profitability of the industry to a certain extent.There seems to be a definite, if not singular,connection between price of fuel and income for the airlines.Increase in oil prices has led to an increase in passenger fares and a drop in the number of passengers. The airline industry profits for the year 2016 please mention which quarter of 2016 here are predicted at $39.4 billion, despite a slowdown in passenger traffic and increase in terrorist attacks all around the world.The growth in profits is supported by an acute decrease in oil prices from mid-2014. The percentage of fuel costs in airline operation has been 19.7 percent for the year 2016,compared to 27 percent in 2015 and 33.1 percent four years earlier.In turn,   the operating profit margins for the world’s airlines are expected to be 8.2 percent in 2016 compared to 7.1 percent in 2015. However,it is also predicted that profit margins may decrease to around 7.5 percent in the coming year,since the introduction of new air planes may have the effect of reduction in passenger fares.The airline industry hopes to make profits in operation even if the oil prices increase.This hope is based on revamping measures undertaken in the management of airline operations and increased focus on shareholders.

The airline industry is highly capital intensive and requires air planes , flight simulators and hangars for aircraft maintenance.The huge positive cash flow generated by airlines is used in repayment of debtor for purchase of new aircraft s. If there is a decline in cash flow,then debt servicing becomes difficult, and the plans for new purchases are in peril.The industry employs large number of people and the operations are adversely affected by the disruptive activities of labour unions.At the best of times, airlines have earned net profits in the range of 1-2 percent .The business in the industry is seasonal with peak demands in summer and less demand in other seasons. The revenues and hence profits follow the same pattern.

The profits of airline companies are dependent on number of factors other than the price of aviation fuel. Salaries of employees, maintenance costs, and overhead administrative costs result in huge operational expenses for the airliners and hence the actual profits are low.

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