TheFinal Exam is a take-home exam. You will be required to answer thefollowing three (3) topics.
Youranswers must be:
Submitted as essays, 4 to 6 pages for each topic, font 11 – double spaced (includes 1 page for citation of sources).
NO BULLET POINTS
If plagiarism is detected, you will fail the term paper and the course.
If team work is detected, you will fail the term paper and the course.
Define the terms macroeconomics and GDP (differentiate current GDP and real GDP). Discuss the components that comprise GDP and provide the global and U.S. GDP growth for 2015 as well as projected growth for 2016 and 2017 . Define fiscal policy and monetary policy and describe how these policies have been used or could have been used to combat the adverse impacts of the financial crisis of 2008. Discuss how the economy impacts the airlines (passengers and cargo) and airports as well as how air transportation benefits the economy.
Various environmental factors impose significant impact on the aviation industry. (This of course, is true for many other industries as well.) Provide a synopsis of the current political and economic environments within which the U.S. airline/aviation industry functions. Based on your evaluation of the current political and economic environment, complete an analysis including a discussion of market structures within the U.S. air transport industry and a near term outlook for the U.S. airline industry. Identify potential opportunities and risks that might impact the airlines, government actions and initiatives that might/should be implemented to address issues/problems within the current airline industry environment.
One of the challenges confronting today`s airlines is to develop appropriate product mixes that will satisfy customer needs and expectations. Discuss three strategies that the airlines have adopted to succeed.
TheEconomic Impact on U.S. Aviation
TheEconomic Impact on U.S. Aviation
Theexuberance and ingenuity of the U.S. air carriage system invigoratesour economy. The U.S. air carrier industry is equally vibrant andinnovative. Air transportation delivers an important basis forbusinesses through which people connect and re-connect, henceboosting economic growth and development.
Answerto Question 1
Theterm macroeconomics refers to a branch of economic studies thatanalyzes the behavior of the aggregate economy. As such, itincorporates a series of economic phenomena that include inflation,price levels, rate of national growth, gross domestic product (GDP),and changes in unemployment.
Inflationrefers to an uninterrupted rise in the prices of goods and services.There are two major causes of inflation known as demand-pullinflation and cost-push inflation. Demand pull inflation occurs whenthere is excess demand for goods and services in the economy. On theother hand, cost push inflation is as a result of increase in theprices of inputs such as labor that leads to a decrease in the supplyof goods and services.
Aprice level indicates the existing prices with regard to the entirespectrum of goods and services that are produced in a given economy.The term is also used to refer to the price of a given tradablesecurity. The Consumer Price Index (CPI) is the measurement unit forprice levels.
Theeconomy is composed of various variables and as such any increasewithin the selected factors in a given time period is known as thegrowth rate. In business situations, the term refers to compoundedannualized rate of growth of dividends, earnings, and other forms ofrevenues.
NationalIncome is a term that defines the cumulative measure of a country’soutput. This value considers the worth of new goods and servicesproduced within a period of one year.
GrossDomestic Product (GDP) refers to the financial value of finishedgoods and services produced within the borders of a country. Whendetermining this economic variable, the monetary values taken intoconsideration relate to a period of one year. The formula ofdetermining a country’s GDP is as follows:
“C”represents total private utility, or consumer expenditure, in acountry`s economy
“G”represents the total government outlay
“I”represents the total nation`s investment, comprising productionscapital expenses
“NX”is the country`s entire net exports, determined as aggregate exportsminus aggregate imports (NX = Exports – Imports)
Unemploymentis defined as the situation in which an individual of working age andwishing to be in employment is not able to get a job. There arevarious types of unemployment namely structural unemployment,frictional unemployment, voluntary unemployment, and demand deficientunemployment. According to the United States Bureau of LaborStatistics, the highest rate of unemployment was recorded in October2009 (10%). The data is contained in the graph below:
Graphshowing unemployment rates for the last 10 years
Definethe term GDP
GrossDomestic Product (GDP) denotes the country’s total earnings inaddition to income earned by a country’s nationals in foreignnations. Gross Domestic Product is a wide measurement of a country’stotal economic activities that comprise the entire private and publicutilities, investments, government expenditures, and exports minusimports in a country
Differencebetween Current GDP and Real GDP
Grossdomestic product (GDP) refers the measure of the value of goods andservices produced within a given year by the private and publicsectors. On the other hand, real gross domestic product is aninflation-adjustment valuation that reflects the value of all goodsand services produced within a given year. The measure is usuallyexpressed in base-year prices and as such is also known as constantdollar GDP, inflation-corrected GDP and constant price. The majordifference between the current GDP and real GDP is that the latteraccounts for the changes in price levels and therefore provides amore accurate figure for economic growth.
TheGDP deflator translates productivity measured at existing amountsinto constant-dollar GDP. This comprises prices for business andgovernment products and facilities and those acquired by consumers.This computation demonstrates the extent by which a variation in thebase year`s GDP depends on variations in the price level. Real grossdomestic product for a specified year in the context of a base yearis calculated by multiplying the nominal gross domestic product for aspecified year by the fraction of the gross domestic product pricedeflator in the base year to the gross domestic product pricedeflator for the agreed year (Tucker, 2008).
Componentsof Gross Domestic Product (GDP)
Thereare four components of gross domestic product: Private consumptionspending, investment expenses, government procurements of productsand facilities, and net exports. GDP is often calculated annuallybut it can also be calculated on a quarterly basis, using theformula: GDP = C + G + I + NX. In this formula, “C” representstotal private utility, or consumer expenditure, in a country`seconomy “G” represents the total government outlay “I”represents the total nation`s investment, comprising productionscapital expenses and “NX” is the country`s entire net exports,determined as aggregate exports minus aggregate imports (NX =Exports – Imports) (Tucker, 2008).
Thisis the consumption spending by households that measures the monetaryworth of consumer products and services bought by families andcharitable organizations for use over a specified period of time.These household products and services are categorized into longlasting, semi durables, perishables, and services that have varyingshelf life.
Thisentails the additions to the physical stock of capital during aperiod of time. It also includes all the infrastructural development,purchase of machinery, and construction. Gross investment comprisesvalues of devaluation while net investment is derived by subtractingdevaluation worth from gross venture. Investment is categorized intofour groups: Inventory stock, business fixed asset, public venture,and residential building investment (Tucker, 2008).
GovernmentPurchases of Products and Services
Thiscomprises all the government expenditures on wages and salaries andbuying of intermediate products, excluding transfer outlays toeliminate double accounting (Tucker, 2008).
Insummary, net exports is the difference between exports and imports.Theglobal GDP growth, according to the International Monetary Fund for2015, was 3.1 percent and predicted to expand to 3.4 percentinflation adjusted in 2016 and 3.682 percent in the year 2017.Moreover, the U.S. gross domestic product for 2015 was 2.1 percentand predicted to grow to 2.2 percent in the year 2016 and shrink to2.1 percent in the year 2017.
Fiscalpolicy refers to the strategies employed by the government throughadjustments to the spending levels as well as the tax rates as ameans of monitoring and influencing a nation’s economy. Fiscalpolicy is therefore based on a balancing act between changing the taxrates and public spending. Consider a scenario where the economy isstagnant and the government reacts by lowering the taxes. The outcomewould be an increase in inflation. Fiscal policy can be utilized in asituation whereby an economy has stagnated and the rates ofunemployment are high. It is also applicable when consumer spendingis massively decreased. The government can correct such economicconditions by decreasing the levels of taxation which would in turngive the consumers more disposable income and the government wouldspend more in buying goods and services.
Thiscan be described as the process through which the relevant monetaryregulatory authority in a country controls the supply of money. Themonetary authority achieves this by targeting inflation rates and theinterest rates as a means of ensuring that there is price stabilityas well as trust in the currency.
Duringthe economic meltdown in 2008, monetary policies were applied as anexpansionary measure. The Federal Reserve level was reduced whichgave companies a motivation to enlarge and employ more personnel andencouraged customers to spend more. Moreover, the Federal Reserveincreasingly dropped its target level from 3.50 percent at thebeginning of the year to below 0.25 percent in December with thetrend still maintained (Fender, 2012). With the joblessness levelstill high and the Federal Reserve level near zero, the Fedsimplemented quantitative facilitation through the acquisition ofmonetary assets like Treasury and mortgage-supported bonds to reducelong-term bank rates, thus raising the money supply level (Fender,2012). The period following the economic crisis of 2008,multinational companies operating within the United States were needin additional capital for expansion purposes. The levels of outputhad also declined massively. To facilitate expansion of the economy,the Federal Reserve lowered the bank rates in order to encourageborrowing by the firms (Fender, 2012).
Therates of unemployment also soared during the period of economicturmoil. To tackle this problem, the government implemented variousfiscal strategies. The main strategy utilized in decreasingunemployment revolved around increasing the aggregate demand and therate of economic growth. The expansionary policies utilized in thiscase include cutting the taxes as well as increasing governmentspending. The decreased taxes lead to increased disposable incomes.This will increase consumption and culminate in an increase in theaggregate demand. An increased demand translates into a boost in thereal GDP. Firms will therefore produce more output and as such willneed to enlarge their labor size as a means of coping with the betteroutput. This will dwindle the levels of unemployment. The higheraggregate demand and strong economic growth will ensure that fewerfirms can go bankrupt and therefore reduce the possibility ofemployees losing their jobs in the process (McKelvey, 2002).
Theeconomic performance and growth have an enduring impact on air travelfor passengers and cargo travel. When the economy is performingpoorly, people tend to use alternative modes of transport that arerelatively cheaper like road and water transport. During a financialcrisis, there is low disposable income, hence people tend to minimizeon leisure travelling and tourism. This has a cyclic effect since thelow performance of the airline travel affects the economy to a greatextent (McKelvey, 2002).
Airtransport is a key employer creating 29 million jobs internationally.There are direct, indirect, and induced jobs that are linked to airtransport. Aviation offers an international transportation system,which facilitates worldwide trade and tourism. This serves as astimulus in facilitating economic development. The importation andexportation of goods and services are often facilitated through airtravel, which is considered fast, efficient, reliable, andconvenient. Approximately 40% of tourists travel through airtransport. Air transport expands the efficiency of supply chain andis a stimulus to innovation through global networking. It alsoenhances productivity and enlarges the market, thus assistingbusinesses to benefit from economies of scale through reduced costs.In addition, air transport is a significant tax payer, hencecontributing majorly to economic growth (Aviation, 2011).
Onecommon trend in the relationships between world GDP and the number ofpassengers is that they have a positive connection. As such, duringperiods of economic recession when the GDP is relatively lower, thenumber of passengers using air transport also diminishedconcurrently. The decrease in the world GDPs was caused by factorssuch as the Gulf War, tumbling of the Asian currencies, terrorismwars and the financial crisis between 2008 and 2009. The graph belowshows the relationship between the economy and air transport.
Answerto Question 2
Theoperation of the aviation industry is controlled by various factorsin the environment. It is therefore important for the relevantauthorities to be conversant with the existing environmental issues.Case in point, the current political and economic environments have asubstantial role to play in ensuring that the aviation industryreacts well to the changing variables. One current economic factorthat is affecting the aviation industry is the changing oil pricesand its subsequent effect on other sections of the environment. Inthis regard, it is critical to establish that the fluctuations of theoil prices have a direct effect on the prices charged for the airtickets since it is one of the core variables taken intoconsideration by the ticket departments and as such, there is need toincorporate the changes. On the other hand, the major politicalfactor affecting the airlines includes regulations on the outbreak ofdiseases such as Ebola. Various airlines have had to make alterationsto their daily routes in order to comply with government regulations.Another factor that affects the operations of airlines in the UnitedStates is compliance with the TSA SPOT program regulations. According to the security aviations experts in the United States,there is need to alter the existing system from the currentbehavioral based structure to the full body check system as is thecase in the Israeli aviation industry.
Moreover,the impact of climate changes that manifest in varying proportionslike heavy rain, fog, mist, and strong winds often affect visibilityand ultimately affect the performance of aircraft. The effects ofclimatic changes may sometimes cause delays in landing or take off,thus affecting time schedules (Energy and Environmental Concerns,2005).
TheU.S. aviation industry operates in a vibrant political and economicenvironment. The government, through various bodies offers regulatoryguidance and incentives to promote the industry. The governmentpartners with various stakeholders and countries globally to providea platform that enables free movement of aircrafts across borders.Security is also a function of the government, which is adequatelyprovided through the relevant agencies to curb any security threats.In addition, there are enhanced efforts to provide the necessaryeconomic stimulus to the aviation industry by providinginfrastructural developments, policies, research, training, andglobal agreements that promote free movement, global trade, andtourism, among other benefits. There are also increasing calls forregulations that range from taxation, trading, charges, and airtraffic controls, due to terrorism threats and other securityconcerns (2002 TRB Distinguished Lecture).
ThePESTEL framework covers the Political, Economic, Social,Technological, Environmental, and Legal external features thatinfluence the airline business. The framework offers a comprehensiveviewpoint on opportunities and threats that affect the airlineindustry.
Politicaland legal factors
Theseaspects contain government involvement on economic processes ora specific industry. Airlines function in a political setting thatis controlled and regulated. Government intermediation canbe essential to safeguarding the customers’ welfare andairline procedures’ safety actions
Avigorous economy is a reagent for industrial development. Economicstability is gauged by numerous economic pointers that includeprogress in gross domestic product, customer confidence, per capitalrevenue, level of trade, disposable earnings, industrial productionand variation in oil charges influences airlines’profitability.
Socialand Demographic Features
Therehave been significant changes in the demand for air travel over time.This shows varying travel inclinations amid the moderngeneration. Classifying generations in the U.S. depending on theyear of birth offers comprehension into the varying tendenciesin the travel and tourism business. Demographic features play asignificant role in predicting demand and imminent travelinclinations. In this respect, the prospect of U.S. travel andtourism is often determined by the progress in the visionarygeneration. The request for air travel has improved considerably overthe years. This specifies varying travel inclinations among themodern generation. The U.S. populace is classified by fourgenerations. There is Generation Baby Boom, those born in the yearsbetween 1946 to1964 Generation X, those born in the years between1965 to1979 Generation Y or Millennial Generation, those born in theyears between 1980 to1999 and Generation Z, those born in the yearsafter 2000.
Technologicaland Political Factors
Toendure the powerful competition in the airline trade, corporationsmust embrace the modern technology. Technological innovation has beenthe motivating aspect for refining airlines’ functioningeffectiveness. Airlines have been capable to moderate costs andexpand operations by using progressive aircraft engineexpertise, information technology solutions, and mobile expertise.The technology has generated improved connectivity and enrichedcustomers’ travel practice. The use of progressive aircrafttechnology leads in reduced fuel consumption. Thisenhances effectiveness and the price of airline operations.Technology is regarded as one of the four significant factors underthe International Airline Transport Association’s plan to resolveclimate change.
Liberalizationof the airline transportation in the U.S. has resulted inderegulation of prices, capacity, entry, and routes of the airlines.This has led to the emergence of many air transport servicesproviders, due to competition, reduced charges, innovative packages,and delivery of excellent services and customization of differentclasses of clients, for example, VIPs, executives, business class,premier class and economy class, depending on the customer’spreference and income. The market structure also varies with distanceand the enhanced facilities within the carrier. There are numerousairlines that fly to various destinations and offer differentflexible time schedules. There are four types of traffic whichinclude passengers, mail, air freight, and passenger bags. Thecustomers are spoiled since the airlines also vary in size withchoices, including private jets (McKelvey, 2002).
Thereare diverse opportunities in the airline industry which are availablein the U.S. Globalization. It has led to unexploited markets all overthe world, which the U.S. airlines can tap to expand their outreach.There are also national carriers that are willing to partner withinternational carriers to expand their potential for the availableopen market that the U.S. carriers can tap and develop. However, thenegative impacts of noise and air pollution, terrorism risks,hijacking, human trafficking, drug trafficking, and child and forcedlabor are a threat to the air transport system. The government shouldbe in the forefront by regulating the industry by imposing strictsecurity measures to moderate the industry and control any forms ofpollution by employing the regulatory bodies (Peoples, n.d.).Moreover, there are various regulatory bodies and agencies thatadvocate and address environmental issues and their impact on theaviation industry. Security checks and strict compliance regulationshave been enhanced in all airports to prevent numerous securityrisks, and human and drug trafficking, among other vices.
Thegovernment has been on the forefront in spearheading strategies andregulatory mechanisms and controls that enhances the airline travel.The government works in collaboration with various agencies to ensurethe airline travel is improved. This includes interventions thatimpose strict environmental guidelines and measures that control allforms of pollution. The government also applies measures that ensuremodern technology is embraced which increases efficiency andperformance by the air carriers as well as result in reducedemissions and noise from the aircrafts. In addition, construction ofresidential houses and other infrastructural developments iscontrolled and restricted accordingly to reduce conflict andaccidents.
Answerto Question 3
Thereare various challenges that affect the airline industry, includingdeveloping appropriate and all-inclusive product mixes that satisfythe needs and expectations of the customers. There are variousfactors that are important, both to customers and service providersthat influence preference and choice of one service provider asopposed to the other. These factors include: pricing, convenience,comfort, brand, compliance to time schedules, specialty, customerservice, security, number of different destinations, benefits andperks offered, and status and award availability, among otherfactors. Customers are influenced by these factors and often use acombined perspective on all of them when making their choices toderive more utility. This poses a big challenge to airlines whendesigning products that satisfy their customers and come up with costeffective products that comply with the laid down policies andregulations. This calls for a balancing act and implementation ofwell-thought out strategies that are reviewed, according to themarket dynamics.
Airlineshave come up with innovative and customized product mixes to satisfycustomers’ desires and prospects. This includes enlarged capacityand efficacy in its facilities and charging low costs, hence thepricing strategy (Aviation, 2011).
Airlinesdesign their products according to the destinations and routes taken.Different airlines offer various stop over and follow certain routes.There are also domestic and international flights. Customers makechoices according to their need. Different airlines have productsthat offer various destinations to entice their customers. Theairlines often maximize on the places that they offer their serviceswhich is a way that improves their competitiveness. Customers in maininstances may tend to use the airlines that fly to many destinationsin order to maximize their utility. The choice of stopoverdestinations is also important in ensuring that customers get thebest services in terms of hospitality. For example, a stopover in atourist destination country can be an advantage to the customer andmay attract clients to the airline.
Mostcustomers often compare and contrast transport charges, variousperks, and benefits offered by the different airlines and make theirchoices accordingly. Most airlines tend to offer competitive pricesto attract more customers. Whereas there are various classes in aplane, customers usually want the best at a competitive price. Thus,prices become an important aspect in providing services by airlines.
Theissue of pricing is often a major factor that is considered by manycustomers when deciding on the airline to choose. Numerous airlinesvary from each with regard to prices. Most travelers choose cheapflights, though some, especially the business people and VIPs, do notcritically look at the price factor. However, many airline travelersspend a considerable amount of their time and energy in comparingthis factor. Some travelers even postpone their travelling to offpeak season when the air fare is cheap especially for non-essentialtravels. This shows how critical the pricing factor is in theaviation industry. With the unpredictable and increasing fuel prices,airlines find it difficult to maintain low air fares. However, toachieve this they have acquired large planes like Boeing with highcapacities to distribute the cost and be able to charge low fares.
Providingexcellent products or services is not enough. The airlines mustensure that they build customer loyalty through their services. Toachieve this, they establish loyalty cards and bonus programs fortheir clients. For instance, customers earn points every time theyuse the airline and may earn free ticket after making a certainnumber of trips. Besides, the loyalty program allows them to redeemtheir points at specific restaurants, malls, or even for an airticket with the company.
Airlinesdiffer with their specialty on the products and services they offerand the clients they serve. Irrespective of all these services beingoffered by airlines, customers often identify them through marketsegmentation and product differentiation. Some airlines are bestknown and identified with status, hence customers choose them .Thereare airlines that are best suited for VIPs, business people, cargocarriage, and ordinary people. Airlines realign themselves well withtheir flagship products, while offering a package deal that is allinclusive.
Thesegmentation based on product and status is usually an element thatembraces comfort, privacy, entertainment, and sometimes security. Theissue of comfort is crucial especially for long and non-stop distanttravels. This is often characterized by comfortable seats and widerooms to relax and to ensure the customers enjoy the journey. Inaddition, the concept of entertainment differs and is oftencharacterized by listening music and TV, among other forms ofamusement that draws customers to their airline. Moreover, variousclients have different preferences that include eating, drinking,working, and playing various games. Most airlines offer interestingamenities and facilities to attract customers. However, specialty isnot always safe. Airlines must be able to tap the broader market ofbusiness people, VIPs, and private citizens to increase their market.Some airlines prefer to beat their competitors by ensuring that mostof their customers regardless of their class get some form of specialtreatment, including drinks and snacks, music, and movies. Althoughthe level of such services may differ, customers feel that they arewell taken care of.
Complianceto time schedules
Toa traveler, there is nothing as important as keeping time. Mosttravelers travel within busy schedules and like when the airlinerespect their time. Airlines therefore work hard to maintainpunctuality by following their time schedules. Even though there areinconveniences caused by traffic snarl ups, airlines must ensure thattime is minimally lost.
Manyairlines combine various attractive mixes to draw the attention ofthe customers and also ensure they remain competitive and profitableat the same time. The hard economic times and the increasing fuelprices usually affect the aviation industry, but with a proper mix ofproducts, a company can succeed in the industry.
Theseare airlines that had already established routes before theimplementation of the Airline Deregulation Act in 1978. As a result,the changes made in the new legislation drastically affected theiroperations. Some of the characteristics of the legacy carriers arethe provision of higher quality services in comparison to thelow-cost carrier and a frequent-flyer program. In addition, they aremembers of an airline alliance that enables them to partner withother airlines in their quest for service provision. Examples oflegacy carriers include American Airlines, United Airlines, DeltaAirlines, and Alaska Airlines. In the case of Legacy Carriers suchContinental Airlines, Northwest Airlines, U.S. Airways, they had toadjust their prices as they increasingly faced competition from theLow Cost Carriers that identified the need for competition in the airtransport industry. One way in which the Deregulation Act affectedthe Legacy Carriers was in the form of airfares that fellsignificantly. In order to tackle such changes, Continental Airlines,Northwest Airlines, U.S. Airways developed complex pricing modelsthat incorporated factors such as service quality and pricesensitivities.
Theseare airlines that are considered to have relatively lower fares andfewer comforts. As a means of making up for the revenues lost throughthe cheaper tickets, such airlines are known to have additionalcharges for food, seat allocation, and priority boarding. One of thecheapest low-cost carriers in the United States is known as SouthwestAirlines. Some of the principles of operations include primarypoint-to-point operations, fleets that are composed of one type ofairline, and low average fares.
Thesetypes of airlines have experienced an increase in the number ofcustomers for a number of reasons in the past. The primary incentivefor these passengers is cheap base fares that have gone a long way inencouraging individuals to switch from the bigger airlines. However,these airlines have a history of being inconvenient in addition todiscomfort. Furthermore, they have additional charges for items suchas carry-on bags and they lack toll-free phone numbers for customerservice products. Examples of the ultra-low cost airlines includeSpirits Airlines, Allegiant Airlines and Frontier Airlines.
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