Economic Profile of the Airline Term Paper

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Not only are they crucial for the movement of people, but they are crucial for the rapid movement of time-sensitive goods. Therefore the government has an interest in the survival of the industry. Government can and has involved itself through monetary policy in sustaining or resuscitating struggling airlines in order to maintain the overall strength of the industry.

Taxation is another area where governments affect the industry. This again relates to the tight margins, as taxation represents a key expense for airlines. Changes in the tax regime directly affect airlines' after tax profits. The government can encourage or discourage the industry based on its taxation policies. The IATA believes the airline industry to be more heavily taxed than some of its substitutes, and has an entire program to deal with the issue of taxation, highlighting taxation's relevance to the industry.

Another way in which fiscal policy can impact the industry is through management of interest rates. The government obviously doesn't just take the airline industry into consideration when setting rates, but those rates do have a profound impact. As many airlines use credit to start or expand their operation, the availability of credit has a direct impact on capacity and the intensity of competition in the industry.

Lastly, fiscal and monetary policy helps to shape the state of the economy. Because airlines are so heavily dependent on a healthy economy to stimulate demand and allow them to secure profits, government policies that impact the strength of the economy are of utmost importance to the airline industry.

Wage Inequality

Wage inequality is another economic issue in the airline industry. Amongst airlines and even within the same airline, there are a wide range of salaries earned by airline staff, from pilots to service staff.

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Because the airline industry is largely standardized in terms of its equipment and operations, the skills airline staff develop are easily transferable to other airlines. Thus, wage inequality drives turnover. This turnover then drives safety and service levels as staff make the adjustment from one airline to another, and new staff are brought in to replace those who have left the industry.

Furthermore, wage inequality between the executive ranks and the workers is significant in the airline industry. For example, at a time when American Airlines sought to halt wage increases to its workers in 2007 in order to maintain the company's hard-won profitability, it managed to pay out $250 million in combined compensation to its executives. Much of this came in the form of stock options, which does not have the same bottom-line hit that cash salaries do, but nonetheless this type of activity breeds a large amount of employee skepticism.

The airline industry operates on razor-thin margins, and this makes it susceptible to virtually any economic factor imaginable. The industry is highly competitive despite high barriers to entry and highly cyclical in terms of its ability to generate profits. With few exceptions (such as Southwest), very few airlines have been able to manage externalities well. Were it not for the perceived importance of the industry to the global transportation infrastructure, the industry would likely not have been sustained to the degree it has by government. Yet despite the difficult economics of the industry, new competitors consistently enter the field in the hopes of carving out some of the profits that can be had during economic upswings.

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