Essays on Economic Impact on Delays in the Airline Industry Case Study

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The paper “ Economic Impact on Delays in the Airline Industry” is a well-turned variant of the case study on macro & microeconomics. Economists have for a long time tried to solve delays and congestion problems at capacity-constrained in the air travel industry. Some of the most heavily congested airports in the US have been a victim of takeoff and landing constraints, this effectively inflicter limitations at these airports (Makinen, 2011). Congress has been attempting to lift restrictions and allow entry into restricted airports in a bid to ease delays.

However, it has failed to provide a mechanism for alleviating congestion. Congestion is a major cause of delay in the air travel industry. While some routes experience significantly lower prices and entry problems due to competition, all routes suffer from a domestic increase in flight delays. Essentially, this report provides the impact of delays in the airline industry. It focuses on the economic principles and the laws in the aviation field. Specifically, the report analyses the ex-southwest airlines. For this airline, the report provides a detailed discussion of the reasons they are late as well as how to improve it.

In addition, it compares the airline with other airlines in the air travel industry to evaluate its competitiveness and efficiency in the market. Importantly, the report will serve as a frame of reference for decision-makers in evaluating the magnitude of delay problems as well as the need for initiatives to address the problems. In this regard, the report borrows from previous research in attempting to measure the size of the problems. Delays in flights is a widespread and serious problem in the United States.

The ever-increasing fright delays place a significant strain on the air travel system and influence huge costs on airlines, passengers, and society. These delays of flights have huge economic effects on airlines. Some of the economic effects of flight delays in the airline industry include the cost components namely cost to, airline cost of lost demand, the cost to passengers, and the indirect effect on the economy (Brueckner& Zhang, 2010). Specifically, the inefficiency in the air transportation sector increases the cost of doing business for other sectors thereby making the associated businesses less productive.

However, the impact of the inefficient is subtle. For instance, the industry would employ fewer people as it becomes more efficient.

References

Economists have for a long time tried to solve delay and congestion problems at capacity constrained in air travel industry. Some of the most heavily congested airports in US have been as victim of takeoff and landing constrains, this effectively inflictentrylimitations at these airports (Makinen, 2011). The congress have been attempting to lift restrictions and allow entry in to restricted airports in abid to ease delays. However, it has failed to provide a mechanism for alleviatingcongestion. Congestion is a major cause of delay in the air travel industry. While some routes experience significant lower prices and entry problems due to competition, all routes suffer from domestic increase in flight delays.

Essentially, this report provides the impact of delays in the airline industry. It focuses on the economic principles and the laws in the aviation field. Specifically, the report analyses the ex-southwest airlines. For this airline, the report provides a detailed discussion of the reasons they are late as well as how to improve it. In addition, it compares the airline with other airlines in the air travel industry to evaluate its competitiveness and efficiency in the market. Importantly, the report will serve as a frame of reference for decision makers in evaluating the magnitude of delay problems as well as the need for initiatives to address the problems. In this regard, the report borrows from previous research in attempting to measure the size of the problems.

Delays in flights is a widespread and a serious problem in United States. The ever-increasing fright delays place a significant strain on the air travel system and influence huge costs on airlines, passengers and the society. These delays of flights have huge economic effects on airlines. Some of the economic effects of flight delays in the airline industry include the cost components namely cost to, airlinescost of lost demand, cost to passengers and the indirect effect to the economy (Brueckner& Zhang, 2010). Specifically, the inefficiency in the air transportation sector increases the cost of doing business for other sectors thereby making the associated businesses less productive. However, the impact of the inefficient is subtle. For instance, the industry would employfewer people as it becomes more efficient.

Table one: (Zhang & Czerny, 2012).

In 2007 the US economy incurred a dent of $32.9 billion arising from the costs of domestic flight delays. Based on a study done by researchers at California University, Berkeley, almost half the cost was borne by airline passengers.The Federal Aviation Administration (FAA) commissioned the research with the final report being delivered on Monday, October 2010. Based on this comprehensive study, the conclusion was that augmented delays directly correlate with augmented costs. The conclusion was after the calculation of economic effect of flights delays on passengers and airlines, the cost of decreased demand and the effect of these costs on the economy.

The study found that of the $16.7 billion, more than half was borne to passengers. The numbers was arrived at depending on the time wasted by passengers because of flight delays, missed connections, cancellations in addition to the expenses like accommodations and food sustained due to being away from home additional time.

Airspace congestion is a major cause of delays in the air travel industry. Nevertheless, not all delays are because of airspace congestion. Some delays are unavoidable. For instance, mechanical problems as well as passengers having problems in boarding flights cause some delays (Deshpande&Arikan, 2012). Even if airports provide ample and adequate infrastructure, there would still be operational uncertainty and hence flights can be delayed more so if safety issues arise because of severe weather of other causes. This indicates that it is almost impossible to prevent delays in the air travel industry. Equally, it is not possible to eliminate all delays. Users use changes in major policy and most decisions about airlines capacity commonly (Deshpande&Arikan, 2012).

A report done by Zhang & Czerny (2012) indicates that almost one in four airline flights arrive at their destination over fifteen minutes late. Nearly, a third of these late arrivals were a direct result of the inability of the aviation system to handle the traffic demands placed upon it. The other third was because of airlines internal problems. Notably, when airlines arrive late, they depart late on their next flight hence causing delays. It is important to note that increasing delays threaten the competitiveness of the United States in the world economy. This is by limiting the ability of the air travel system to serve the needs of the United States economy. The air travel demand and gross domestic product are closely linked. There is a strong correlation between growth in business travel and growth in economic productivity.

This indicates that the air travel increases business performance considerably. In addition to this, air transport affects the economy though revenue and jobs it directly create in the air travel related industries. The expenditures of air passengers on auxiliary services and goods as well as the secondary impacts that result as the dollars recycle throughout the economy. The study done by Fu, Oum&Zhang (2010)estimates that the economic impacts from air travel is at $1.3 trillion in economic output. This represents almost $396 billion in earnings and 12 million jobs. Ironically, the air travel industry realizes very little return from the economic contributions. In the United States, this industry suffered huge losses from the terrorism attack in September 2001. The losses were followed by the skyrocketing oil prices and recession. This was also made worse by the global financial crisis that started in 2007. These made even larger losses; the total market capitalization of the major carriers in United States had dropped by 65 percent. Flight delays, by reducing demand for air travel and increasing airline costs compound these financial challenges.

Wu (2012) reports that some delays arise because of externalities in inefficient patterns of usage. An air travel operator considering adding a new flight to an already crowded system may take in to account the delay it is likely to experience but is unlikely to take in to account the delays its flights will impose on other users. On the other side, an operator contemplating drawing down flights in order to increase efficiency of its proceduresand operations is highly conscious of the likelyreactionof other airlines to the market prospects that this would open up for them.

Another impact of delay in air travel is the cost to passengers. The passengers react by reducing their demand for flights with longer delays and choose to fly from less congested airports. This has economic impact in that demand will decrease air travel while another will increase (Vaze& Barnhart, 2011). Air passengers are keen on avoiding delays more so because of their business commitment and the extra cost of the delays. In this regard, airlines operating in delay-infested airports will lose revenue as customers choose another airport and other airlines. It is important to note that air passengers demand efficient services with no delays. If they realize that a certain airline has delays, they switch to another airline that does not have delay. This represents a lost revenue for the airline and hence negative impact (Vaze& Barnhart, 2011).

Importantly, when demand changes and air passengers move to another airport that have no delays, the former airport losses airport charges. Airports charge levies for takeoff, parking aircraft and landing. They also charge for noise and emissions as well. This is in addition to the facilities used by the passengers at the airport. These are the main source of revenue for airports, they use such revenue to improve and increase infrastructure in order to improve service delivery. When demand affect demand drastically, airports lose revenue, as airlines will record reduced business. Reduction in demand infiltrates from the airlines to airports and to other sectors, especially those closely related to the air travel industry (Santos & Robin, 2010). Therefore, it is important for airport management to improve service delivery in order to avoid delays.

The cost of domestic delays is estimated to put a $32 billion dent in to the United Stateseconomy; this is how serious delays are to the economy (Pai, 2010). Interestingly, passengers bear half of this cost. The research commissioned by the federal aviation administration indicate that passengers bear the biggest cost of flight delays. This cost, $16.7 billion, is based on lost passenger time due to delayed flights, missed connections, cancellations as well as expenses such as drinks, food and accommodation that are incurred from being away from home for additional time. This opens a new and important aspect on economic impact of delays in air travel; the area has not been focused as much before (Britto,Dresner&Voltes, 2012). More so, it provides passengers with insights when choosing their preferred airlines.

There are also the cost of hidden delays. These are delays that airlines and airports anticipate and thus build to baffle or paddle their schedules. Moreover, the total cost of lost demand from potential airline customers who changed and used alternative airlines and airports represent a huge economic impact. Delays have environmental impacts as well. This is in form of increased emissions, airplanes are forced to spend additional time holding stacks or taxiing as they await the opportunity to land. They also have noise effects on persons working and residing near the airport (Zou& Hansen, 2012).

Graph 1: Revenues of the US Airline Industry Passenger from 1999-2004(Zou& Hansen, 2012).

As shown in the figure, Low Cost Carriers (LCC) grew faster in the US since the 1990s. In 2005, they comprised of 25% of the US domestic traffic. In the US airline industry, JetBlue, Frontier, Southwest and AirTran are the low fare airlines.

One of the ways of reducing delays and improving air travel efficiency is by expanding runway capacity. The runways represent a pinch point in the air traffic system. Where demand is approaching capacity, queues start to build up. Airports should expand the8ir runways in order to accommodate more flights. Expanding the runway capacity is additional to the other benefits contained in appraisal framework (Vossen, Hoffman & Mukherjee, 2012). Airports should ensure that they have runways for both arrivals and departures; this would avoid delays of waiting for arrivals first and then departures or vice versa.It is also important to ensure that there is a direct transport economic efficiency framework. This framework works to reduce shadow costs to passengers as well as ensuring that they benefit from frequency benefits. The frequency benefits captures the convenience benefits of increased flight frequency, this allows the users to be better matched to their preferred travel time. Formulating a workable and viable framework is as important as expanding the runway. It is essential to note that expansion of runway without the necessary policy framework would render it null, as it would not be possible to deliver the objectives as Vossen, Hoffman & Mukherjee (2012) asserts

Essentially, delays make passengers to spend more time in the air or waiting, this time could be used to do more productive and enjoyable work. Delayed and cancelled flights cause wasted journeys and frustrations to passengers. Uncertainty of the arrival time and the departure time inconvenience the passengers and make them to be stranded in runways and departure loungesSantos & Robin, 2010).

Another way of reducing delay is to use tactically enhanced arrivals management, this technique works very well in boosting the capacity of arriving airplanes. It boosts arrivals capacity by way of allowing a part of incoming airplanes to use the departure runway. This technique is used in well performing airports in the world such as the Heathrow airport in the United Kingdom (Zou& Hansen, 2012). Wu (2012)adds that some delays arise because of externalities in inefficient patterns of usage. An air travel operator considering adding a new flight to an already crowded system may take in to account the delay it is likely to experience but is unlikely to take in to account the delays its flights will impose on other users. On the other side, an operator contemplating drawing down flights in order to increase efficiency of its procedures and operations is highly conscious of the likely reaction of other airlines to the market prospects that this would open up for them.

Graph 2:Low cost carriers US domestic traffic (Zhang& Czerny, 2012).

Perhaps the most crucial element of the fruitful low-fare airline business model is suggestively higher labor productivity as opposed to traditional network carriers. The changes lie in labor productivity rather than in wage rates or even unionization.

There are also benefits that comes with delays. However, these benefits are only realized for airports with well operational management team and framework. These benefits are driven by a combination of number of passengers and delay time that these savings accrue to. Savings in delay time are even higher when the airports additional capacity remains spare for longer and therefore delays do not start to build up (Ferguson et al., 2013). Nevertheless, delay benefits are rare and only occur to well managed air travel system.

The report indicates that delays in the air travel industry have economic impacts to airlines, environment, passengers, economy and related sectors. It is there plausible to avoid the delays as much as possible. Customer demand is essential in ensuring that passengers get services as promised and not as affected by delays.; equally, loss of demand represent a lost income to airlines and airports. For such reasons, it is significant to put in place policy framework and measures to avoid delays.

References

Britto, R., Dresner, M., &Voltes, A. (2012). The impact of flight delays on passenger demand and societal welfare. Transportation Research Part E: Logistics and Transportation Review, 48(2), 460-469.

Brueckner, J. K., & Zhang, A. (2010). Airline emission charges: Effects on airfares, service quality, and aircraft design. Transportation Research Part B: Methodological, 44(8), 960-971.

Deshpande, V., &Arikan, M. (2012). The impact of airline flight schedules on flight delays. Manufacturing & Service Operations Management, 14(3), 423-440.

Ferguson, J., Kara, A. Q., Hoffman, K., & Sherry, L. (2013). Estimating domestic US airline cost of delay based on European model. Transportation Research Part C: Emerging Technologies, 33, 311-323.

Forbes, S. J., & Lederman, M. (2010). Does vertical integration affect firm performance? Evidence from the airline industry. The RAND Journal of Economics, 41(4), 765-790.

Fu, X., Oum, T. H., & Zhang, A. (2010). Air transport liberalization and its impacts on airline competition and air passenger traffic. Transportation Journal, 24-41.

Makinen, G. (2011). Economic effects of 9/11: A retrospective assessment. DIANE Publishing.

Pai, V. (2010). On the factors that affect airline flight frequency and aircraft size. Journal of Air Transport Management, 16(4), 169-177.

Santos, G., & Robin, M. (2010). Determinants of delays at European airports. Transportation Research Part B: Methodological, 44(3), 392-403.

Vaze, V., & Barnhart, C. (2011). An assessment of the impact of demand management strategies for efficient allocation of airport capacity. International Journal of Revenue Management, 6(1-2), 5-27.

Vossen, T. W., Hoffman, R., & Mukherjee, A. (2012). Air traffic flow management. In Quantitative problem solving methods in the airline industry (pp. 385-453). Springer US.

Wu, C. L. (2012). Airline operations and delay management: insights from airline economics, networks and strategic schedule planning. Ashgate Publishing, Ltd.

Zhang, A., & Czerny, A. I. (2012). Airports and airlines economics and policy: An interpretive review of recent research. Economics of Transportation, 1(1), 15-34.

Zou, B., & Hansen, M. (2012). Impact of operational performance on air carrier cost structure: evidence from US airlines. Transportation Research Part E: Logistics and Transportation Review, 48(5), 1032-1048.

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