This document discusses the impact of the global financial crisis on the demand and supply of air travel. It explores the predicted changes in price and quantity, and provides insights into the trends in Available Seat Miles (ASM) and Revenue Passenger Miles (RPM).
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It would be expected that on account of the global financial crisis which started in 2008, there would be a shift in the demand curve. This would occur primarily because there woulda lower demand for air travel. One of the reasons contributing to low demand would be that casual travellers going for holidays abroad would decrease owing to lower disposable income and a greater tendency to save considering the pessimistic economic outlook. Further, owing to slowdown in the businesses, it would be expected that business related travel would also slow down (Arnold, 2015). Also, it would be predictable that both households and businesses would want to reduce the costs by deferring or minimising their travels. Further, it is also likely that for domestic routes people may consider substitutes such as driving or using other modes of transport. With regards to supply curve, it may be expected that the supply may reduce owing to some distressed airline being closed or the airlines rationalising flights to improve occupancy. This would be required so as to ensure that the operations remain profitable (Mankiw,2016), The predicted impact on the quantity demanded and price can be estimated from the graph shown below. Owing to decrease in demand, there would a shift in the demand curve from D to D1. There would also be some decrease in supply but it would be lower than the corresponding decrease 2
in demand. This is represented by the shift in the supply curve from S to S1. The net impact of these changes is that the predicted price P1would be lower than the original equilibrium price P. Also, there would be a decrease in the equilibrium quantity as indicated in the above graph. Thus, it would be expected that flights would get cheaper and the airline tickets sold would be lower than pre-crisis period (Arnold, 2015). An indicator of supply is ASM (Available Seat Miles). The trend for these parameter from October 2007 to December 2010 is indicated below (BTS, 2018). Source: BTS From the above graph, it is apparent that there was some decrease in the supply but it was less than 10 percent. Also, the decrease in supply in more prominent from mid 2008 and then further accentuates in 2009. However, there is some improvement in supply from 2010 onwards as the peak supply of 2010 is greater than 2009. 3
The demand for air travel can be captured using two parameters namely RPM (Revenue Passenger Miles) and Enplanements. The respective graphs in this regards indicating the movement from October 2007 to December 2010 are shown below (BTS, 2018). Source: BTS The decrease in demand is apparent from the above graph. Comparing the respective figures in January 2008 and January 2009, it is apparent that demand has slowed in excess of 10 percent. Further, from mid 2010 there is some improvement in demand as there is about 5 percent improvement in RPM for July 2010 when compared to corresponding RPM for July 2009. A similar trend is visible for enplanements which is shown below (BTS, 2018). 4
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Source: BTS The price movement for airfare tickets during 2008-2010 is captured below (BTS, 2018). Source: BTS On predicted lines, there has been a decrease in the price of airlines tickets from Q3 2008 and the prices reach their minimum in Q2 2009.In the next one year, there is recovery in the prices. 5
References Arnold, A.R. (2015).Microeconomics(9thed.) New York: Cengage Learning. BTS(2018)U.S Air Carrier Traffic Statistics throughDecember 2018,Retrieved from https://www.transtats.bts.gov/TRAFFIC/ Mankiw, G. (2014)Microeconomics(6thed.). London: Worth Publishers. 6