Economics in Aviation Australia Theory 2022

Running head: ECONOMICS IN AVIATION
ECONOMICS IN AVIATION
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ECONOMICS IN AVIATION1
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Economic Principles of Aviation industry...................................................................................2
Reasons for the failure of the Compass Airlines.........................................................................4
Virgin Blue and Jetstar Airways..................................................................................................5
Conclusion.......................................................................................................................................6
Reference List..................................................................................................................................9

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Introduction
The Airline Industry of Australia was deregulated in 1990 with the introduction of a low
cost carrier airlines. It was a start-up company known as the Compass Airlines that was operated
in December 1990. However, the company stopped operating within 12 months from its launch
which led to the introduction of a new airline known as the Compass II in the airline industry.
Although, it started operating from August 1992, yet it again failed operation in March 1993. On
the other hand, Virgin Blue was operated in 2000 and continued with effective profits until the
Global Financial crisis affected its revenue in 2009. Thus, it is crucial to study the reasons behind
the failure of the Compass Airlines for two successive periods and making a comparison with
Virgin Blue. It is important to follow the economics behind the operation of the aviation industry
in order to generate a greater success in the long run. Thus, the aim of the paper is to interpret the
effectiveness of aviation economies and the way it can affect the growth of the airline companies
by making a comparison with respect to Compass Airlines and Virgin Blue and determine its
strength and weakness.
Discussion
Economic Principles of Aviation industry
The law of supply and demand is effective for the operation of the aviation industry in
order to understand the equilibrium state and enact accordingly for extraction of enormous
profits. It has been said by that airline industry often goes through a relentless period of over
capacity that has it obvious impacts in the economic profits. Demand for air travel is highly
cyclical though the inventory cannot be stored. The overall cost is extremely high and the burden
is because of high fixed cost of operation. City pair product offerings are geometrically increased
from hubbing and accordingly overlapping hub networks are created for effective performance of

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the airlines. New aircraft needs to be ordered few years before the delivery time as production of
airplanes and airlines requires several process, cost and time (Mankiw, 2020). Aircrafts are
ordered in good times such that when the flow is quite high and delivered in bad times when the
airport sector deliberately feels that there is need for increasing operations and using newer ones.
The supply curve shows a S-shape such that the curve is more shifted towards market share when
the frequency is low and vice-versa.
The airline industry requires a high level of investment which is often considered
irrational by investors and cannot be provided by investors alone. That is why government
financing is important and export financing is provided by the government such that companies
are able to export goods and airlines can generate revenues (Kille, Bates & Murray, 2013).
However, bankruptcies can be common when the flow is low although it does not eliminate
capacity. Capacity cannot be reduced as it rises the unit costs and lowers the level of product
offering which has a bad impact on the firms as per significant changes in market based statistics
and outcomes. On the contrary, inventory seats cannot be lowered even of demand is low and
therefore, lower prices is not effectively good for airline industry (Murphy et al., 2015). This is
because demand is dependent on seasons, day of the week and time of the day and accordingly
airplanes are either fully loaded or partially.
Demand for air travels can have a huge impact on the airline firms, industry and economy
as a whole. The efficiency of the economy is adequately based on the movement of people and
goods across economies. Accordingly, income and the annual revenue generated from the people
are denoted (Ma et al., 2015). Globalization has led to a decline in domestic growth due to
changes in telecommunication sector that has reduced the market share of air travel. Thus,
performance for air travel is effectively based on the demand and the business structures because