Report on Influence of Macroeconomic Indicators on the Airline Industry

Summary of Influence of Macroeconomic Indicators on the Airline Industry:

            The study investigated different macroeconomic factors responsible for influencing the performance of airline industry around the globe. An extensive literature review technique was used in order to achieve the formulated objectives of the study. The study also included some relevant data related to different macroeconomic variables associated with airline industry. The results of the study suggested that crude oil prices are considered to be the most significant and important factor responsible for influencing airline industry. Crude oil prices are inversely associated with profitability of airline industry. The study also identifies that macroeconomic indicators like exchange rate and interest rate are also responsible for influencing the performance of different Airlines around the globe. The results of the study also suggested that macroeconomic variable per capita income is responsible for being a significant factor associated with performance of airline industry. Per capita income was identified to have positive relationship with demand prevailing in airline industry. The airline industry has been experiencing increasing trend of passengers, and it is forecasted that airline industry will experience positive growth with the passage of time. It is recommended for airline industry to frequently introduce different types of promotion and discount related activities in order to attract customers and to effectively compete in the market.

Introduction of Influence of Macroeconomic Indicators on the Airline Industry:

This study is focused towards investigation of different macroeconomic factors responsible for influencing the performance of airlines industry around the globe. Different external macroeconomic factors are responsible for influencing the strategic decision-making process in airline industry. These macroeconomic factors are also responsible for influencing the market forecast related to aircraft manufacturing industry. Due to present economic crisis as well as instability related to fuel price in aviation industry, performance of airline industry is also influenced. Due to increase in oil prices, business around the globe related to airline industry has shrunk, and business environment has positively increased competitive rivalry among airline industry around the globe with the passage of time. As far as future growth of this industry is concerned, future projected growth looks positive and promising.

Related Studies of Influence of Macroeconomic Indicators on the Airline Industry:

            Different studies have been conducted in the past investigating the influence of different macroeconomic factors on performance of airline industry. A similar study was conducted in past in European Union region. This study investigated influence of different selected macroeconomic indicators on the demand level prevailing in airline industry in European countries. The study utilized regression analysis technique in order to achieve the formulated objectives. The results of the study clearly suggested that macroeconomic indicators income per capita and ticket price are responsible for influencing demand level prevailing in airline industry. The result of regression analysis for the suggested that increase in level of income per capita and decrease in ticket pricing is responsible for positively influencing demand level prevailing in aviation industry. That is why it is important for airline industry to have an increased growth of income per capita in different parts of the world. It is also important to reduce ticket pricing in order to increase the demand for airline tickets (Secilmis & koç, 2016).

Another similar study was conducted in the past investigating the influence of different macroeconomic factors on performance of airline industry in Turkey. The study applied Granger causality technique in order to analyze two-way causality prevailing between selected macroeconomic indicators and performance of airline industry in Turkey. Results of the analysis clearly suggested that macroeconomic indicators per capita income, Gross Domestic Product and consumer price index are responsible for significantly influencing the number of domestic as well as international passengers traveling from Turkey airline. This clearly suggests that one of the biggest and important macroeconomic factors associated with performance of airline industry is income. The results of the study suggested that there prevails positive significant relationship between per capita income and number of passengers traveling from Turkey airline. This suggests that increase in level of per capita income will positively influence the number of passengers traveling from Turkey Airlines (KİRACI & BATTAL, 2018).

            The above graph provides information regarding net profits in billion US dollars realized by the airline industry during 2018 and 2017 for different selected regions around the globe. It can be easily observed that net profit percentage has been experiencing increasing trend in 2018 from 2017 in American region, European region, Asia Pacific region, Middle East and African region. This clearly suggests that airline industry is experiencing increasing growth with the passage of time from net profit perspective. It is also due to increase in number of passengers traveling through airline industry with the passage of time. Competition among different Airlines is increasing with the passage of time due to increase in number of travelers. In order to effectively complete in airline industry and to remain leader in airline industry, it is important for Airlines to continuously provide different types of promotions and discounts to their potential Travelers and passengers. It is also important for the airline-related companies to continuously introduce different types of discount programs and attractive programs for their frequent flyers in order to make sure that their frequent flies do not move to their competitors.

            The above graph provides a relationship between Gulf coast Jet fuel and oil prices. According to the above graph, it can be easily observed that there prevails a strong Association between movements of oil prices and jet fuel costs. It can be observed that Gulf Jet fuel cost followed decreasing trend due to decrease in price of Brent crude oil and WTI crude oil at international level. The graph suggests that with increase in crude oil prices, Jet fuel cost also increases, and a decrease in crude oil prices results in decrease in Jet fuel cost. It can be observed from the above graph that cost for Jet fuel was approximately 120 US dollars at the start of 2013 which decreased to approximately 40 US dollars at the end of 2015. This clearly suggests that decrease in international crude oil prices results in influencing Jet fuel costs in positive manner. With decrease in jet fuel cost, Airlines are able to reduce their ticket prices due to which number of passengers traveling from airline is increased. That is why price of crude oil can be considered as one of the most important macroeconomic indicators associated with the performance of airline industry around the globe.

            According to the above diagram, different factors are responsible for influencing the profitability of the airline industry. These different factors include market share, competition in airline industry, Product life cycle, brand image, economic growth of the country in which airline is operating, exchange rate and cost of production. Out of these factors responsible for influencing profitability of airline industry, economic growth is considered to be the most important and significant one. It is mostly because of the fact that if the passengers are economically stable then it will positively influence the revenue generation of airline companies. Passengers with better economic conditions will consider airline transportation over other means of transportation. That is why it is always beneficial for airline industry to have positive economic growth in the country in which they are operating.

The global airline industry has experienced significant and positive improvements in recent years. There are approximately 2,000 different airline Carriers operating at global level. There are approximately 23000 different aircraft operating at an international level, and these aircraft are responsible for providing service to more 3700 airports around the globe. On average, airline industry approximately made 28 million flights in 2006 carrying approximately 2 billion passengers during 2006 (INTERNATIONAL LABOUR ORGANIZATION, 2013). These numbers are increasing rapidly with the passage of time. Time with increase in growth of airline industry, challenges associated with airline industry are also increasing. Most of the airlines are offering low prices for their tickets due to low cost. It is important to improve transparency related to pricing of airline tickets in the industry in order to improve the revenue generation in airline industry. It has been observed that lack of transparency in pricing of airline tickets has negatively influenced revenue generation in airline industry. The cost of feeling is considered to be the most important and the most significant expense of this industry. For the first time, cost related to fuelling has surpassed the cost related to labor in 2008 in the airline industry, suggesting that fuel cost is the most important aspect and macroeconomic indicator responsible for influencing the performance and growth of airline industry around the globe.

     According to the forecast provided by the International Air Transport Association, number of passengers traveling through Airlines will increase to approximately 8.2 billion at the end of 2037. According to the forecast provided by international air transport Association, it has been forecasted that annual compound growth rate for the airline industry will be approximately 3.5% in coming years. The airline industry has experienced rapid growth as number of passengers traveling through Airlines in 1998 was approximately 1.4 billion while the increased to approximately 4 billion in 2017. This rapid increase in number of passengers traveling from different types of airlines is a positive sign for the airline industry. These statistics have been provided by the International Civil Aviation organization (Garcia, 2018).

The interest rate is another factor responsible for influencing the market economy as well as airline industry in different parts of the world. Interest rate is used in order to formulate connection between the price prevailing today and the price which will be used in future. An increase in the amount of interest rate generally increases the expected cost of distress which eventually influences the airline industry in negative manner. This cost is considered to be a substantial and important cost an airline industry. That is why, interest rate is considered to be a significant and important factor responsible for influencing the performance of airline industry (UWAGWUNA, 2011).

The exchange rate is another Macro Economic indicator responsible for influencing the performance of airline industry around the globe. The profitability of airline industry is closely associated with movement in currency values (SEGAL, 2019). Tourism demand is considered to be a significant factor responsible for influencing exchange rate which eventually influences the performance of airline industry. Both types of Travels whether they are inbound or outbound are influenced by the exchange rate prevailing in the airline industry. When exchange rate is increasing, tourists will benefit from this increase. Due to this benefit, most of the tourists will increase their travel, and it will increase the demand related to airline tickets. On contrary, due to depreciation-related to domestic currency, tourist is discouraged from traveling due to which demand for airline tickets is negatively influenced. Traveling in a recession time is considered to be the most common example. If the exchange rate prevailing in the market related to the currency falls down then customers will be able to save their expenses by not traveling or they might wait for appropriate promotion or discount provided by different types of airline companies. This suggests that International demand for traveling is negatively associated with the value of the domestic currency. That is why the exchange rate between the prominent currencies around the globe is considered to be one of the most significant macroeconomic factors responsible for influencing the performance of airline industry around the globe.

Conclusion of Influence of Macroeconomic Indicators on the Airline Industry:

The study was focused towards investigation of different macroeconomic factors responsible for influencing airline industry around the globe. The relevant literature review was conducted, and relevant macroeconomic indicators were investigated in order to analyze their influence on the performance of airline industry. The study clearly suggested that airline industry is experiencing increase in growth of passengers traveling by this mean of transportation. Results of the study also suggested that crude oil price is considered to be one of the most important and significant macroeconomic indicator responsible for influencing the performance of airline industry.

Study results also suggested that per capita income is also identified as significant macroeconomic indicator responsible for influencing the demand level prevailing in airline industry. The study identified the strong and positive association between per capita income and demand in airline industry by using previous studies. It was also identified that macroeconomic factors like exchange rate and interest rate are also responsible for influencing the profitability and performance of airline industry.

References of Influence of Macroeconomic Indicators on the Airline Industry

Garcia, M. (2018). Air Travel Projected To Double In 20 Years, But Protectionism Poses Threat. Retrieved 11 04, 2019, from Forbes: https://www.forbes.com/sites/marisagarcia/2018/10/24/iata-raises-20-year-projections-to-8-2-billion-passengers-warns-against-protectionism/#140fd5b2150f

INTERNATIONAL LABOUR ORGANIZATION. (2013). Civil aviation and its changing world of work. INTERNATIONAL LABOUR ORGANIZATION.

KİRACI, K., & BATTAL, Ü. (2018). Macroeconomic Determinants of Air Transportation: A VAR Analysis on Turkey. GAUN JSS .

Secilmis, N., & koç, A. (2016). Economic factors affecting aviation demand: Practice of EU countries.

SEGAL, T. (2019). Currency Fluctuations: How They Affect the Economy. Retrieved 11 04, 2019, from Investopedia: https://www.investopedia.com/articles/forex/080613/effects-currency-fluctuations-economy.asp

UWAGWUNA, C. (2011). How the Macroeconomic Environment of the Airline Industry Affects the Strategic Decision of Boing Vs. Airbus. Elaboration.