The theory of supply and demand is perhaps the most fundamental aspect of economics. Across industries, there is a correlation between the two and the aviation industry is no exception. The aim of this paper is to examine factors that affect supply and demand within the aviation industry. This will be done by investigating Airbus’s Global Market Forecast (GMF) and Boeing’s Current Market Outlook (CMO), and then connecting the reports to the writings of experts in economics. This will, in turn, provide insight as to why Boeing and Airbus produce their reports and what they believe will drive the growth of future air travel.
Keywords: Revenue Passenger-Kilometre (RPK), Available Seat-Kilometre (ASK)
Supply and Demand for Global Air Transportation
Managers can often fail because they become focused on daily operations and forget to step back and examine the “big picture”. Therefore, it is crucial for managers to understand the correlation between supply and demand, so they can see the “big picture”. Baye and Prince argue, “Absent a view of the big picture, you are likely to negotiate the wrong prices with suppliers and customers, carry too much inventory, hire too many employees, and purchase ads in which your prices are no longer competitive by the time they reach print” (2014). I believe this is why Boeing and Airbus produce their annual forecast. They are assisting managers with understanding the “big picture”.
Between the two reports, there were similarities in factors that affect supply and similarities in factors that affect demand. This should not be surprising because the two companies make a lot of money to know what influences their market. The commonalities on the demand side are airfare and income. On the supply side, it is the future demand prediction and increases in flights that have the most influence. What is interesting about supply and demand for the airline industry is that the two impact each other. “An understanding and evaluation of the demand for air transport leads to the provision of service which themselves then affect demand. New adjustments to the supply then take place to meet the changes in demand and this interactive process continues” (Doganis, 2010). Although interesting, it can make it difficult for managers to truly know the implications their decisions will have on the company. The next sections of this paper will address the top factors that affect supply and demand in more detail and explain how managers can reduce the number of “headaches” when making decisions.
Influence on Supply
There are many factors that can influence supply in the airline industry. The two that I believe are most influential are increases in flights offered and demand prediction models. Air travel has continued to expand its reach by offering more routes to new destinations at a higher capacity. The GMF report argues that this is especially true in developing countries (Airbus, 2017). These emerging markets increases the investments that companies make in infrastructure and airport developments. Boeing estimates that $1 trillion dollars will be invested in new and existing airports worldwide within the next 4 years (2017). The new routes and destinations will require an increase in the amount of supply. A few ways that airline managers have been able to circumvent buying additional planes has been to develop an efficient maintenance cycle and plan for peak times. “To mitigate the adverse impact of highly peaked demand, airlines may also lease in aircraft or try to use seasonally employed labor during peak periods” (Doganis, 2010). By effectively predicting peak travel times managers can also determine the best time for their planes to rotate into maintenance for checks and inspections. However, according to the Airbus and Boeing reports even the most efficient airlines will not be able to avoid buying new planes if they plan to keep up with the growing market.
The demand for new passenger and freighter aircraft will grow by nearly 35,000 over the next 20 years according to the Airbus GMF report (Airbus, 2017). Boeing’s forecast estimates the demand for their aircrafts will be 41,000 over the next 20 years. The equates to a 3.5% growth in the fleet and over $6 trillion dollars in market value for Boeing (Boeing, 2017). I believe this forecast for demand will influence supply. Airlines will buy additional aircraft to capture the growing market and reinforce their share of new routes and destinations. However, managers will have to balance this expansion with the performance variables (ASK and RPK) in order to remain profitable.
Influence on Demand
There are many factors that can influence demand in the airline industry. Doganis provides a few examples: aircraft type and speed, departure and arrival times, frequency of services, the level of airfares, in-flight services, and the quality of ground handling (2010). The two most prevalent in the Airbus and Boeing reports were also income and airfare. Doganis refers to these factors as the “most important” factors affecting demand (2010). As the personal income increase so does the demand for air travel. This rise in personal income also reflects a rise in a countries GDP, especially in developing countries. Boeing states (2017), “economic and income growth in large emerging markets such as China and India have been a primary driver of global GDP growth and also demand for air travel” (p. 7). Higher incomes paired with lower airfares set the most favorable conditions for an increase in air travel demand.
There are many supply factors that influence demand. One of the more predominant factors is the cost of airfare. There are three major factors that drive the cost of airfare: fuel cost, technological efficiency, and services offered. Airlines can tailor their services to the customer by charging more for more services. This model allows the airline to reach the low-cost traveler as well as the high-end traveler. With maintenance and fuel being the two biggest cost for airlines when either of those improves the cost of the airfare goes down. Improvements in technology have allowed fleets to fly longer using less fuel and reducing cost.
Successful airline managers are able to step back and see the “big picture” of the operations. This can be particularly difficult due to the supply and demand relationship in the airline industry. Supply and demand can be difficult to predict in this industry because changing one area of supply can impact demand. That impact on demand can then lead to more changes in supply. This relationship goes back and forth throughout the industry. It is imperative that managers understand this supply and demand correlation. The tools they have available are the Boeing CMO and Airbus GMF reports that analyze the growth of the airline industry. Of the many factors that influence supply and demand, these reports focused on traveler income and where the most growth will take place over the next 20 years.