Supply and demand for Global Air transportation

Supply and demand for Global Air transportation

Introduction

There are salient factors which influence the forces of demand and supply in any market. According to Belobaba, Odoni and Barnhart (2015), demand forecasting is highly essential for business planning and decision making in the airline industry. The main objective of this paper is to show the application of the managerial economic theory in forecasting demand in the airline industry. The report will look into the demand and supply elements factors employed by Boeing and Airbus.

Factors Employed in Forecasting

Airbus

Both Boeing and Airbus forecasts are based on a set of factors. These first factors include changes in political, economic and market conditions, including the business cycle of Airbus limited. Secondly, the estimates are also prepared, having accounted for the possibility of significant disruptions resulting from terrorism attacks across the globe. Thirdly, the calculations have also taken into account possible currency variations among different countries, particularly between Euros and the US dollar. Fourth, the forecasts are prepared in light of the successful execution of internal performance plans, including productivity and cost reduction efforts. Fifth, the forecasts have also considered risks related to programme development, management and product performance. Also included are performance contracts for suppliers, customers and associated financing issues. Seventh are factors relating to consolidation and competition in the defence and aerospace industries

. The eighth factor includes significant disputes with collective bargaining on labour. Ninth, are the outcomes involving legal and political proceedings, the size of the procurement budget and the possibility of government financing. Tenth includes the outcomes regarding research and development expenses relating to new products of the company. Eleventh includes government, financial and legal risks associated with global transactions. Twelfth include investigatory and legal proceedings as well as the political, economic and technological uncertainties and risks. The models used by Boeing in the projections are linked to other proprietary models used for independent assessments, government and fleet budgets.

Forecast Overview

Airbus

The Airbus Global Market Forecast (GMF) for the year 2019 explores the relationship between the cities across the globe, the airports, types of aircraft in terms of range and size. While preparing the forecasts, the Aviation megacities were critical. About sixty-six cities, which account for about 40% of the world’s passenger population since 2002, were considered (Airbus, 2020). The majority of these cities have increased demand for more than one airport per city, with others having even four in one city. The average aircraft size has increased from 155 seats in the year 2002 to 175 seats. The forecasts spread up to 2038, and it is expected that the number of Aviation Mega-Cities will increase to 95 from 66 as cities such as Philadelphia, Lagos, Rio de Janeiro, Muscat, among others, are most likely to join the list.

Overall, the air travel industry plays a crucial role in connecting people with geographic distances and contributes about 3.6% of the GDP (Airbus, 2020). It is estimated that the industry employs about 65 million people. The forecasts reveal that the aviation industry has become more resilient to external shocks since the year 2000, and its traffic has grown by 2.4 times since then. The traffic in the industry is expected to grow by double in the next one and a half decades. The annual traffic growth is estimated to be 4.3% for the next 20 years. Airbus also expects that about 850 freighters will be built while 14,200 aircraft will be replaced with 38,360 passenger aircraft (Airbus, 2020). The forecasted demand for M and L segments will stand at 24%. The service market is estimated to deliver a cumulative value of US$4.9 trillion for the next twenty years.

Boeing

According to Boeing’s forecasts, the airline industry is expected to be highly vibrant, given the previous performance. Boeing believes that the demand is likely to grow further in the next twenty years due to the growing number of the middle class, economic growth, evolving business models in the airline industry and growing economic growth. The airline industry has indicated an increasing trend for the last nine years. Airlines in the industry have increased their operational efficiency and airlines have continued to improve their financial results with an average of $30 billion net profit for the last nine years (Boeing, 2020). The air travelling market is expected to grow 2.5 more times in the next 20 years.

Boeing forecasts cover the current service and support function common in the market today. The forecast timeframe serves as a guide for business aviation, government markets, civil helicopters, business aviation, commercial aviation and general aviation. Boeing expects that the market served will be worth $3.1 trillion from the year 2019 to 2028, with an expected growth rate of 3.5% (Boeing, 2020). Based on the forecasts, the commercial services account for $1.68 trillion, while the government services account for $1.45 trillion (Boeing, 2020).

Reasons for the forecasts

Airbus and Boeing, for many years, have been investing in demand forecasting to keep up with the high competition in the industry. The predictions play a significant role in the preparation of their budget and making critical management decisions. It is also used as a basis for performance measurement. The forecasts help the company to do better planning so that they can exploit all the available opportunities in the industry. Proper planning helps the companies to remain highly competitive and keep up with the changing demand.

Factors affecting the demand and supply curve of the airline industry

The factors that influence demand in the airline industry include the ticket price, stage length, route population, level of income and seasonality (Belobaba, 2009). When the ticket price increases, consumers prefer to use other alternatives such as automotive, especially for local frights. An increase in the ticket price; therefore, results in a consequent increase in demand while a decrease in the ticket price results in a decrease in demand. Stage length also influences supply and demand in the airline industry. Consumers prefer short stage length and will, therefore, chose airline companies which will take to their destinations without having too many stoppages as such stops wastes too much time. The routes, especially those connecting major cities with a high population, have high demand than those connecting small cities with a small population. Airlines operating in economies with high-income levels also experience high demand than airlines operating in low-income economies. An increase in the level of income results in an increase in demand (Belobaba, 2009). Seasonality is also an important issue when looking into the factors that influence demand in the airline industry. During the peak seasons, especially when there are too many tourist visits, the demand also increases and vice versa.

The factors that affect the supply side in the airline industry, on the other hand, include the frequency of service, availability of seats, the cost of buying and maintaining the airplanes and the in-transit stops (Belobaba, 2009). Airlines with a high number of airplanes can deliver the transportation service more frequently than those with limited airplanes. The capacity of passenger and cargo airline carriers also influences the supply side air transport. Large carriers can offer high airline transport services as they have more seats than small carriers. A high number of in-transit stops consume more time and is, therefore, a hindrance to the supply of service. Lastly, the major factor affecting the supply of air transport service is the cost of purchasing and operating the airplanes.

Conclusion

Based on the analysis above, both Boeing and Airbus forecast that the airline industry is expected to grow more than double in the next twenty years. The factors that influence demand in the airline industry include the ticket price, stage length, route population, level of income and seasonality. The factors that affect the supply side in the airline industry, on the other hand, include the frequency of service, availability of seats, the cost of buying and maintaining the airplanes and the in-transit stops. The company invests in the demand forecasts in the preparation of its budget and making critical management decisions. It is also used as a basis for performance measurement. The forecasts help the company to do better planning so that they can exploit all the available opportunities in the industry. Proper planning helps the companies to remain highly competitive and keep up with the changing demand.

References

Boeing (2020). Commercial Market Outlook, 2019 – 2038. Retrieved from https://www.boeing.com/commercial/market/commercial-market-outlook/

Airbus (2020). Global Market Forecast. Available from

https://www.airbus.com/GMF-2019-2038-Airbus-Commercial-Aircraft-book.pdf

Belobaba, P. (2009). Overview of airline economics, markets and demand. The global airline industry, 47-72.

Belobaba, P., Odoni, A., & Barnhart, C. (Eds.). (2015). The global airline industry. John Wiley & Sons