Running Head: CURRENT MARKET CONDITIONS PAPER Current Market Conditions Paper University of Phoenix ECO 365 Current Market Conditions Paper In this paper Learning Team A will explain how Delta Air Lines (Delta) has been affected by the economy, giving details about the positive and negative externalities as well as the shifts in price in elasticity of supply and demand. We will discuss how quantity demanded and quantity supplied has changed due to price changes and technology innovations. We will discuss how government regulations create surplus or shortage of airline flights. Supply and Demand Analysis
Delta is the one of the major airlines of the United States that carries cargo and passengers. Opportunities for Delta in terms of equipment are highly advanced and are constantly improving. Demand for leisure travel and the global nature of the airline industry encourage Delta to enter further strategic alliances that offer a range of measures to be taken into consideration to provide a flawless global network to be present in all major markets. Delta offers a variety of services for customers, such as online product information, fare information, flight booking, and daily flight schedules.
The airline industry is an unstable industry because of various factors. One such factor is that airlines are highly dependent upon current market conditions. The passengers’ reasons for travel contribute to instability of the airline industry. Various events such as increased oil prices, terrorist attacks, and inflation significantly have changed the demand for travel through the years. Typically, passengers travel for either business or pleasure. The airline industry is elastic because leisure or vacation travel is more price sensitive (Business Travel News, 2008).
Business travelers still contribute to high demand for airline travel, however, with improved technology and a global recession; a portion of the business travel has been eliminated or decreased to conserve spending. The equilibrium for airline tickets from Atlanta to Orlando fluctuates greatly due to changing demand for flights, which will affect the pricing for airline tickets. The supply is based on Delta’s flight schedule for a specific day: On December 20, 2009 Delta offers 17 flights between Atlanta and Orlando; each Boeing 757 aircraft holds 183 passengers for a total of 3,111 available passenger seats (Delta, 2009).
The closer the travel date is, the more the airline monitors the price for specific flights to ensure that all flights are full. Delta factors in a no show rate of passengers, which can lead to involuntary denied boarding of passengers. During the fourth quarter of 2008, 1. 10 per 10,000 passengers was denied boarding due to overselling of flights (DOT, 2009). Factors That Determine Changes in Supply of Demand Delta’s ticket sales fluctuate due to current market conditions, such as fuel cost, global economy, and terrorism threats.
Available substitutes also have an effect on supply and demand of airline tickets. Once potential customers check the ticket cost on Delta for a given flight, they may consider alternative transportation means, such as discount airlines, cars, trains, or busses. The Internet has contributed to increased competition among airlines and substitutes. Websites, such as expdia. com and Travelocity. com, allow passengers to shop for the lowest price available. Depending on the purpose of the travel potential passengers might decide to postpone their travel or to cancel their travel plans.
Telecommunications has developed into another substitute for Delta because of video conferencing, its ability to offer webinars, and other electronic services. The terrorist attacks of September 11 decreased the demand of airline travel as well. The Bureau of Transportation Statistics (BTS) reports that the events of September 11, 2001 caused more passengers to fly low-cost airlines, resulted in a reduced airline workforce to reduce cost, whereas airlines reduced their offerings of daily flights, which resulted in fewer empty seats (BTS, 2005. ).
The number passengers on domestic U. S. flights fell from 65. 38 million in August 2001 to 31. 82 million in September 2001 due to the terrorist attacks on September 11 (BTS, 2005). Changes in Quantity and Demand Due to Price External circumstances whether positive or negative can influence the supply and demand of Delta and the airline industry. No matter how good or bad the economic market conditions are they will always have an impact on how Delta deals with specific situations, such as aircraft malfunctions and crashes due to human error or technological problems.
Airline tickets have an elastic price when booked in advance. Long run consumers and organizations have time to shop around for the best fare. For example, to book a one-way ticket in coach class on December 8, 2009 for February 14, 2010 from Atlanta to Orlando the ticket price has a base price of $94 plus $10. 60 for taxes and fees for a total cost of $104. 60 whereas a one-way ticket for the same flight if booked on December 8, 2009 for December 8, 2009 has a base price of $305 plus $10. 60 for a total cost of $315. 60 (Delta, 2009).
Short-run the airline ticket cost is inelastic because passengers are willing to pay a high price for any short-notice travel due to family emergencies or last-minute business meetings. For the airline industry the terrorist attacks of September 11 meant seizing the entire operations for several days due to government orders. Consumer’s insecurities to trust the airline industry and federal security guidelines led to decreased demand of airline ticket sales. This forced the airlines to raise prices to offset the decreased revenue and to compensate for new security fees enforced by the United States government and airport authorities.
These tragic situations led some airlines to face bankruptcy, including Delta and United. But somehow through all the hardships endured, Delta and other airlines managed to overcome the situation by modifying their ways of operations. Delta’s adjustments came from reducing, altering benefit plans, reducing employee pay rate, reduction of flights and routes, and some services, while charging additional fees for some basic services, which were included in the ticket price before. In today’s economy both the airline industry and the consumer must deal with the rising cost of fuel.
The Deal website (2009) estimates that Delta pays around $80 million annually for every dollar the oil price rises. This situation affects the supply of airline tickets by increasing ticket prices and charging extra fees for checked baggage and meals. These charges will help the airline industry survive current operations due to economy changes, helping to offset the current economic situation. Although the price of the oil barrel reached $140 earlier in 2009 currently is down to $80 per barrel (TheDeal, 2009).
These figures show that the economy is stabilizing somewhat and Delta and other airlines may begin to show profit (TheDeal, 2009). Therefore, if oil prices keep rising it forces airlines to raise prices while offering sales campaigns for those hard to attract consumers watching their spending. Nonetheless airlines count on consumers and business travelers who are willing to pay the current prices no matter how high it may be. Delta’s move to cut down services and schedules will well prepare the airline for the uncertain future of the airline industry (TheDeal, 2009).
Influence of Technology on Supply In the airline industry technology plays an important and necessary role on how this business must find ways to improve on to continue in a highly competitive market. Technology has played an important role for Delta by proving passengers online access. This technology allows passengers to purchase tickets, check on status of flights, books seating, and printout of boarding passes. At most airports Delta is proving self service kiosk for check in. Although technology can affect supply in a positive way, it can also result to a dramatic decrease in supply.
In March 2001, a computer glitch by a Delta commuter airline shut down Delta’s entire flight dispatching system, causing delays and cancellations of flights for an entire day in the eastern United States and Canada (Mearian, 2001). This dispatch system provides Delta flight crews with vital information, such as weather forecast, flight plans, and fuel data. Shortage or Surplus Due to Government Regulations The Federal Trade Commission (FTC) is a federal agency, which advocates for consumer protection and competition jurisdiction in broad sectors of the economy in the consumer industry.
The FTC has designed regulation that is used for fraudulent or deceptive conduct in the petroleum market; referred to as the Petroleum Market Manipulation Regulation (PMMR). The PMMR controls fuel supply in the market therefore; Delta can keep cost low and the demand for tickets high (FTC, 2009). The Federal Aviation Association (FAA) helped pass legislation on December 14, 2007 to reevaluate the retirement age of pilots from 60 to 65 due to the shortage of qualified pilots for all airlines, thus helping to create a surplus of qualified ilots flying commercial aircraft. The legislation is known as the Fair Treatment for Experienced Pilots Act. This act helped Delta to cover the demand of consumer flights without reducing the number of flights. The FAA also created a bill named Airline Safety and Pilot Training Improvement Act. This act demands that pilots log up to 1,500 hours in flight time and teach pilot safety maneuvers in the event of air travel emergency protocol such as midair crashes, passenger injury, and volatile weather alerts (FTC, 2009).
Airlines will have to let passenger know on the ticket if they are traveling on commuter jets contracted by the airline to cover the demand for lower flight destinations and departures. This creates a surplus by allowing commercial airlines to contract smaller aircrafts to smaller airports and offer less expensive tickets to airports with less demand. Conclusion Delta’s ticket price has proven to be elastic. The supply of fares (seats) responds substantially due to changes in the price of uncertainties; reason the airline industry as elastic. Elastic supply can be seen in price wars initiated by Delta’s competition of other airlines.
As the supply of seats is high or low, extreme modifications in price accompany the movement in supply. Special sales of flights greatly affect the supply and demand of flights. Delta must follow government regulations that will create surplus in today’s industry. With the help of the FAA and FTC, Delta can ensure a surplus of pilots and fuel so they can keep the consumer surplus up with low-cost airfares and safety. Some regulation could solve the surplus temporarily, it will take both Delta and the federal government to create surplus, in which there is a deficiency. References FTC. gov (2009). About the Federal Trade Commission.
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