The Economic Factors that Help Explainining the Expansion of Low-Cost Research Paper

The Economic Factors that Help Explainining the Expansion of Low-Cost Airline Carriers - Research Paper Example Accessibility of alternative modes of transport that are rationally close substitutes for air transportation diminishes with distance travelled. Globalization and free movement of merchandise and people between and within regions have a positive effect on air travel demand. Business travel market consists of time sensitive passengers; therefore, these customers are price inelastic in terms of fares. If the airline firm offers high quality service to this market segment, such as frequent and reliable frights, flexibility, comfortable seats, and excellent, frequent flyer programme rewards, business class customers will be willing to pay high prices (Junwook, 2011). However, with the introduction of low cost airlines the price elasticity of this business class market has changed and they display price elasticity. In previous years, airline industry relied heavily on business travel market as a major source of profit, however, this trend has changed, and the industry has noted that a hig her percentage of passengers considers price over service. Business class customers are willing to give up luxuries, food quality, flexibility or choice in return to lower prices. According to Rosario & Eddy, 2010, the economy travel market is largely determined by the costs being charged by the airlines; they are price sensitive. The first class air travel market does not generate much profit to the airline industry, as a result, many airlines are moving from three to a two-class cabin. The levels of consumer income influence the passenger’s choice of the air travel class; the choice of consumers with high levels of income will differ with those of consumers with low levels of income (Bijan, & Tom, 2008). The demand for leisure travel is influenced by the number of independent holidays and short term breaks; in this market passengers book flights, accommodation and car by themselves. According to Airport International, the changes in demand of leisure travel indicate that cu stomers are expecting and preferring low fares. Low fares in this market segment are the main stimulus for growth in luxury travel, and passengers are willing to change destination for fabulous deals. According to Susan, 2009, the prices of air tickets are largely influenced by the fuel prices, the exchange rates, and the costs of financing airline projects. High costs of financing, unstable exchange rates, and high fuel prices lead to high air fares. Other natural calamities, such tsunami and earthquakes among others results to decline in tourism and business travels thereby, affecting the air travel demand in the affected areas (Roger, 2008). The following diagrams and tables show the effects of fuel prices on operating costs of the airline industry. Prices of air tickets are determined by the price of fuel; fuel price is influenced by the prevailing economic conditions such as the exchange rates. Industry Fuel Costs and Net Profits. Source: Industry Financial Forecast Table (IATA Economics). Fuel Impact on Operating Costs Year % of Operating Costs Average Price per Barrel of Crude Break-even Price per Barrel Total Fuel Cost 2003 14% $28.8 $23.4 $44 billion 2004 17% $38.3 $34.5 $65 billion 2005 22% $54.5 $51.8 $91 billion 2006 26% $65.1 $68.3 $117 billion 2007 28% $73.0 $82.2 $135 billion 2008 33% $99.0 $88.9 $189 billion 2009 26% $62.0 $55.4 $125 billion 2010 26% $79.4 $91.0