Free Essay Example on Understanding Derived Demand in Air Travel Economics

Introduction

Economics illustrates derived demand as a demand for productive resources or intermediate goods, which emanate from the need for another good or service. The author uses this term to indicate that the willingness and the ability to buy air travel services depend on other essential services primarily associated with airline services. Such services include business trips, leisure trips, et cetera et cetera. Importantly, it implies a mounting force for the airline industry to invest in the goods and services operate concurrently with the air journey.

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Other examples of these ventures include hotel services, car hire, tour organizers, and travel agencies. To a great extent, an increase in the demand to say tourism services significantly impacts the air service, stimulating its demand. A decrease, on the other hand, will signal a possible reduction in air services. It is thus necessary for the air industry to split into other services related to air travel. For instance, on some trips, leisure travels are more likely to have more bags than business travels. These travels represent a case that justifies that a cut in fares, especially after airlines start imposing fees for checked bags, should be more considerable for leisure travels.

Factors Influencing the Number of Air Travel Passengers

Numerous circumstances continue to work either for or against the air industry and the number of passengers therein. These may include the living standards, and in this case, an increased GDP leads to an expansion of disposable income, hence the improved living standards (Fernandes and Aparicio, 2020, p.34). Consequently, there is a higher probability of an intensified demand for air travel for both business and leisure purposes. Secondly, demographics play a role. Here, researchers have concluded that the working-age population makes more air trips than the older and younger generations. It mentions that states witnessing an increased working population rate stands an extraordinary chance to boost air travel passengers.

A third and very fundamental factor is the cost of air travel. In cases where the air ticket becomes cheaper, the number of people who can afford it increases, and consequently generated air traffic. Another significant factor responsible for the number of passengers is the consumer tastes and preferences. The feelings and preferences change for consumers' benefit, and there is a high probability of a positive effect in particular air travel, which will experience increased customers for such services. Trade is also fundamental. For instance, increased international trade will attract more people from various geographic locations and expand the number of air passengers.

Types of Business Airline Models

Currently, there exist various airline business models in operation. Firstly, there is a Full-Service Network Carrier. It is also known as a legacy. Its focal point is on the provision extensive range of pre-flight and in-flight services (Whyte and Lohmann, 2016, p.108). It operates a hub-and-spoke model, including several service classes, as well as linking flights. Examples of this model include Air France, Lufthansa, Australian Airlines, and British Airways. Secondly, we have a Low-Cost Carriers model (LCC). It mainly focuses on the cost moderation to hooks price leadership (Whyte and Lohmann, 2016, p.109). It has an aggressive pricing strategy, which helps to is achieved by issuing hefty discounts for those tickets ordered way ahead of time. So, there is new demand, particularly from low-yield customers and the substantial bargainers who would otherwise not manage to afford a flight.

Southwest Airlines is an example of the LCC and operates between 20-25 mini hubs, thus charming passengers' rapid movement (Whyte and Lohmann, 2016, p.109). Besides, there also exists an integrators model. The integrators model operates based on door-to-door services. This service facilitates the management of sales and shipment operations. Importantly, the integrators emphasize punctuality services. They also operate hub-and-spoke systems with both primary and secondary hubs in several regions.

Advantages of the Models Mentioned above

Full-Service Network Carrier

These models are relatively cheaper because of their cost structure. For a case in point, there is only one cost implying that the only price one is to pay the ticket price, except where bag and baggage remittance is transcended (Oliveira and Huse,2009, p.310). Secondly, due to the hub and spoke operations, one can buy tickets that do not instantly link to the departure terminus. The Full-Service Network Carriers have magnanimous cabin services, including two to three classes; therefore, one can pick a favorable seat depending on affordability.

LCC

Since the Low-Cost Carriers operate on a point—to—point basis, the infrastructure and airport fee achieves greatly lessened. LCCs also lower taxiing and holding since they work in uncongested airports. Besides, the LCCs are relatively cheaper due to its nature of the disposition were, resulting from the execution of deregulation and liberalization (Oliveira and Huse, 2009, p.310). Additionally, due to its comprehensive feature, the LCCs have better decision making, which is beneficial in aviation operations.

Integrators

They can easily manage sales and operational processes. This management further enables the implementation of effective price leadership. They also operate nightly rubbing to connect overnight accouchement in essential areas. Furthermore, the major players include DHL, UPS, and TNT, which provide comprehensive services using domestic and contract services.

How Airlines Operate in and from Hubs

A primary principle of hubs is that it is easy to direct flights on a point-to-point system, thus providing more services to the customers, and while at the same time lowering the number of empty flights, thus ensuring cost-effectiveness of the airlines. An example of this system is Delta Airlines that operates a hub at Hartsfield Atlanta International Airport. A hub center is a significant airport in which all the flights for a particular airline have to go through direct spokes, on the other hand, refer to those paths used by flights from a given hub (Mohri and Nasrollahi, 2018, p.376). From the center, the spoke flights take particular passengers to particular terminals.

The main reason for adopting the hubs system was to save the airlines from unnecessary losses experienced when operating half-empty flights and give the customers better routes to their various destinations. The airplane seat is a direct representative of the chunk of the flight's entire cost at the hub. Remarkably, every position that is occupied by a passenger provokes the airline to lower its break-even. Notwithstanding, the price has to increase in case of an empty seat to ensure the break-even point.

Resources at the Airport Hub

Because of the nature of operations at the airport hubs, there are several facilities available. These include airport aprons, air traffic control centers, passenger facilities such as the lounges and restaurants, taxiway bridges, and emergency services (Guzha and Skorokhod, 2018, p.2). Other fundamental resources may include gates, waiting areas, security clearance gates, terminals, check-in facilities, and international travel customs.

Advantages of Airport Hubs

Hubs offer numerous instant flight options making it favorable to passengers. Secondly, they give more space and scheduled flights, thereby minimizing unnecessary delays. The third benefit is that hubs can accommodate several planes. This benefit enables a faster substitution of an airline's possible routes with fewer passengers (Liu and Yuan, 2018, p.3). Furthermore, in international hubs, it is possible to access more destinations at a relatively cheaper cost. Reduced costs improve the local economy. Lastly, they offer advanced air service solutions and customer-specific.

Disadvantages

In as much as the hubs have significant benefits to the users, they also have their drawbacks. These include possible cases of congestion and delays at the hub airports due to the scheduling of the incoming and outgoing flights in numerous paths in the shortest time possible (Liu and Yuan, 2018, p.3). This arrangement results in traffic, which causes delays.

Challenges in Profit Realization

From the year 2000 and 2009 were very challenging years for the airline industry. For instance, in the year 2000, the national economy had slowed down. It had enormous effects on consumer behavior since the consumers became more price-sensitive; thus, a reduced number of air passengers, causing the airline industry to experience losses (Zarb, 2016, p.3). On September 11, 2000, there was a terrorist attack, whose aftermath had dire consequences on the airline industry (Zarb, 2016, p.3). Between 2000-2002, the economic plunge industry smacked the airline industry. In 2008, there was a worldwide financial calamity due to the largest USA bank's collapse, which went by the name Lehman Brothers.

The results of the crisis sent packing the major economies to the recession. There was a massive nosedive in the leisure and business travels in the major markets during this period by illustration. However, profits were realized from 2010 because the industry had started recuperating from the 2008 financial crisis. Moreover, the decrease in aviation fuel price was a relief as it reduced fares, thus attracting more customers. Another significant attribute to the realization of profits since 2010 in the airline industry is technological improvements, especially in airframe and engine technology (Zarb, 2016, p.5). These paved ways for the more abundant, economical, and speedy aircraft were customer-efficient and attracted the passengers.

An Account for the Loss in 2008

The airline industry might have experienced huge losses in 2008 due to the same year's global financial crisis. The crisis saw the most significant bank collapse in the United States of America (Zarb, 2016, p.5). As a result, many banks were equally affected, and the consequences spread to other major markets and economies. Ideally, the financial crisis led to increased unequal information in the market. Consequently, there was an immense depletion in the number of funds driven by venture capitalists to the entrepreneurs. By an extension, it led to surge malnourishment of external finance, and hence forcing businesses to retrench production activities, which had a tremendous effect on decreasing the economic activities.

The financial crisis of 2008 drove the global banking system on the verge of collapse. Accordingly, the development ventures pinched borrowers, and they struggled to repay their debts. The worst part is that the property's value fell due to the giant reduction in their prices. The governments had to discharge bail-outs by injecting billions of money to the banks to avert the financial structure's sag. The effects were tremendous to the extent that there was a massive decrease in wages and very low or no money for air travel by the majority.

Specific Features of B787 and A350

Boeing 787 is composed of 50% composite substances plus wings and fuselage. This feature enables the aircraft to lower emissions to the environment. B787 has adequate air inside. The air availability is because its cabin pressure is higher, thus a higher humidity than previous-generation planes (Baxter and Wild, 2018, p.302). Such changes enable the reduction of passenger fatigue, dry eyes, as well as headaches. A third and essential feature of the Boeing 787 is its efficiency in fuel use. For instance, it is 20% more fuel effective compared to the previous generations of planes. This characteristic...