Blog
Cross elasticity: Demand for new aircraft
14th July 2008
Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times.
The report claims that
“More than $100 billion (£50.2 billion) of aircraft orders could be cancelled or postponed in the next couple of years as the high price of fuel drives airlines into bankruptcy or forces them to cut spending. Analysts estimate that 20 to 30 per cent of the $530 billion order backlog held by Boeing and Airbus, the aircraft manufacturers, could be cancelled or delayed as the aviation industry heads towards a winter of turmoil. These cancellations would have a significant impact on aerospace suppliers such as Rolls-Royce, the engine maker ........According to the International Air Travel Association (IATA), every $1 rise in the price of oil increases the fuel costs for the global airline industry by $1.6 billion”
Plenty of economic concepts here:
The relationship between the price of aviation fuel, seat prices, demand for flying and the need for new capacity in the airline industry - many airlines have already taken decisions to shrink their capacity in the face of rising costs and declining passenger volumes
The impact of any fall-off in new orders on the aviation-construction supply chain (i.e. concept of derived demand)
Multiplier effects from contractions in employment
Effects of a rise in oil prices on variable costs, prices and profit margins - U.S. airlines are forecast to spend an extra $20 billion on fuel alone this year - and the industry is projected to lose between $7 billion and $13 billion this year.
It seems that a key factor in the months ahead for the likes of Boeing and Airbus (a duopoly) will be the strength or otherwise of government procurement of new aircraft for defence purposes. Can fiscal policy decisions alleviate some of the stresses and strains in the commercial aviation market? The Gulf States - awash with petro dollars could provide a saving grace.
Gloomy skies for the Farnborough world air show (International Herald Tribune)
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.