Macroeconomic forecasts determine the future directions of state macroeconomic policies. These forecasts and policies invariably impact economic performance of the airline industry. Monetary, fiscal, and budgetary decisions may cause irreversible economic effects on airlines. Simultaneously, fiscal and monetary policies only shape business approaches in airline industry, but do not guarantee its economic health. For many years, the airline industry in the U. S. has been experiencing steady growth.
The industry was building its business and economic strategies on the basis on the two major economic forecasts: those produced by OMB, and those generated by Global Insight. The Fiscal Year (FY) 2007 has displayed the continuous inconsistence of the basic economic forecasts, especially in terms of oil prices. The constantly growing oil indices have essentially undermined the leading position of the airline industry. “In early January 2008, oil prices topped $100 / barrel for the first time before retreating.
The dramatic increase in price of oil has led many analysts to revise their long-term oil price projections upward” (FAA, 2008). Oil price is just one example of the way economic forecasts impact the airline industry. These forecasts and the expected values of the major macroeconomic indices also determine future fiscal and monetary policies.
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It was critical to immediately increase the level of consumer spending in the country. The state projections for the growing budget surplus were vanishing. The number of flights was rapidly decreasing (20% since 2002 – Eldad, 2007). A new fiscal policy was developed to reduce taxes and to implement annual tax rebates for the U. S. citizens. Fig. 1. Economic indicators (Eldad, 2007). Certainly, such fiscal approaches could help airlines survive the coming economic crisis: increased consumer spending would boost purchasing, economic activity, and ultimately, the profits of airlines.
However, after the events of September 11, 2001, airlines required additional security measures to promote demand for airline services, and to support the safety image of flights for business travelers. The state evidently needs to find additional financial resources to expand the government spending without increasing bureaucracy, and without damaging the major social policies. It is clear that the government will not use the decreasing budget surplus to promote airlines security; “instead of retiring the federal debt earlier, the government would continue to pay interest on the debt by using the surplus” (Eldad, 2007).
Lower taxes will probably increase consumer spending, but will also decrease the budget surplus. In this controversial fiscal environment, airlines will have to develop security strategies without state’s financial assistance. It is expected that mergers within airline industry will become the major tool of resolving financial and business issues in 2008 (FAA, 2008). “While the current forecast calls for continuing high growth rates throughout the forecast period, there are many downside risks inherent in these forecasts. In the near term, the largest risk is the global credit crunch” (FAA, 2008).
These credit problems have already generated a monetary response from the Fed: interest rates are being gradually decreased; consumer savings are being decreased, too. The main Fed’s task was to increase consumer confidence, and to guarantee that consumers had sufficient financial resources for business and daily transactions. Lower interest rates will distract financial resources from savings, and will direct them at spending. Consumers will no longer be interested in keeping their finances in the forms of stocks, bonds, or other instruments of high return; they will be more interested in purchasing goods and services.
As a result of these fiscal activities, airlines will have better chances to retain their existing consumers, and to attract new customers. Fiscal and monetary policies, as well as budget deficits / surpluses impact the aggregate demand; airlines feel this impact, too. “Demand is declined not only from the multiplier effects as supporting industries lost opportunities across the economy, but also due to a general malaise of consumer and business confidence in the face of continuous economic recession” (Eldad, 2007). The question is, whether the government will take a decision to directly support the most vulnerable U.
S. industries (including airlines), or will use other financial instruments to indirectly support airlines by improving business activity and consumer confidence. Although the U. S. government has taken aggressive fiscal and monetary measures, they were not sufficient to boost demand in the airline industry. Evidently, the state is not willing to finance airlines directly, but is eager to utilize the best economic instruments to improve the economy, and to promote industrial growth in airlines. The airlines should use the increased consumer spending to attract new customers.
Better consumer spending will improve economic activity; the airline industry should use promotion strategies to increase the number of business travelers. In the environment of vanishing budgetary surplus, and lower interest rates (and cheaper borrowing) the airlines should expand borrowing, to develop additional security measures, and to make the oil price shocks less pronounced. Conclusion Economic forecasts determine future fiscal, monetary, and budgetary policies in the U. S. These macroeconomic policies directly impact the economic performance of airline industry.
Currently, the state keeps to the principles of lowering taxes and increasing money availability in fiscal policy, decreasing interest rates in monetary policy, and using small budget surplus to pay interest on federal debt. Lower taxes will increase consumer spending, and airlines should develop sound advertising and promotion strategies to attract new consumers to use airline services.
Lower interest rates will create the two-fold effect on the airlines: first, they will be able to use the benefits of increased consumer spending; second, the cost of borrowing will decrease, too.This is why airlines should use the situation to borrow financial resources for the development of additional security measures, and for making the oil price shocks less pronounced.
Eldad, B. Y. (2007). The evolution of the U. S. airline industry. Springer. FAA. (2008). Aerospace forecast fiscal years 2007-2020. Retrieved May 05, 2008 from http://www. faa. gov/data_statistics/aviation/aerospace_forecasts/2007-2020/media/Risks%20to%20the%20Forecast. pdf