Impact of Economic recession on UK aviation Industry
As the global economic recession deepened, financial and economic constraints were negatively affecting the aviation industry in UK. The impact of the economic crisis has affected the operation of Airline industry and has drastically reduced its earnings and revenues. There have been certain extents where some of the operators in the industry have been forced to reduce their fleet or wind down certain flying routes in order to cope with the economic crisis.
The aviation industry entirely depends on the ability of its passengers to fly frequently and any negative shift in the way passengers fly like declining numbers directly impact the economic and financial survival of the airlines. The paper tries to analyse and evaluate the aspects behind the declining number of passengers, the impact it has on the aviation industry and the remedies which could be taken to address the problem. Introduction The recent global recession witnessed was one of the worst economic upheavals since the great depression.
Economic recession hit all sectors of the economy and one of the hardest hit sectors was the aviation industry. Airline industry operation is directly correlated with the status of the economy. Record declining passengers levels witnessed in airports are attributed to the small number of passengers willing to fly due to the economic constraints. Although the aviation industry is seen as basic mode of transport in developed nations like the UK potential passengers had to look for alternatives ways of transport in order to “save” the little income during the tough times.
During economic crisis airline transport is sometimes viewed as a luxury mode thus forcing customers to seek other methods which reduces the traffic flow of passengers flying. Slow economic growth negatively affects the survival of the aviation industry as disposal income of passenger’s declines thus customer’s inability to fly frequently reducing airlines revenues. Airlines due to this existing economic condition have been forced to cut their spending and implement other austerity measures to ensure they at least withstand the situation in the short run and hope for the better future.
Implementation of effective different policies is however necessary during this period to mitigate the risks emanating from declining passengers numbers who affect the revenues and financial position of the aviation industry. Economic Concepts Correlation between the GDP, Individual incomes and Airline Industry Airlines depend on the passengers as their major source of income alongside other services like cargo handling. Individual incomes determine the ability of people to fly frequent or cut back their spending.
The growth of Gross Domestic Product boosts the level of individual income which in turn determines the disposal income of an individual person. GDP growth is the yardstick for determining economic growth and GDP growth is therefore a boost to disposal income of individuals who can frequently travel. Shrinking GDP reduces disposal income of individuals who in turn tend to cut down their spending and limit their budget and with the case of airline transport which is somehow it ends up suffering as individuals(potential passengers) would seek for alternative methods of transport.
Similarly the GDP growth stimulates investment and business cycles in the country and negative economic growth constrain investment and can directly affect even the cargo handling services of the airlines. Due to the recent economic crisis, United Kingdom has posted negative GDP figures which mean declining economic growth thus affecting individual incomes and affecting the numbers of passengers using the airlines. Demand and Supply “The law of demand states that price and quantity are inversely related (Vasigh, 2008, p.
30). This aspect may shed some light on the declining number of passengers during the economic recession. As disposable incomes were incomes most airlines maintained their airline prices amid the falling individual incomes. It was becoming expensive to travel for passengers with the same level of prices as they had become expensive relative to the income which they have. This has been the scenario which attributed to the shift in passengers demand for the airlines as the prevailing rates were “too expensive for them”.
Similarly in this aspect the price elasticity of demand for airlines is seen as more elastic than inelastic. Airline transport is essential but not seen as necessity in certain conditions. During economic downturns people tend to look for substitute alternative for airlines like road and railways and airlines in this case is perceived as a luxury option and not compulsory. The elastic demand of the airlines makes passengers to be more price sensitive and thus negatively affecting consumer demand for airlines(which happen to be more expensive than other alternatives) during recession periods.
The passenger numbers have reduced in the UK airports following the experience of the increased recession. In 2009, the annual passenger number reduced by 10 percent as compared to 2007(Great Britain Treasury Committee, 2009, p. 32). It is noted that the regional airports are failing more than those in the South East. The airports have either withdrawn completely or decreased the number of routes they operate from UK airports because the demand has fallen.
The airport models of business are under pressure since the ability of the airports to improve the number of passengers is reduced due to loss of airlines and routes. The ability of accessing markets has decreased which has significantly placed challenges on the local and regional economics. The UK airport profits are really affected by the reduced routes, airlines and demand. In 2009, the average profits fell by 18 percent and the turn out fell by 8 percent (Great Britain Treasury Committee, 2009, p. 32).
Unfortunately, some of the airlines were making loss before the recession which will be joined by others who will be making loss due to fall in demand. The airports are unable to bear the impact of the airport policing requirements, spectrum pricing and staff employment due to the reduced profits. It is mandatory for the for the Aviation industry to meet its social and environmental costs hence contribute towards sustainable transport creation (Great Britain Transport Committee, 2009, p. 416). Therefore, there should be equality between environmental external cost of aviation and APD (Air Passenger duty) costs.
APD rose in 2009 whereby it has resulted into increase on the taxes of long haul with the longest routes having 113 percent increases such as UK –Australia (Great Britain Transport Committee, 2009, p. 416). There is considerable impact of the increased costs on the long haul on air links between the UK and the main economies globally such as Middle East, India and China. Therefore, UK aviation industry expects that the APD revenue will grow rapidly more than passenger numbers hence it will be a burden on the airports during this time it is experiencing recession and reducing passenger numbers.