Which of the Following Would Decrease the Supply of Airline Travel?

AirAsia Sdn. Bhd established in 1993 and started operations on 18 November 1996. It is the commencement airline manufacture in Asia that implements e-ticketing and likewise the pioneer of upkeep airline in Asia (AirAsia.com, 2013). AirAsia is founded by Tony Fernandes and a parent visitor which is Tune Air Sdn. Bhd. The head office is at Kuala Lumpur International Airdrome (KLIA) (AirAsia.com, 2011). AirAsia aims to be the largest toll airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares (AirAsia.com, 2013). AirAsia currently has 66 aircrafts in utilise and 45 aircrafts have sold to other operators with an average 4.8 years of fleet age. In that location will be another iv aircrafts orders in the hereafter due to expanding demands (Planespotters.net, 2013).  AirAsia's action of setting low air fares bring a lot of positive influences to the people, the chances for low income families to travel by airplane can be increased and it besides reduced the expenses for business organization human to travel internationally due to business purposes. From my research, Tony Fernandes (The Founder) is inspired past the situation when his family unit was affordable to send him to London for schooling but unaffordable to send him back to Malaysia during mid-term break (Thomas White International, 2013). He went to the airport in London and starred at the airplanes and hoped someone can cutting the air fares for him but no one could assist him, these made Tony took the matters in hand and inspired him to go an entrepreneur himself and fix the air fares in low cost so that "everyone tin fly", which is AirAsia'south slogan. Now, AirAsia has go the largest depression cost airline in Asia and named equally the World's Best Low Toll Airline in the annual World Airline Survey by Skytrax for v sequent years in 2009, 2010, 2011, 2012 and 2013(AirAsia.com, 2013).

Airline industry such equally AirAsia that provides transportation services is a uppercase and labour intensive industry considering their main resources (inputs) are airplanes, labor and fuel. Airplanes are the main criteria in airline industry, AirAsia needs to invest a lot of majuscule in buying airplanes so that they can satisfy the loftier demand of customers due to low toll flight so that information technology achieves economic efficiency in long-run production. 58 airplanes in the year 2012 has increased to 66 airplanes and the carrying passengers capacity has increased to vi,896,880 in year 2013from 6,163,020 in year 2012 due to higher demand from 34,239 flights made in twelvemonth 2012 to 38,316 flights fabricated in year 2013 (thirty^thursday ) and 12% increase of passengers (BursaMalaysia, 2013).

Marginal social benefit, MSB exceeds marginal social cost, MSC caused underproduction in AirAsia. Shortage arises when quantity demanded exceeds quantity supplied. To overcome this state of affairs, AirAsia increases their output and shifts supply curve to the right, S1. Hence, consumer and producer surplus maximized when the quantity supplied and quantity demanded is equal and the cost is equilibrium at this indicate, Pe.

Airplanes are fixed variable for AirAsia in short-run production. Large amount of fixed costs required for AirAsia in brusk-run production because the price of airplanes is very high. The total fixed costs will be spread over a greater output (air travel services) and this will reduce the average stock-still costs in curt-run production.

Besides that, fuel is complement of airplanes because it needs fuel to drive airplanes to provide air travel services to customers. Fuel prices boss near l% of expenses in AirAsia, it is the major variable price and also a primal resource in AirAsia. Fuel consumption depends on how many flights made per solar day and the distances the flights travelled and is known as variable cost. In the twelvemonth 2012, 1,155,269 barrels of fuel consumption had toll up RM481,549,000 of shipping fuel expenses that contributed to the total expenses of RM 964,669,000 in year 2012 (BursaMalaysia, 2013). It is about half of the total expenses. Notwithstanding, fuel consumption has increased 13% to 1,299,843 barrels with RM498,614,000 of shipping fuel expenses that contributed to the total expenses of RM1, 065, 400, 000  in year 2013(thirty^th June) due to 6 additional airplanes and 12% increment of flights made to overcome the loftier demand of customers in AirAsia (BursaMalaysia, 2013). Therefore, fuel is 1 of the chief resources in AirAsia.

Moreover, labour resource play an important role considering AirAsia requires large labour forces such as highly skilled and licensed pilots for airline flying operation, highly qualified aircrafts machanics for aircraft maintenance operations, managers and workers that manage and progress the ticket buying process, and flight attendants that serve the customers to operate their concern. RM123,861,000 of staff costs in year 2012 has increased to RM161,395,000 in year 2013 due to increasing passengers from 4,902,689 people in year 2012 to 5,509,576 people in year 2013(30^th June) (BursaMalaysia, 2013) . Therefore, labour costs occupy the most on total toll of AirAsia afterward fuel costs. Labour resource are variable costs that depend on the air travel services (outputs) provided, the more the customers they have, the more labours (inputs) they need to hire to overcome the high need by creating more than air travel services (outputs).

Furthermore, large amount of maintenance and overhaul fees for airplanes to go on the airplanes in optimum condition. It is a variable cost that depends on the usage of airplanes in AirAsia. The costs for maintenance fees and overhaul expenses are increased from RM22, 205, 000 in year 2012 to RM40,086,000 in year 2013 June 30th due to 12% (iv,077) rise of flights fabricated  (BursaMalaysia, 2013).

In curt run production, maintenance and overhaul fees, fuel and labour costs are variable costs. AVC is average variable cost in short run of AirAsia. The fixed cost is airplanes. AFC or the gap betwixt ATC, average total cost and AVC is the average stock-still cost in short run.

In long run production, the number of airplanes is increased xiv%from 58 to 66 in AirAsia from year 2012 to year 2013 June 30^th. Airplanes are not a fixed variable in long-run production because AirAsia has plenty time to purchase additional airplanes.  Eolith on aircraft purchase increased to RM548,120,000 in year 2013 June 30^th from RM483,795,000 in yr 2012 (BursaMalaysia, 2013). Every expense is counted as variable toll because at that place is no more fixed variables in long run production. LRAC is long run average cost includes fuel expenses, labour expenses, maintenance and overhaul fees and airplanes cost.

Overall, fuel, labour and airplanes are the principal resources in AirAsia considering they contribute large percentage of inputs and corporeality of costs in AirAsia.

Determinants of Supply and its Elasticity

Fuel is complement to airplanes for air travel, elasticity of supply for AirAsia is highly inelastic considering in that location are no substitution possibilities for fuel which is their simply resource to drive the airplanes. Fuel prices are the main gene that influences the fiscal operation in AirAsia.

Fuel prices fluctuate widely depending primarily on international market weather, geopolitical and ecology events and currency/commutation rates. As a result, fuel costs are non within the command of lessees and significant changes would materially touch on their operating result (The Geography Of Transport System, 2013). Fuel prices boss nearly 50% of expenses in AirAsia, it will cause a drop in cyberspace profits every bit fuel prices increase. According to BBC(2012), AirAsia has reported a 56% fall in fourth-quarter profit due to higher fuel costs. Internet turn a profit for the last three months of 2011 savage to 135.7m ringgit ($44.8m; £28.6m) from 311.1m ringgit in the same menses a yr earlier. These proven that fuel prices are the main factor that affects the profits of AirAsia. Fuel prices increase leads to drib in net profit due to decrease in profit margin. The only mode to remain their profit margin is by pushing the toll to consumers which is past raising the toll of air fares to generate more revenue.

Supply curve, S shifts leftward to S1 as fuel price increased. New equilibrium toll, P1 is higher than the original equilibrium cost, P due to lower quantity supplied, Q1. Thus, new equilibrium point, New Pe is set due to the ascension fuel price in AirAsia.

Furthermore, fuel cost charges are also different in every land, AirAsia has leveraged the costs of fuel and airport charges in Malaysia, which are much lower than in India. A similar advantage will exist hard to spot in India. The input costs will exist steeper for the AirAsia in Republic of india. Fernandes already fabricated it public that airport costs are too loftier to fly into Delhi and Mumbai (Gupta and Delhi, 2013). Therefore, it affects the price of air fares in India to increase and quantity of services decrease due to high total price that imposed largely by fuel prices.

Determinants of Demand and its Elasticity

Hence, AirAsia got no choice but to discover a manner to cutting down their costs by rising up their air fares prices or charges for preferred seats and cheque-in baggage so that AirAsia can earn more revenue to cut off the high fuel cost in India. However, unlike Malaysia, AirAsia is not the but Depression Cost Carriers (LCC) Airline Company in India, there are many directly competitors such as GoAir, SpiceJet and Indigo that are also Low Cost Carriers (LCC) airline companies in Republic of india (Gupta and Delhi, 2013). Therefore, tickets pricing for AirAsia is extremely sensitive and the need is very elastic in India, a little alter in ticket price may results in losing their potential consumers due to high demand elasticity and low switching cost to other airline companies. In Malaysia, AirAsia takes over the LCC airline industry due to low number of straight competitors which has Firefly that provides LCC services only, price sensitivity is weak equally compared to AirAsia in Republic of india. Therefore, demand for air travel with AirAsia is highly inelastic in Malaysia because in that location is low number of direct substitute that provides depression cost fares and gain wider consumers' share to travel with LCC.

Figure- High inelasticity to price for AirAsia in Malaysia due to low number of substitutes (competitors)

Effigy- High elasticity to price for AirAsia in India due to big number of substitutes (competitors)

Figure- Large consumers' share of AirAsia in Malaysia(CAPA, 2013)

Therefore, existing of competitors will affect the demand for air travel to be more than rubberband and the consumers are spread to dissimilar airline companies due to substitution issue. Thus, it makes the demand curve of AirAsia'south air travel services shift leftwards due to decrease in quantity demanded for the services and new equilibrium price is gear up, Pe2 to accomplish economical efficiency.

In add-on, airline industry such as AirAsia is oligopoly market due to merely few firms are providing the air travel services to many consumers in the market. The barriers of entry are very high, one of the main barriers is high set up up cost. Airline industry requires large amount of coin to buy airplanes, hiring employees and ad.  Although AirAsia has the ability to control over the price of air fares due to low number of firms in the marketplace, their pricing strategy will still effect by the competitors considering their customers may switch to another airline industry if the price is lower.

Income is the major variable that affects the need of air travel. Lower income consumers tend to reduce their air travel than high income consumers. Depression income consumers are more likely to modify their demand patterns during periods of economical recession due to depression purchasing ability and elasticity of price is high to them. Despite of travelling to long distance places with plane, they reduce the costs by travelling to nearby places by land transportation for holidays. The recession in 2008 and 2009 represented the first time that passenger numbers had fallen for two successive years, the Civil Aviation Authority (CAA) figures showed.U.k. airports accept suffered their biggest decline in passenger numbers since records began at the stop of WWII (BBC, 2010). CAA economical regulation director Harry Bush-league said the big refuse of demand for air travel is due to the enormous impact of recession (BBC, 2010). However, high income consumers tend to maintain their demand level due to inelastic to price changes in air fares.

Figure- High inelasticity to price of air fares for high income groups

Figure-High elasticity to price for low income groups

Moreover, currency commutation rates accept a large affect on the market for international travel and tourism. Travellers must buy foreign currency in gild to spend the money at foreign state to pay for their expenses. An appreciation in currency of our domestic state will affect the need of air travel to foreign countries because domestic currency becomes stronger and information technology is cheaper that previously for vacation in other countries. The amount of travellers will increment as domestic currency appreciated because they can purchase more foreign currency than before and this makes travelling cheaper. Therefore, demand for air travel rises and shift demand curve rightwards. Thus, price of air fares increase besides, P.

Figure-Demand increases when domestic currency appreciates.

Similarly, if domestic currency depreciates, demand for air travel volition drop and shift the demand curve leftwards and price for air fares decreases, P.

Figure-Need decreases when domestic currency depreciates.

Dissimilar seasons determine different demands of air travel. For case, the demand of air travel is very high during school holiday seasons. The reason is every family will bring their kids for vacation to foreign countries by air travel. Therefore, it shifts the demand curve rightwards due to increment in demand of air travel. To brand the market equilibrium, the price of air fares of AirAsia volition increase in summit seasons such as schoolhouse holidays. Moreover, seasonal weather patterns affect the demand of air travel at different times of the year. Flights to the Caribbean are depression in need and typically cheaper during the hurricane season, which nominally lasts from June to November each twelvemonth(Jae Allen, 2013). Cooler areas such as Europe, Canada, Alaska, the Pacific Northwest, and Maine and New Hampshire are popular destinations during summer season. Therefore, the demands of flights to the destinations are loftier in summer season. These will shift the need curve for air travel to the stated destinations rightwards and the prices of air tickets rise as well.

In conclusion, AirAsia is a well-known LCC airline visitor in the world. I hope AirAsia can go on to follow their slogan "At present everyone can fly" so that anybody can enjoy depression air fares to "wing around the globe".

Referencing Lists

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AirAsia.com (2013) Corporate Profile. Available from: http://www.airasia.com/my/en/about-the states/corporate-profile.folio  [Accessed 12 Oct 2013].

Allen (2013) The Cheapest Fourth dimension of Yr for Airline Travel. Available from:  http://traveltips.usatoday.com/cheapest-time-year-airline-travel-35436.html [Accessed 11 Oct 2013].

BBC (2010) Air travel drops for second year during recession. Available from: http://news.bbc.co.great britain/two/hi/business concern/8566998.stm [Accessed 12 October 2013].

BBC(2012) Air Asia hit by loftier fuel costs. Available from: http://www.bbc.co.uk/news/business-17131282 [Accessed 12 October 2013].

BursaMalaysia (2013) Quarterly rpt on consolidated results for the financial catamenia ended 30/half-dozen/2013. Available from: http://www.bursamalaysia.com/market/listed-companies/visitor-announcements/1382517 [Accessed 18 October 2013].

CAPA (2013) AirAsia'due south 2013 outlook marred by intensifying competition and continued losses at new affiliates. Available from: http://centreforaviation.com/analysis/airasias-2013-outlook-marred-by-intensifying-competition-and-continued-losses-at-new-affiliates-99766 [Accessed eighteen October 2013].

Gupta and Delhi (2013) AirAsia: The low-cost card may non wing in India. Available from: http://www.business organization-standard.com/commodity/management/airasia-the-low-toll-menu-may-not-fly-in-republic of india-113051501057_1.html [Accessed 12 October 2013].

Planespotter.Internet (2013) AirAsia Armada Details and History. Available from: http://www.planespotters.net/Airline/AirAsia [Accessed 18 Oct 2013].

The Geography of Send Organisation (2013) Operating Expenses of the Airline Industry. Available from: http://people.hofstra.edu/geotrans/eng/ch3en/conc3en/airlinecosts.html [Accessed 12 Oct 2013].

Thomas White International (2013) Tony Fernandes, CEO of AirAsia & Founder of Melody Grouping. Bachelor from: http://www.thomaswhite.com/global-perspectives/tony-fernandes/ [Accessed 12 October 2013].

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