Business Economic Environment - Gofast Airlines - Essay Example

?FINDINGS Glossary Market Equilibrium – This is a situation where the supply of a particular item is exactly equal to its demand so that there is neither a surplus nor a shortage of this item in the market. On a graph this is shown where the market demand curve intersects with the market supply curve. The diagram below shows the equilibrium point where the demand curve and the supply curve intersect. [McConnell, Brue, Flynn, 2009] Figure 1 Price Elasticity of Demand – This measures the rate of response of quantity demanded due to a price change. Where the demand and supply meet to show the market equilibrium, an increase in the price may show a fall in the demand. Similarly, a fall in the price of a particular item shows a rise in the demand for that item. On a graph, a fall in price will show an inward shift of demand curve and a rise in the prices will show an outward shift of the demand curve. The diagram below shows a fall in demand due to a price rise. Figure 2 Shift in Demand – This happens when the demand of a particular item rises or falls due to various factors which include an increase or decrease in the number of consumers; an increase or decrease in the prices of substitute products and complements; a change in consumer incomes (ability to afford that particular item); changes in tastes and preferences of consumers; and price expectations. On a graph, a rise in demand is shown as an outward shift while a fall in demand is shown as an inward shift of the demand curve. [McConnell, Brue, Flynn, 2009] Shift in Supply – This happens when the supply of a particular item rises or falls due to various factors which include an increase or decrease in the prices of the resources used to manufacture that item or render a particular service; an increase in technology which is more likely to increase the supply; an increase or decrease in the number of suppliers; and a rise or fall in the price of a substitute or a complement item. On a graph, an increase in supply is shown with an outward shift of the supply curve while a fall is shown as an inward shift. Future Risks GoFast Airlines has excelled in the market for low-budget flights inside of the UK. However, there are certain factors which could negatively affect the growth of this airline service in the future. For any business, its risk management will be naturally concerned with avoiding such negative factors which could kill the business. Therefore, the first task for any such manager is to identify what might potentially harm GoFast Airlines in the future. Prices of Fuel As a strategist, the first factor to consider is the rising prices of fuel, which is the most important raw material for any form of a travel company today. With the increasing fuel prices, GoFast will naturally have to increase fair prices to cover the costs, while still competing with giants like British Airways which have been there since a longer time and are more financially secure. Higher prices may cause a fall in demand for air travel which can directly reduce the number of fares for GoFast Airlines, as which happened with Singapore Airlines earlier in 2011 [Singapore Business News (SBN), 2011]. This will directly affect their low-price flights approach which, mixed with quality service, gained them the customer base they have today. Economic Recession Economic recession is potentially the most important economic factor which could affect the profitability and the market leadership of GoFast Airlines. In times of economic recession, the consumer’s purchasing power is weaker. In such times, although important corporate business trips may be made anyway, the smaller business may think twice before making an expensive trip. Most importantly, however, leisure trips are more likely to decrease in greater numbers in time of recession than business trips. Even in this situation, the consumer would be able to afford lesser than before and this will affect the number of fares. The demand will naturally fall for flights and so will GoFast’s sales and profitability [Milmo, 2009]. In all cases, a rise in the prices will cause a fall in demand for flights. This is shown in the diagram in Figure 1 in the Glossary. Interest Rates Interest rates of an economy have always played a major part in determining the purchasing power of the business itself. Every plane is not purchased directly from the manufacturer. It may be financed through a bank which had loaned the company such capital to purchase the planes. This also includes various different parts of the plane. This loan has to be paid almost always coupled with a certain percentage of interest, and it takes the form of a debt. When interest rates of an economy increase, the amount payable for the debt also increases. Therefore, such higher costs will directly affect GoFast’s profitability and the power to spend finance on employee wages, fuel, maintenance, and other company expenses [Freeman, 2004]. This is bound to affect the operations of the company. This may lead to GoFast cutting down on employees to maintain capital. This is bound to reduce the quality of their service, and such was the factor which helped GoFast achieve the market leadership. Another plan of action could be to reduce fares to save on some expenditure on fuel, but this will obviously have a deadly impact on GoFast Airlines in such a competitive market. Either option will cause a fall in service which will directly reflect a fall in their economic supply of services. Such a fall in supply is an option against increased prices which will cause a fall in demand as discussed above [Demerijan, 2008]. The diagram below shows a fall in supply due to rising interest rates. At IR1, Q1 is the quantity supplied. But when the interest rates rise to IR2, the Quantity supplied decreases to Q2. Figure 3 Government Policies and Regulations Oil is a scarce resource and its efficient allocation is the job of the government. This may take the form of a government policy which may dictate how this commodity is to be allocated throughout the United Kingdom. A lesser proportion of allocation of oil for GoFast will naturally limit their scope of operations and this could prove fatal for the company which may have to reduce the number of flights, resulting in lesser sales and profits [Keller, Butler, 2000]. Moreover, the government will also be responsible for setting the price at which fuel is to be sold. A higher price will force GoFast to raise fare prices which may lead to a fall in their customer base as discussed earlier. For example, the Federal Aviation Authority (FAA) of the United States refused to allow ValuJet to add more planes to its fleet and expand its services in 1996 [Anon., 1996]. Another factor that could affect GoFast’s performance is Airport tax. A higher tax would mean more expenditure which would mean lesser profits or a fall in supply of services. RECOMMENDATIONS While factors like high interest rates and rising fuel prices are bound to affect the whole airline industry, such affect is not the same for everyone. In times of such recession, the best plan of action for an airline would be survival. What is important is the aim that the prices offered remain competitive, while the quality of service is not compromised. Achieving such an aim in time of recession is difficult, especially for young businesses. Since the most affected area of fares in times of recession is leisure trips, GoFast should concentrate on getting a step ahead in the market in this area the most. GoFast could offer flights to selective holiday spots bundled with offers which may include stays at a hotel or discounts on the purchase of two or more tickets coupled with other services like travel guides. GoFast could also attempt to offer discounts on leisure trips which include more than one destination. This will also take a form of a bundled offer in which a trip could span across the most demanded tourist spots across the United Kingdom. Moreover, GoFast could seek to improve its in-flight services as well as the pre-flight services. Concerning the pre-flight services, GoFast could opt for online ticket purchase as well as door-step delivery of the tickets, thus making it easier and convenient for the consumer. Modern airlines have also attempted to offer generous discounts to customers who travel more often than others. A kind of a corporate customer base is bound to help GoFast to a great extent. For example, offering a first class flight to some corporate customers who travel much more often in the economy class. This could help retain existing customers, and might even help get more customers through word of mouth. GoFast could also attempt to make up for previous poor experiences of customers by making good their experience and winning back consumer confidence and customer base. For example, delayed flights could be compensated for additional, special in-flight services or reduced prices. Moreover, today, the internet social websites have a humungous marketing scope. GoFast could promote its cheaper flights on these websites to attract a relatively, and mostly, younger crowd for leisure trips across the United Kingdom [McCarthy, 2010]. Bibliography McConnell, C. Brue, S. and Flynn, S., 2009 Microeconomics: Principles, Problems, and Policies. 18th ed. Ch 3: Demand, Supply, and Market Equilibrium [e-book]. The McGraw?Hill Companies, 2009. Available at: http://bcs.solano.edu/workarea/lprescot/3._Demand,_Supply,_and_Market_Equilibrium.pdf [Accessed on 17 July 2011]. Singapore Business News (SBN), 2011. Profit pressure: Global airlines’ profits slump on rising fuel costs in 2011. Singapore Business News, [online] 30 June 2011. Available at: http://singaporebusiness.asia/profit-pressure-global-airlines%E2%80%99-profits-slump-on-rising-fuel-costs-in-2011/ [Accessed on 17 July 2011]. Milmo, D., 2009. Airlines 'to lose $9bn' as they fight to survive recession Iata nearly doubles forecast of losses as passenger numbers fall and carriers slash ticket prices. Guardian, [online] 8 June 2009. Available at: http://www.guardian.co.uk/business/2009/jun/08/iata-airline-industry-losses [Accessed on 20 July 2011]. Freeman, R., 2004. Oil Price and Interest Rate Hikes: A Lethal Combination. Executive Intelligence Review, [online] 28 May 2004. Available at: http://www.larouchepub.com/other/2004/3121oil_inflation.html [Accessed on 20 July 2011]. Demerijan, D., 2008. Airline Industry Begs For Help As It Fights to Survive. Autopia, [online] 2 June 2008. Available at: http://www.wired.com/autopia/2008/06/the-internation/ [Accessed on 21 July 2011]. Keller, R. K. and Buttler, G. F., (2000). Handbook of Airline Operations – Aviation Week. Anonymous., 1996. The FAA Refused. Aviation Week & Space Technology, 12/23/96, Vol. 145 Issue 26, p8. McCarthy, C., 2010. Airline Twitter promotion attracts huge crowds. The Social at CNET News [online] 11 March 2010. Available at: http://news.cnet.com/8301-13577_3-20000289-36.html [Accessed on 21 July 2011]. Read More