Economic indicator in the Airline Indistry - Essay Example

The aim of this paper is to find out the effect of two important economic indicators on the performance of airline industry. For this purpose one particular airline company has been chosen for the convenience of discussion. The airline company discussed here is Southwest Airlines, one of the most popular airline companies in U.S. Here, attempts have been made to find out how Producer’s price index and foreign exchange rates influence the performance of Airline industry. To judge the performance of the company, one indicator will be uses.

Here, yearly net income of the company has been taken into account. Before moving on discussing the effect of these two variables on the performance of the selected airline company, it is necessary to describe briefly all these three indicators that are taken into account for the present analysis- producer price index (PPI), foreign exchange rate, and net income of the company. (Froyen, 2001; Sodersten and Reed, 1994)Producer price index is a measure of average change in the level of prices that producers of a nation receive for the outputs they produce.

Foreign exchange rate between two currencies of two different nations can be defined as the rate at which a particular currency is exchanged for one unit of another currency. For analytical purposes the yearly average exchange rate is generally taken into account. (Froyen, 2001; Sodersten and Reed, 1994)Net income of any company, can be defined as the level of earnings that remains after deducting the costs and expenses of the firm from its total value of revenue. For the present study, a period of 2000-2007 has been considered for examining the impact of producer price index and foreign exchange rate on net income of Southwest Airline.

Only the unadjusted level of price index for finished products has been considered here. It has been found that during December, 2000, PPI was 139.7. In the next year it dropped to the level of 137.2. However, since 2002, it has started to rise continuously (2002- 139.1, 2003- 144.5, 2004- 150.4, 2005-158.8, 2006-160.5, 2007- 170). PPI can be taken as a proxy of cost of living, although not very accurate as consumer price index. From the value of PPI over the year, it is clear that cost of living has increases which in turn will force consumers to economise on their spending.

Therefore, a fall in the demand for air traveling can be expected. Looking at the annual report of Southwest airlines it has been found that during 2000, net income was 603,093 thousand dollar. But it then fell to the 511, 147 thousand dollar in 2001, and then again 240, 969 thousand dollar in 2002. However during 2003 it increased to 442000 thousand dollars, but again fell in 2004.however, since 2005 it has continue to rise. Therefore, PPI has not influenced to a great level the performance of the airline company during the selected period.

(Southwest Airlines Annual reports, n.d.; Bureau of Labour statistics 2009)Again, only a single exchange rate between euro and U.S. dollar has been taken into account. Fall in this exchange (euro/U.S.dollar) is expected to increase international air trafficking towards U.S. as a result net income is expected to rise. Since 2000, this exchange rate has continuously fell down from Euro 1.2118/$ in 2000 to Euro 0.7757/$ in 2007. (Measuring Worth 2009) However, income trend did not show expected rise in income in a continuous way.

To summarize during the period 2000-2007, so such significant impact of PPI and foreign exchange rate on airlines performance have been found. References 1. Bureau of Labor Statistics (2009). Producer Price Index. Available from (accessed on 21st February, 2009)2. Froyen, R.T. (2001). Macroeconomics Theories and Policies. Singapore: Addison Wesley Longman. 3. Measuring Worth (2009), Purchasing Power of Money in the United States from 1774 to 2008, available at: http://www.measuringworth.

com/ppowerus/ (accessed on February 22, 2009) 4. Sodersten, B.O. and Reed, G. (1994). International Economics. London: Macmillan Press5. Southwest Airlines Annual reports. (n.d.) Available from (accessed on 21st February, 2009)