Research Paper on Supply And Demand for Global Air Transportation

Introduction

Forecasting is an integral process of business management. Good prediction allows companies to develop and work on existing marketing plans and strategic growth strategies by increasing understanding of market dynamics. The forecasts provide useful information for managing different aspects of the business (Granger, 2014). Airbus Global and Boeing forecast provide a look into the future of the air transport sector. The goal of this paper is to demonstrate how the theory of demand and supply has been used by Airbus and Boeing to develop forecasts.

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Forecast of Air Travel

Demand is the willingness and ability of a consumer to purchase the desired product. Potential customers must not only desire the product based on taste and preferences but have the money to purchase the product (Baye, Prince, & Squalli, 2006). The ability to purchase suggests that income plays an important role. This theory of demand has been used by Airbus and Boeing to predict an increase in demand for air travel in emerging markets. This prediction is informed by the fact that since the population in these market segments is gaining more income, they will not only have the willingness to travel, but also have the ability to do so.

Increased Traffic

Airbus forecasts that by 2037, 85 % of the population in emerging markets will be flying. Traffic growth for sub-Sahara Africa PRC is predicted to grow by 13.9 %, and 7.7 % for both sub-Sahara Asia developed and Middle East (Airbus, 2018). The traffic growth for PRC South Africa will be 11.4 % from 2017 to 2027. PRC USA traffic will grow by 8 % and 7.7 % for Russia. Freight traffic for advanced Asia, Advanced Asia- Central America and Asia CIS will increase from 2017 to 2027 by 8.3, 8.0 and 8.0 % respectively. According to Airbus (2018), the three regions represent the highest future growth, followed closely by Advanced Asia CIS (7.8%), Advanced Asia emerging market (7.7%) and advanced Asia, Europe market by 7.6 %. South America, PRC, and South America North America will experience the least traffic growth of 0.4 %, 0.6 % and 1 % from 2017 to 2027.

Anticipated Growth of Global Fleet

It is anticipated that there will be an additional 2500 new aircraft deliveries in the next 20 years while the world fleet will more than double. According to the law of supply and demand, this means that prices will most likely go down because of excessive supply. The anticipated increase in demand will attract more investors and increase competition. Boeing forecast that the global fleet will expand by more than 70 % to 3 260 airplanes and the freighter deliveries will be valued at $280 billion. This growth will require 27 400 aircrafts units with a value of $5.8 trillion (Boeing 2018). Factors contributing to this change include the growth of the Chinese market and the rise of global e-commerce that is predicted to increase by 20 % per year. As a result, the demand and supply will be equal when the high demand is met by the anticipated growth of the fleet. At this equilibrium, the price of air travel will be reached when sellers have provided all the goods and services needed to satisfy the demand.

Importance of Investing in Forecast

Accurate forecasting helps ensure business runs smoothly as desired. Airbus and Boeing use forecast information to predict future challenges and prevent against risks to ensure that operations continue seamlessly (Granger, 2014). Understanding future demand through effective forecasting allows marketers to make the right decisions to achieve long term goals. These forecasts are used by the manufacturers and the broader aviation industry and make management and marketing decisions by looking at strategic areas to invest and how to best prevent the company from risks. Additionally, forecasting provides the management with informed and accurate management decisions.

Factors that will Drive Air Travel Growth

The Growth of Middle Class

Both Boeing and Airbus anticipate a future increase in the supply of air transport services. Airbus predicts that the air traffic industry will experience growth at 4.4 % annually and will require an additional 37 400 new passengers and freighter aircraft costing $ 5.8 trillion over the next 20 years. 30 % of the people in emerging markets took a flight in 2017, and the number is expected to grow because the middle class is also increasing.

The growth of global middle-class household annual income is partly to explain for the anticipated growth of airline services. More revenue means that more people will have the ability to purchase services. The global middle-class annual revenue is expected to grow from 2017 through 2027 to 2017 with the Asia Pacific representing the highest potential for household income growth. The middle across the world is expected to be at 56 % of the population. The demand for large airplanes will continue increasing in the cargo market. Airlines for passengers, according to Boeing, will move to small wide-body planes.

Emerging Markets

The economic growth in emerging markets of Asia, Africa, and Latin America is expected to push demand for air travel. According to Chin (2002), the need for air services depends on air traffic. It is expected that the middle classes in these markets will more than double by 2022 and double from the current 33 % to 63 % across the world. This increase will have a positive effect on traffic as more people will be able to travel to different destinations around the globe. However, increased traffic represents a future increase in demand. This may lead to increased cost of air travel since according to the theory of demand and supply, prices rise when demand increases (Baye & Squalli, 2006). Besides, urbanization and wealth concentration will increase aviation cities in these countries. These cities will become synonymous with wealth with more than 95 % of traffic going through them.

Conclusion

Effective control of business finances requires keeping track of profits and loss statements, cash flow statements, and balance sheets. Forecasting is a crucial part of planning to ensure undesired outcomes are prevented and these eventualities are minimized. Forecasting helps keep track of the future and how much time and resources will be required to achieve future goals. Both Boeing and Airbus anticipate future growth of demand for transport services in emerging markets. This growth will be caused by the growth of household income that is expected to increase in the next few years. According to the laws of demand and supply, the high demand will push prices up and suppliers want to bring the price closer to equilibrium.

References

Airbus (2018) Airbus Retrieved from https://www.airbus.com/newsroom/press-releases/en/2014/09/emerging-markets-and-urbanisation-driving-air-traffic-growth.html

Baye, M. R., Prince, J., & Squalli, J. (2006). Managerial economics and business strategy (Vol. 5). New York, NY: McGraw-Hill.

Boeing (2018). World air travel forecast. Retrieved from https://www.boeing.com/

Chin, A. T. (2002). Impact of frequent flyer programs on demand for air travel. Journal of Air Transportation, 7(2), 53-86.

Granger, C. W. J. (2014). Forecasting in business and economics. Academic Press.