Cyclical economic data has been observed by ATA since 1938. The early years of commercial aviation from 1938 to 1959 shows a steady increase in profits caused by the growing industry. With the introduction of the Jet Airlines in the 1960’s, which lays a base for the business structure known today, the profit pattern became that of a first order damped oscillation system with peaks and valleys somewhat equal. The damping factor was the ability of the government to change fares as a direct response to demand using the P=D-C theory. As an example the cost of an RPM increased from .0663$ to .1280$ between 1973 and 19841 following the Yom Kippur war and the subsequent fuel crisis. In contrast with the latter, the price of an RPM decreased following the beginning of the gulf war and 9/11 and in both cases the RPM price rose while profits increased indicating a lag between the oscillation of profits and RPMs. There is a saying that airlines are always the first to feel a crisis and the last to benefit from a prospering economy. This can be explained by the lag between economic cycles and the adjustment in the airline industry. Interestingly the cycles of the airline industry have been quite consistent in terms of frequency. It can be determined that the fundamental frequency of an oscillatory graph based on airline profits is 0.0938/year. The period of the industry cycle can therefore be established as the reciprocal of the frequency, 10.7 years. This cycle period is therefore endogenous caused by the lag between demand/orders and acquisitions of aircraft and not significantly affected by events such as 9/11. The more lag there is the more aggravated the cycle amplitude becomes. Prior to deregulation, industry lag was minimal since the federal government could react quickly to changing needs and acted as a damper on the system. This created an economic cyclical sine wave similar to that of neutral stability. Exogenous factors such as international problems, fuel crisis and economic cycles have a relatively small impact on period but a large impact on amplitude.
06-02-2014
