Khusaldeep Kumar z5479953 - Assessment 2a What factors are causing escalating costs to consumers in the aviation industry in Australia? ___________________________________________________________________________ 1 Khusaldeep Kumar z5479953 - Assessment 2a INFORMATION TOOLKIT The once normal idea of going on a family holiday or even travelling the world has become increasingly precarious, as cost of airlines continue to escalate by more than 50% pre-pandemic (Barrett, J 2023). This business report will consider data from 1st of January 2022 to 1st of January 2023. This dataset includes a sample of 200 randomly selected bookings of economy tickets during this time period, as the means to provide an insight into the problem of escalating costs in the aviation industry.. WHAT IS THE ISSUE? The issue is the detrimental increases in costs to consumers in all aspects of the aviation industry in Australia, where the average ticket costs $664.1438 with a statistical moderate correlation of 0.600. This is caused by multiple factors such as operational costs and external factors such as demand. Overall, leading to a negative impact on the Australian economy as consumers continue to no longer afford air travel. WHO ARE INVOLVED? Consumers: Individuals and businesses who utilise aviation services, including domestic and international travellers, tourists, and corporate clients, Airlines: Both domestic and international carriers operating in Australia. Airports: Airport authorities and management responsible for operations. WHY IS THE PROBLEM OCCURING? The factors that may contribute to the issue of escalating costs in the aviation industry are: operational costs such as fuel and increased demand, where the aviation industry is able to charge a premium price. Budget airlines, as a result of these airline companies having the largest market share, such as Virgin, a budget airline who have 34% market share in 2022 (Australian Competition and Consumer Commission 2022) and aim to keep their market share, despite the closed airspaces that occur in Australia. Thus, airlines are increasing prices to be able to ensure they can use the airspaces, (tiket2 2023). Furthermore there are ethical issues with implementing methods of de-escalating costs such as reducing seat sizes to increase capacity, further explored in the ‘Ethics Toolkit’. 2 Khusaldeep Kumar z5479953 - Assessment 2a WHERE IS THE PROBLEM Escalated costs to consumers are widespread all over Australia. With all of Australia facing and paying 50% more for air fares than pre-pandemic (The Guardian 2023). Figure 1 uses jet fuel and crude oil prices as the dependent variable, resulting in price changes. In Assessment 2a, flight price shows a strong correlation (0.806) with flight distance, indicating that the relationship is likely due to increased fuel usage and costs, although not explicitly stated. Figure 1: Increases of fuel prices as time progresses BOUNDARIES AND LIMITATIONS This report will focus on developing a solution that will deescalate prices in the Australian aviation industry including: Geographical scope, focusing on domestic and international flights within Australia. Airline types, focusing on full service airlines and low cost carriers. 3 Khusaldeep Kumar z5479953 - Assessment 2a LOGIC TREE (FACTORS THAT CONTRIBUTE TO INCREASED COSTS) Figure 2: Logic Tree 4 Khusaldeep Kumar z5479953 - Assessment 2a LITERATURE REVIEW The escalating costs of airline tickets are driven by rising demand, limited supply, inflation, capacity reductions, and fuel costs. Factors contributing to the expensive Virgin Australia flights in 2023 include increased demand, limited supply due to staffing shortages, inflation impacting fuel prices, and closed airspace (Virgin Australia, 2023). Rising demand allows airlines to raise prices and recover from revenue losses caused by the COVID-19 pandemic. Limited supply, caused by staffing issues, results in delays and cancellations, leading to a scarcity of available tickets and higher prices. Inflation affects fuel and labour costs, leading to the implementation of fuel surcharges (ticket2, 2022). The aviation industry's rising fuel costs prompt airlines to retire older, less fuel-efficient aircraft, potentially increasing ticket prices (Bullen, J 2019). Fluctuations in fuel prices directly affect operating costs and are passed on to consumers. Implementing hedging strategies, such as cross-hedging with alternative energy futures contracts (Lim & Hong, 2014), can help airlines manage fuel price risks and potentially mitigate the impact on consumer prices. ETHICAL TOOLKIT Decreasing airline seat size to accommodate more passengers per flight will have a variety of ethical impacts, different to each stakeholder. From the ethical framework perspective: consequences of actions and care ethics these dilemmas are evident CONSEQUENCES OF ACTIONS PERSPECTIVE From a Consequences of Actions perspective, decreasing the size of airline seats to increase capacity has negative effects on stakeholders. Passengers are negatively affected, experiencing discomfort and irritation, which can lead to increased volatility and frustration. As stated by Cusmano (2021), "This rage and frustration can increase the volatility of people." Consequently, this negative emotional state can be exerted onto the staff, altering the cabin crew's work environment. Furthermore, the smaller seat sizes can create a hostile work environment for staff, as conflicts with disruptive passengers may arise. According to Sainato (2021), "flight attendants are forced to manage disruptive passengers." Therefore, implementing smaller seats can have adverse consequences for both passengers and staff. CARE ETHICS Applying care ethics to the situation of decreasing passenger seat size in business has negative impacts on stakeholders. Passengers are negatively affected as their physical needs are disregarded, leading to customer complaints and anger, as seen in figure 3. Airline companies should balance increased capacity with care for customers to avoid dissatisfaction and potential 5 Khusaldeep Kumar z5479953 - Assessment 2a loss of customers. Care ethics emphasises empathy, compassion, and care for others, and disregarding passenger needs can decrease enterprise value. Maintaining a positive relationship between airline companies and customers is crucial in upholding customer satisfaction and preserving the business's value, as there is a conflict of views from a business standpoint. Figure 3: The Top 10 Airline Customer complaints IMPACTS ON STAKEHOLDERS Decreasing airline seats to increase capacity poses an ethical dilemma. While it may offer financial gains, stakeholders' well-being, including passengers' comfort and crew's stress levels, are compromised. Balancing financial considerations with ethical concerns becomes crucial in addressing the impact of reducing seat size. Statistical toolbox WHAT IS THE AVERAGE TICKET PRICE? $664.1438 DOES THE TICKET PRICE CHANGE DEPENDING ON WHEN IT WAS BOOKED OR WHETHER THE FLIGHT IS INTERNATIONAL OR DOMESTIC? The correlation between time booked and ticket price is 0.167, indicating a very weak relationship. This could be due to advanced ticket releases and limited discounts during specific booking windows (Dinich, 2021). On the other hand, the correlation between flight price and travel being international or domestic is 0.600, suggesting a moderate relationship. This may be 6 Khusaldeep Kumar z5479953 - Assessment 2a attributed to increased fuel costs associated with longer distances travelled, (Bullen, J 2019). Overall, the type of travel has a greater impact on price compared to the timing of the ticket booking, emphasising the significance of fuel costs in airline ticket pricing. HIGHLIGHT KEY RELATIONSHIPS BETWEEN THE COST FACTORS PRESENTED IN THE DATA. THIS CAN BE UNDERTAKEN BY ANALYSING CORRELATIONS AND POTENTIAL REASONS FOR THESE CORRELATIONS. Figure 4: Descending order of correlation between flight price and a cost variable 7 Khusaldeep Kumar z5479953 - Assessment 2a FLIGHT PRICE AND FLIGHT DISTANCE Figure 5: Price vs Distance graph There is a 0.806, a strong correlation. A possible reason is fuel prices have increased, thus longer distances use more fuel and thus cost more. FLIGHT PRICE AND TRIP TIME Figure 6: Price vs Trip Time There is a 0.748, a moderate correlation. A possible reason is fuel prices have increased, thus longer distances use more fuel and thus cost more. 8 Khusaldeep Kumar z5479953 - Assessment 2a FLIGHT PRICE AND INTERNATIONAL TRAVEL Figure 7: Price vs International Flight There is a 0.600, a moderate correlation, a possible reason is the further distance travelling overseas requires more fuel, thus the longer distances use more fuel and thus cost more. FLIGHT PRICE AND PEAK TIME Figure 8: Price vs Peak Time A correlation of 0.352 suggests a moderate relationship between flight prices and peak travel times. During peak periods, high demand and limited seat availability lead to airlines raising prices to maximise revenue. 9 Khusaldeep Kumar z5479953 - Assessment 2a FLIGHT PRICE AND DAYS BOOKED BEFORE FLIGHT Figure 9: Price vs Days Until Flight There is a 0.169, a weak correlation has occurred as a result of airline tickets being released in advance hence the customers who bought in advance didn't buy in this window time. Meaning there were no discounts or benefits. FLIGHT PRICE AND TRIP DATE Figure 10: Price vs Trip Date There is a 0.028 correlation, this weak correlation may be a result of different people’s lives, thus holidays and visiting holidays don't line up. Hence, there is no way for airlines to increase costs on consumers as there is little to no pattern with days except for end of year holidays. 10 Khusaldeep Kumar z5479953 - Assessment 2a FLIGHT PRICE AND FLIGHTS PER DAY Figure 11: Price vs Flights per Day There is a 0.014 correlation, this weak correlation may be of the same hypothesis as flight price vs trip date. FLIGHT PRICE AND BUDGET AIRLINE Figure 12: Price vs Budget Airline There is a -0.092 negative correlation. This means there is little relationship between price and budget airlines, this could potentially be a result of budget airline tickets not including baggage and meals, hence consumers pay the same amount as regular airlines. APPENDIX Figure 13: Table of correlation between variables 11 Khusaldeep Kumar z5479953 - Assessment 2a Reference List Grey Literature Jonathan Barrett 2023, Why Australians are paying 50% more for airfares than pre-pandemic, even as jet fuel costs drop. Accessed 2023, June 26, <https://www.theguardian.com/australia-news/2023/may/30/why-australians-are-paying-50-more -for-air-fares-than-pre-pandemic-even-as-jet-fuel-costs-drop> Tiket2 2023, Virgin Australia flights. Book tickets online. Cheaper fares in economy and premium class. Accessed 2023, June 26, <https://www.tiket2.com/airline/virgin-australia/#:~:text=Airfares%20soared%20in%202023.,airs pace%2C%20and%20increased%20operational%20costs> Joe Cusmano 2021, Why so many people are fighting on aeroplanes. Accessed 2023, June 26, <https://www.traveldailymedia.com/why-so-many-people-are-fighting-on-airplanes/> Michael Sainato 2021, ‘I worry what’s going to happen’: how Covid has made airline work risky and exhausting. Accessed 2023 June 24, <https://www.theguardian.com/business/2021/sep/16/covid-19-airline-work-risky-exhausting> Trax 2015, Top airline customer complaints. Accessed 2023 June 24, <https://www.airlinequality.com/news/airline-customer-complaints/> Michael Dinich, Here’s exactly when you should buy plane tickets. Accessed 2023 June 24, <https://www.theladders.com/career-advice/heres-exactly-when-you-should-buy-plane-tickets> White Literature Bullen, J, 2016, AAPA: High fuel prices accelerating plane retirement. Accessed 25 June, <https://web-s-ebscohost-com.wwwproxy1.library.unsw.edu.au/ehost/detail/detail?vid=0&sid=ec 0ed198-37c8-4a37-a5d2-674e5235a017%40redis&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29w ZT1zaXRl#AN=83430536&db=buh> Sujata Kar, 2020, Cross-hedging aviation fuel price exposures with commodity futures. Accessed 25 June <https://www-sciencedirect-com.wwwproxy1.library.unsw.edu.au/science/article/pii/S097038962 1000033> 12
