Text 2. Airlines Economic Considerations

Historically, air travel has survived largely through state support, whether in the form of equity or subsidies. The airline industry as a whole has made a cumulative loss during its 120-year history, once the costs include subsidies for aircraft development and airport construction.

One argument is that positive externalities, such as higher growth due to global mobility, outweigh the microeconomic losses and justify continuing government intervention. A historically high level of        government intervention in the airline industry can be seen as part of a wider political consensus on strategic forms of transport, such as highways and railways, both of which receive public funding in most parts of the world. Profitability is likely to improve in the future as privatization continues and more competitive low-cost carriers proliferate.

Although many countries continue to operate state-owned or parastatal airlines, many large airlines today are privately owned and are therefore governed by microeconomic principles in order to maximize shareholder profit.

Assets and financing

Airline financing is quite complex, since airlines are highly leveraged operations. Not only must they purchase (or lease) new airliner bodies and engines regularly, they must make major long-term fleet decisions with the goal of meeting the demands of their markets while producing a fleet that is relatively economical to operate and maintain.

A second financial issue is that of hedging oil and fuel purchases, which are usually second only to labor in its relative cost to the company. However, with the current high fuel prices it has become the largest cost to an airline. While hedging instruments can be expensive, they can easily pay for themselves many times over in periods of increasing fuel costs, such as in the 2000—2005 period.

In view of the congestion apparent at many international airports, the ownership of slots at certain airports (the right to take-off or land an aircraft at a particular time of day or night) has become a significant tradable asset for many airlines. Clearly take-off slots at popular times of the day can be critical in attracting the more profitable business traveler to a given airline's flight and in establishing a competitive advantage against a competing airline. If a particular city has two or more airports, market forces will tend to attract the less profitable routes, or those on which competition is weakest, to the less congested airport, where slots are likely to be more available and therefore cheaper. Other factors, such as surface transport facilities and onward connections, will also affect the relative appeal of different airports and some long distance flights may need to operate from the one with the longest runway.

Exercise 11. Answer the questions on text 2.

1. Why has the airline industry made a cumulative loss during its 120-year history? 2. Why is airline financing quite complex? 3. What has become the largest cost to an airline? Why? 4. What has become a significant tradable asset for many airlines? Why?  5. What other factors will affect the relative appeal of different airports?

 

Exercise 1 2 . Match the terms and their definitions.

Terms	Definitions
1. subsidy	a) money gained in business, especially the difference between the amount earned and the amount spent
2. consensus	b) a group of aircraft, buses, taxis, etc. traveling together or owned and operated by one organization
3. government intervention	c) the process of transferring smth from state control or ownership to private ownership
4. fleet	d) money paid, esp. by a government, e.g. to reduce the costs of producing goods so that their prices can be kept low
5. privatization	e) a hard surface along which aircraft take off and land
6. runway	f) the state of being crowded or too full of smth
7. profit	g) a general agreement about a matter of opinion
8. congestion	h) the government policy or practice of becoming involved in the domestic economic affairs, esp. so as to prevent or to try to help

Exercise 1 3 . Give Ukrainian equivalents.

Cumulative loss, state support, equity, subsidy for aircraft development, airport construction, positive externalities, to outweigh the microeconomic losses, to justify continuing government intervention, political consensus, low-cost carriers, to proliferate, state-owned airlines, parastatal airlines, to be privately owned, to be governed by, to maximize shareholder profit, to make major long-term fleet decisions, to meet the demands, hedging oil and fuel purchases, ownership of slots at certain airports, to attract the less profitable routes, surface transport facilities, onward connections.

 

 Exercise 1 4 . Fill in the blanks with correct conjunctions (since, while, whether, once, although).

1.Historically, air travel has survived largely through state support, … in the form of equity or subsidies. 2. The airline industry as a whole has made a cumulative loss during its 120-years history, … the costs include subsidies for aircraft development and airport construction. 3. … many countries continue to operate state-owned or parastatal airlines, many large airlines today are privately owned. 4.Airline financing is quite complex, … airlines are highly leveraged operations. 5. … hedging instruments can be expensive, they can easily pay for themselves many times over in periods of increasing fuel costs.

 

Exercise 15. Name and analyze the use of tense-forms in text 2.

Exercise 16. Learn the following words and word combinations.

estimate	– оцінка
set	– комплект, набір
pithy	– стислий, змістовний
all-inclusive	– таке, що включає в себе все
resource allocation	– розподіл ресурсів
share	– акція, пай, частина
contend	– стверджувати
subsidiary	– другорядний
appropriate	– належний, доречний
relevant	– відповідний
redo	– переробити

Exercise 17. Read, translate and give the gist of text 3.

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