Impact of Inflation and Unemployment Rates on the Airline Industry
The economy comprises all the activities in a country that is related with the production, distribution and use of the goods & services. The economic factors highly affect the business operations. It comprises all the key trends in an economy, which can hamper or help the entity in attaining its overall objectives. The economic factors affecting the business may include inflation and recession, banking and the interest rates, tax rates, employment factors, and the consumer behaviors (Palmer and Hartley 2011).
Recently, an outbreak of the covid-19, has shaken the global economy and stability. This public health crisis has severely affected the world’s economy and the financial markets. Some of the consequences of the covid-19 includes increase in the unemployment, significant reduction in the income, and disruptions in the manufacturing, service, and transportation industries. Hence, this report aims to discuss about the influence that the macro-economic activities can have on the Virgin Atlantic Airlines during the covid-19 pandemic. For this, two main macro-economic factors that needs to be considered by the company and the overall influences these could have on the business outputs, will be discussed. Further, discussion will be done on how the current UK’s growth rate impacts the airline business. The discussion will be done on how can the government’s current intervention methods affect the airline business. Lastly, discussion will be done on the current global issues facing the airline with recommendation on the measures to overcome then in the present period.
- An explanation of two macro-economic factors that the chosen business will need to consider and the influences these could have on its business outputs (macro-economic factors e.g., economic output, unemployment rates, inflation etc.)
The two macro-economic factors, which Virgin Atlantic will require to consider, and the overall influences these could have on the business outputs are inflation and the unemployment rate.
Inflation has become a growing concern for the businesses. The covid-19 crisis has caused increase in the inflation rate. As the economic activity revived with the opening up of the economies, the inflation picked up across the globe. The nations are being highly threatened by the new covid-19 variants, and the new infection waves could delay the economic growth and recovery. Many nations face the double risks of the slowdown of economy and the high inflation rate, with the resulting impact on the businesses. The inflation would trouble the global economy. It is expected that inflation will continue for long due to the covid-19 and the supply chain issues (Rothengatter et al.2021).
The CEO of Virgin Atlantic already warns that the inflation will drive higher costs. In the coming years, Virgin Atlantic Airways will experience the increasing labour costs, supply chain challenges, and increasing fares (Corporate.virginatlantic.com. 2020). The inflationary cost is not only the major risk for Virgin Atlantic, but for everyone in the industry. Virgin Atlantic is the airline that has become much leaner in fighting for its survival at the times of the covid-19 situation. The airline lessened its cost by around $400 m, and have secured around $1.6 b rescue deal (Parsons 2022).
A planned transition from the fossil fuels to the greener low carbon economy presents some quantifiable risks to the inflation’s baseline projections over the medium term. Virgin Atlantic has already made significant investment in this, which would result in reducing around 30% fuel by the end of 2030. However, increasing the sustainable aviation fuel amount that is presently 3 to 5 times expensive than the traditional fuel, would surely hit the pockets. It is not just the company that will bear the cost, but the costs will be shared by all its shareholders (Parsons 2022).
Effects of the Current UK Growth Rate on the Airline Business
The excessive downturn in the air traffic triggered by the covid-19 pandemic, followed by the sluggish recovery will led to around 46 million losses of jobs across the globe. The unemployment rates highly increased as an outcome of the covid-19 crisis. The direct aviation jobs reduced by 4.8 million. In the normal situations, the aviation and tourism enable supporting 87.7 million jobs across the world. These comprises highly-skilled roles of the aviation. The continued lockdowns and restrictions imposed by the government across the globe because of the covid-19 pandemic, is highly impacting the overall industry and expected to continue for long, which implies that the impact on the workforce will persist for long (ACI World. 2020).
Figure 1: International Flights Leaving the UK were Reduced by Eighty Percent Between March to August 2020 (Topham 2020).
As the national lockdowns and the grounded flights ruin demand for the air travel, Virgin Atlantic announced job cuts during the covid-19 crisis. As per the CEO of the company, Virgin Atlantic have faced various crises and difficult situations since its 1st flight thirty-six years ago. But it is believed that the covid-19 is the most distressing crisis faced by the entity because of the huge loss felt by the company, and the related loss of livelihood and loss of life for number of people (Taylor 2020). For emerging the sustainably profitable business and safeguarding the future, the company has taken step to lessen its costs, and preserve cash. The company cut around 3,150 jobs in May 2020. Again, this airline cut a total of 1,150 jobs and kept 600 members of crew on the extended furlough by the entities, despite securing around £1.2 billion rescue plan. In total, Virgin Atlantic laid off around 45% of its overall employees during the pandemic (Topham 2020).
- How will the UK current growth rate impact on the chosen business (give reference to economic life cycle, GDP, inflation, unemployment rate)
The UK has the world’s third largest network of the aviation, and second largest sector of aerospace manufacturing. The turnover of the aviation sector is £60 billion, and it contributes around £22 b to the overall GDP, and over 1 m jobs in the UK indirectly or directly. The air transport signifies a major portion of the GDP of the UK, and is closely linked to the other sector’s activities, particularly aircraft manufacturing and aircraft. A key facilitator of various economic activities is the aviation industry (Sustainableaviation.co.uk. 2018). A most dramatic fall in the demand for the passenger air transport because of the covid-19 and various restrictions imposed by the UK government and the other countries’ government, exposed the viability of various entities in the aviation industry, causing various jobs at stake, and Virgin Atlantic airline is not an exception (OECD. 2020).
Figure 2: Unemployment Rate of the UK (Tradingeconomics.com. 2022).
The inflation rate in the UK hits 7 percent in the year 2022, and is expected to accelerate to about 23.7 percent, which is highest ever since 1999 (Wearden 2022). If this inflationary situation continues to persist, it will highly impact the business of Virgin Atlantic. As already discussed in the above discussion that soaring inflation will adversely affect Virgin Atlantic in terms of increasing cost of operations, and eventually fare, which will put burden on the passengers. Although the current unemployment rate of the UK has reduced to 3.9 percent in the 3 months to Jan 2022, which is the lowest in past 2 years, it is still below the expectations of the market of 4%, since the labour market is continuously recovering (Tradingeconomics.com. 2022). Virgin Atlantic also aims to lessen the percentage of its job cut, which it did during the covid-19. According to the CEO of the company, it does not intend to enable any job cuts. However, if the inflation continues to soar up, the company will be in difficult position to minimize its costs and reduce laying off its employees. Inflation rate includes the percentage decrease or increase in the price during the specified period. Inflation affects growth by changing the supply and demand of the labour, and hence lessening aggregate employment in the sector, which is subject to increasing the returns. The reduction in the employment level, will lessen marginal productivity of the capital (Griffiths and Wall 2012).
Government’s Intervention Methods and Their Impact on the Airline Business
The unprecedented market situations brought by the covid-19, has extremely reduced the overall revenues for Virgin Atlantic and the global aviation industry (Ruiz Estrada 2021). As the economic condition of the UK starts gearing up, Virgin Atlantic started taking decisive measures to resume its position in the global market. The company started exploring all the options available to get additional fund to improve its condition (Corporate.virginatlantic.com. 2020).
Figure 3: Forecasted Annual Growth of the UK’s GDP (Clark 2022).
However, post-pandemic, the economic condition of the country is now coming on its track. It is expected that the UK’s GDP will grow at around 3.8% in 2022 and further by 1.8% in the year 2023 (Clark 2022). It will surely benefit the aviation industry and Virgin Atlantic. This company has now geared up and have announced the plans to resize and reshape its overall business to make sure its fitness for the future. It is in the response towards the disastrous impact of the pandemic on the UK, the industry of aviation, and the overall global economy. The recovery from the covid-19 severe impact, is expected to take more than 3 years. Once the covid-19 wanes, Virgin Atlantic airlines will make the significant contribution the economic recovery of the UK by providing important connectivity and the competition (Corporate.virginatlantic.com. 2020).
- How can the government current intervention methods affect the selected business? (e.g., fiscal and monetary policies, furlough scheme etc).
As an outcome of the covid-19 pandemic, the UK economy has suffered a lot. Consequently, the UK government have taken various fiscal, monetary, and regulatory initiatives to support the economy and the different industry in the economy (Gov.scot. 2020). Fiscal policy is used by the government to stabilize the economy (McTaggart, Findlay and Parkin 2015). The fiscal policy of the UK government continues to play a key role in preventing an immediate financial disruption from the pandemic by helping the households and businesses. The monetary policy is used by the monetary instruments used by the central bank to stabilize the economy by managing the money supply (Sloman, Wride and Garratt 2012). Further, as a response to the pandemic, the BoE took the monetary initiatives by cutting the interest rates, so to help the UK’s households and businesses. This helped the businesses in the UK to lessen their costs. The Bank of England closely worked with the government, so as to provide support to the large businesses by providing them the corporate debt, which helped them to continue paying suppliers and wages (Bankofengland.co.uk. 2022).
Figure 4: UK Interest Rate Pre and Post Covid-19 (Parliament.uk. 2022).
The dramatic reduction in the number of the air passenger had had huge impact on the revenue of the aviation industry. There has been a potential loss of around £20 billion in the year 2020 in the UK. The airlines and airport remain suspended their operations because of the government restrictions and lockdown, which increases the costs of airlines industry. Till date, the government of the UK has not provided the industry-wide packages or scheme for the entire aviation sector, but yes, it has waived off the air traffic control charges for around fourteen months, and the payment plan facility has been introduced by the CAA to meet the annual charges payment. The focus of the government has been instead to provide “bespoke” aid to the individual entities, which is only after the other sources of the financial support have been ended. On this basis, the government rejected the bid from Virgin Atlantic for assistance (Publications.parliament.uk. 2022).
Global Issues Facing the Airline, along with Recommendations
The entities in the aviation industry have mainly accesses the generic support schemes of the government to fight against the pandemic. These schemes include “the Covid-19 Corporate Financing Facility”, “the Job Retention Scheme”, and “the Coronavirus Business Interruption Loan Scheme”. There has been huge impact of these schemes in the aviation industry, particularly the JRS and the VAT deferrals. Under the JRS, the government offered the grants that covered around 80 percent of the wages for the staff who are on their payroll and are forced to stop working due to the covid situation. It helped the containing the social fallout and employment due to the covid-19 pandemic (Oliver 2020). The CAA is also intending to work with the airports, airlines and the ground handlers to offer some flexibility in the regulatory framework. Despite the available support, various UK-based airlines, including Virgin Atlantic have made announcement of the potential or actual large-scale redundancies, delayed or cancelled orders for the new aircraft, and changes to the terms and conditions of the staff (Publications.parliament.uk. 2022).
- What are the current global challenges facing by the chosen business and recommendations on how to overcome them in this current time?
Figure 5: Current Challenges Facing Aviation Industry (Global Market Insights Inc. 2022).
Currently, the aviation industry across globe is facing numerous challenges, and Virgin Atlantic is not an exception. Like any other airlines, Virgin Atlantic’s finances have been adversely affected by the collapse of air travel because of the pandemic. The covid-19 presented huge challenge for not only Virgin Atlantic but for the entire industry. Both demand and supply have been highly affected. The demand is affected because of the continuing restrictions, for instance, self-isolation of fourteen days after arrival at the destination. It also affected the large amount of business demand. Likewise, the supply was also affected due to government-imposed restrictions, labour shortages, lesser available airlines, and increasing costs. There has been considerably increase in the fluctuations in the supply and demand with increasing dependence on the pandemic reoccurrence and vaccine development. Further, because of increasing cost, Virgin Atlantic laid off its major workforce, which gave rise to the delays and cancellations of the flight. The overall processing times also increased, creating the most problematic challenge. The international operations of Virgin Atlantic also reduced, which highly affected company’s revenue (Elliott 2022).
Therefore, it is recommended that Virgin Atlantic must devise the strategies to adapt as per the situation. Business travel has been highly affected due to the covid-19 and it will take time to recover; hence, Virgin Atlantic should focus on the leisure trip. It will surely fuel the speed of recovery. The increasing debt levels of the airline will require it to increase some margin of the ticket price, which is at present required. Further, the airline should respond by restructuring for the greater efficiency. Lastly, the airline should adopt the digitalization of its most of the processes, and move towards less efficient aircraft (Bouwer, Saxon and Wittkam 2021).
Conclusion
Therefore, it can be concluded that the covid-19 pandemic has adversely affected the nations’ economic conditions and respective businesses across the globe. There is hardly any country and business that is not affected by the covid-19. It has been analysed that the higher inflation has resulted in the rise in the costs and eventually the fares, the burden of which is not only felt by the company, but also by all the stakeholders of the company. There has also been increase in the unemployment rates due to the covid-19 crisis. Virgin Atlantic laid off around 45 percent of its total employees, so as to reduce its overall increased costs. The company took this measure to sustain its survival during the difficult times. Further, it has been analysed that the continued inflation in the UK is impacting the business of Virgin Atlantic in terms of increasing costs and fare, and increasing laying off to minimize the costs. However, the UK’s GDP is likely to rise in the coming years, which will provide new opportunities to the airline to resume its condition and thrive in the global market.
It has been analysed that following the covid-19 crisis, the UK government have decided to provide generic schemes to fight against the pandemic, rather than going for the sector-specific support. The government took various measures to support the loss experiencing the industry with the help of different schemes. Despite this, Virgin Atlantic announced the extensive redundancies, delaying and cancellation of the new aircrafts’ orders, and changing the terms and conditions of the staffs. Lastly, it has been analysed that Virgin Atlantic is facing various challenges, but these challenges can be minimized by taking right approach for the better future.
Hence, it can be concluded that Virgin Atlantic must take constructive actions to safeguard the airline’s future, so that it can be able to emerge from the crisis situation, a sustainable and profitable business. The company must be prepared enough, and should be agile and adapt to the changing situations so as to face any kind of uncertainties in the future.
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