Why a shrinking middle class is bad for the airline industry

Wednesday, April 23, 2008

It’s kind of obvious, isn’t it?

Airlines have pretty high fixed costs. They have to rely on a high volume of business to cover those fixed costs and turn a profit. If ridership goes down, they can reduce the frequency of flights and save some money, but the overall infrastructure which they have to maintain can’t be shrunk or grown very rapidly in conjunction with the ebb and flow of consumer demand.

The airline industry has two primary customers: the business traveler and the leisure traveler. The majority of leisure travelers are middle-class folks who are going on vacation or going to visit family. As middle-class folk earn less money, they have to work more and their ability to get time away from work goes down. And if they can get time away, they are less able to afford an expensive vacation that involves air travel.

The impact of a shrinking middle-class on business travel is more indirect, but significant nonetheless. As middle-income folks lose their purchasing power, demand for the products and services most businesses provide decreases. As a result, the businesses spend less on business travel and other expenditures. An oversimplified example, I know, but you get the idea.

If the middle class continues to shrink, more airlines will have to close up shop. Eventually the only people flying may be the uber-rich in their private jets.

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