Market Structure of the Airline Industry

Introduction

- Describe the type of the market structure and industry in which the company of your choice operates and identify its main competitors? (400 words)

Formerly the European airline industry was identified as an oligopolistic market structure, imperfect competition in which a few firms have control over the industry (Rubin and Joy 2005). Oligopolistic firms can either compete hard and end up imitating perfect competitors, leading to low profits and driving costs down or cooperate and collude to act like monopoly companies and thrive in pushing up the prices and earn consistent profits (OpenStax 2016). Various decisions such as prices and advertising depend on the decisions of the other firms, therefore, the actions of each firm are interdependent. Normally there are high barriers to enter the market, reason being is if it was easier to enter then other firms would step in chasing the profits and would decrease the market share for the leading firms.

Heavily advertising and booking landing slots are one of the few high barriers in the industry. EasyJet maximized competitiveness and have overcome obstacles by differentiating the service from well-established companies like British Airways who have larger market share (Young Economist 2015). Offering fewer cabin crew and a lot less legroom was one of the Ryanair’s tactics to bring the price down. It has caught the attention of the fliers who were not buying tickets when the price was higher. And that allowed EasyJet to increase its market share, in addition, this competition also reduced British Airways price to ensure that more customers stay with them and choose them over low-cost airlines (Young Economist 2015). In 1998, BA decided to try the low-cost carrier market which had boomed in the 90s and the company ‘Go’ was born in result, it flew from its base in Stansted to all around the Europe. It was British Airways attempt to hijack success from its competitors: EasyJet, however, this was eventually sold to EasyJet through a management buyout in 2002 (Laura 2019).

The revenue generated by the business per passenger was 58 pounds compared to the cost per seat including fuel of £53. For the first time in 2017, total business revenues amounted to more than 5 billion pounds, compared to operating cost of 4.6 billion pounds of which just over 1 billion is the cost of fuel. The return on capital employed was just under 12% in 2017 (Riley 2018). Such data suggests that EasyJet is a fast-growing business with strong revenue growth and a consistent corporate strategy to gain cost efficiencies in a market where many carriers are losing more than most years (Riley 2018).

- Explain how expansionary monetary and fiscal policies could impact the business activities of your chosen company. (400 words)

The federal government uses fiscal policy -- taxation and government spending -- to steer the economy in the right direction by increasing or decreasing the demand and availability of goods and services. Fiscal policy can encourage investment, create jobs and pave the way for long-term economic growth. For retail businesses, fiscal policy affects consumer demand, the cost of doing business, investment decisions and the ability to compete. Fiscal policy influences how much risk a retailer takes. When Congress introduces tax credits for investing in business expansion, or tax incentives to hire and train employees, retailers may feel confident in hiring workers or opening new locations. Lower corporate tax rates also free up cash to reinvest in facilities and merchandise selection. Possible ways in which a change in ADT could impact on the economy – supply side responses

Airlines could also respond to the ADT cut in a number of different ways – with some budget airlines suggesting that they would do this. They could be incentivised by the anticipated increase in demand to add new destinations and/or increase frequencies on existing ones. On the other hand, they could just pocket higher profits and leave ticket prices unchanged if they expect customers to be irresponsive to price changes.

Interestingly, a 2014 study on the likely impact of an APD cut in Northern Ireland found that, even in the most optimal tax design scenario, the cut in the air passenger tax is likely to deliver only small economic benefits (and only in the short-run). Their results are driven by findings of minimal impact from tourism effects and from airlines retaining some or most of the losses in tax revenues in the form of profit.

Naturally, forecasts of this kind are highly dependent on the underlying assumptions of the modelling approach. And there may well be strategic and wider policy reasons why cutting ADT is appropriate.

But the presence of conflicting forecast results, and the complexity and ambiguity surrounding the underlying economic effects leads us to conclude that we need to be cautious about assuming that any reduction in ADT will act as a massive boost to the Scottish economy.

References:

• Rose M. Rubin, Justin N. Joy – “Where are the airlines headed? Implications of airline industry structure and change for consumers” – The Journal of consumer affairs, vol. 39 issue 1. P.215-228
• OpenStax Economics, Principles of Economics. OpenStax CNX. May 18, 2016
• http://cnx.org/contents/69619d2b-68fo-44b0-b074-a9b2bf90b2c6@11.330.
• Young Economist, 2015, http://youngeconomistblog.blogspot.com/2015/11/airlines-and-oligoplogy-theory.html
• Laura Ash, 2019, https://simpleflying.com/low-cost-go-fleet/
• Geoff Riley, 2018, https://www.tutor2u.net/economics/reference/easyjet-factors-affecting-costs-revenues-and-profits