Competition Versus Predation in Aviation Markets - Case Study Example

Running Header: Case Analysis: Qantas Airline Your name: Course name: Professors’ name: Date 1. The nature for competition Qantas in its regional, domestic, international operations and its impact on Qantas’s ability to set its prices in the markets Qantas has been facing a downward growth for the last few years in that; the airline lost most of its hold on regional, domestic and, international customers (Forsyth 2005, 254). In the regional front, competition for Qantas is brought about by major airlines such as Air New Zealand, Etihad and, Singapore Airlines. Qantas faces domestic competition from Virgin airlines, which is an Ansett project. Internationally, the number of competitors increases by the day. The airline is fighting to maintain its 65% market share in Australia (Ryan 2014, p.16). The market structure in the airline business has grown and the international scene has become joined through globalization. The move has enhanced competition since there are international airlines offering cheap seats compared to Qantas. The market structure in the airline business in Australia is more or less oligopoly since the chief players in the business control prices. Internationally, Qantas has lost its footing because of the cheap seats offered by its competitors. The oligopoly structure weighs on the resources of the airline to match up to their competitors. Price is another segment that explains the nature of competition for Qantas. Since the airline business has been globalised, the big wigs in business control pricing (Forsyth 2005, 254). The airline is forced to adhere to the prices set to maintain their customers and stay in business. However, the pricing hurts the operations of the airline that has registered loses in its international business. Interaction between Virgin airlines and regional airlines such as air New Zealand, Etihad and, Singapore airlines also affects the prices (Ryan 2014, p.16). The four airlines own a vast market share therefore; the prices they set affect Qantas. The interaction of the airlines also increases the market share of Virgin airlines because the three regional players are state owned and therefore, the percentage of investment is high. New Zealand, Singapore airlines and Etihad have shown interest of entering the Australian airline business (Bartsch 2012, P.346). The new entries into the business threaten the existence of Qantas. The airline is prone to failure since the new entries may set enticing prices for consumers. The prices may be too low for Qantas to make profit or maintain themselves as the leader in airline business. The airline will fall out of business since it may end up operating at a loss domestically, internationally and regionally (Ryan 2014, p.16). Improvement of technology also facilitates the entry of new airlines into the business. The new airlines have advanced structures and technology that improves flight experience for customers. Given the financial prowl in Qantas, they are unable to upgrade thus; new players in the business may take over. For a while, the Qantas airline has been bound by the Qantas sales Act that the government holds (Orr 2014, p.1). The airline has been lobbying to repeal or amend the Act to increase its playing level to its biggest competitor. Nonetheless, the message communicated to the government is chaotic since the airline also seeks a standby debt guarantee from the government. The airline’s potency to influence price in the market is diminished because the competition level has increased in the business. 2a. Use the AS-AD model to discuss the effect of an increase in the price of oil on GDP and price level for the economy and effects it would have on the price and quantity of flights in the international airline market Pricing for flights entails consideration of several chief factors among them oil price. Oil prices are prone to fluctuation in prices. The uncertain prices affect the airline’s operations both domestically and internationally. The aggregate demand and aggregate supply (AD-AS) model influences the gross domestic product (GDP) of a country’s vital utilities. The model works such that demand and supply are in equilibrium. Since oil is a vital commodity in the airline business, increase in demand for oil causes increase in the price (Cornwell 2014, P.12). The logic in this scenario is that, demand reflects the urgency or preference of consumers. Therefore, suppliers take advantage and increase prices to make abnormal profits. The economy is affected because increase in oil prices leads to increase in all commodities that depend on oil for production or operation. The flight tickets for Qantas will increase due to the increased prices for oil. The cost of producing local commodities will increase making exports expensive (Orr 2014, p.1). Commodities produced locally will be expensive compared to imports from other economic powerhouses such as the US. Aggregate supply is influenced by capital, labour and, technology. In the case of Qantas, technology plays a vital role in its business where new airlines such as the A380s are built to meet market preference. The A380 consumes large gallons of oil due to the technological innovation of fuel tanks that require extra oil. The aggregate supply propelled by technological progress influences demand, which determines the price of the product. The increase in AD-AS translates to increase in price of GDP (Cornwell 2014, P.12). Imported commodities are cheap compared to domestic products. In the airline business, demand for tickets in the international airline will increase due to decreased price of flight tickets. The quantity of flights will increase since the international airlines will become an alternative to the high priced domestic airlines. 2b. Explain effects of increase in oil price how Qantas uses microeconomic model assuming it has a monopoly on regional flights. How will Qantas’s ticket prices and flight capacity in its regional operations. A monopoly market structure allows a company or business to assume responsibility in terms of pricing of commodities. In the case of Qantas, the airline will have control over pricing which will lead to increase in flight prices (Webber 2013, p.4). The airline uses the pricing microeconomic model to establish prices. The model entails consideration for the demand pattern to establish a price for their tickets (Holden 2014, P.1). Qantas will use this microeconomic model to drive for high profits in its regional operations. Increase in price of oil translates to high operational costs for the airline. In a scenario where Qantas enjoys monopoly, the extra operational costs are transferred to customers through ticketing (Webber 2013, p.4). Since customers have one service provider, they have no choice. The regional operations for Qantas will increase and their ticket prices because the airline aims to make profits. The airline maximizes profits for its operations such that the quantity of flights is high compared to its operational costs. The total revenue received minus the operational costs yields large profits that may be considered abnormal (Webber 2013, p.4). The flight capacity of the company will decrease because of the high costs of tickets. Customers will opt for alternatives to save on the costs of purchasing tickets. Such actions will lead to standardization of prices. 3a. Suppose the RBA decides to increase the interest rate. Using the relevant economic model, describe the mechanism by which the RBA controls the interest rate, and by extension, exerts pressure on the exchange rate. Monetary policy affects the interest rate (money charged on banks when they borrow and lend each other over notice) of financial hubs such as banks (Grimson 2014, P.4). Banks borrow and loan each other money to maintain flow of cash. The RBA can control the interest rate since it has authority over the cash flow from all banks in an account (exchange settlement account) that is common for all banks (Bartsch 2012, P.346). The RBA ensures there is sufficient supply of cash to meet demand at an interest rate that is favorable for them. When there is an increase in demand for cash and the RBA is threatened to increase interest rates, it applies its open market operations mechanism. The mechanism works to increase supply of cash in the market (Grimson 2014, P.4). The increased supply coincides with demand to reach equilibrium where the interest rates are controlled. The same procedure applies to when the demand for cash decreases. Another mechanism that the RBA uses to control interest rates is buying second hand government bonds and paying in cash to increase cash supply thus; controlling the interest rates (Albrechtsen 2014, P.2). The ability to control the interest rates by RBA exerts pressure on exchange rates causing the Australian dollar to be strong compared to other currencies. 3b. How might exchange rate movements affect Qantas’s revenue and costs? Explain and give examples. The pressure exerted on the exchange rate by increased interest rates influence the revenue and costs of Qantas airlines. Cost and revenue are dominated directly and indirectly by foreign currency (Holden 2014, P.1). The increase in Australian dollar decreases the foreign currency paradigm that is influenced by the high interest rates. Qantas revenue is impacted on grounds that the airline is an international business where customers use their home currencies to purchasing tickets. Flights to countries with low currencies compared to Australia generate low revenues. Freight business of the company is negatively affected by the strong Australian dollar. For instance, the freight business, movement in exchange rate affects the revenue earned in that, most of the payment is made in US dollars (Albrechtsen 2014, P.2). The Australian dollar is strong and hence; revenue received is minimal. The exchange rate does not affect the domestic and regional revenues of the country since the currencies are almost equal in measure. The cost effects of exchange rate movement include the strong dollar where Qantas can access all its current assets at low costs (Simkin 2014, p.2). An example is when the business encounters foreign costs in terms of fuel, operating leases and, spare parts. Most of the cost effects are purchased in US dollars considering the strong Australian dollar. The strong Australian dollar leads to decrease in costs of operation for the airline such that revenue is high compared to costs boosting the company’s financial state. 4. The impact of increased competition in the regional and domestic airline markets on Qantas’s long run profits. What barriers exist to increased competition in these markets? What will be the likely long-term outcome? Qantas profit making depends on the market structure where the number of competitors defines pricing of tickets. Domestic, regional and, international competitors influence the long run profits of Qantas (Holden 2014, P.1). Increased competition reduces tickets sales because its competitors have an advantage in market coverage and customer preference. The prices set affect the operations of the airline leading to low returns that translate to low long run profits. There are barriers that hinder increased competition in the airline market where Qantas operates (Simkin 2014, p.2). The barriers include price determination that is set by all sellers in the market. The prices are standardized to regulate competition. Exit and entry of new businesses is not prohibited hence; the players in the market consider the possibility of being sidelined and reduce competition. The likely long-term outcome of Qantas is that the company will improve its services to match up to vigorous airlines from international, regional and local sectors. The company is likely to regain its position in the airline business because of increased competition. It will be challenged to enhance and advance its performance. References Albrechtsen, J 2014, Blame aplenty for all in Qantas’ downward spiral. The Australian. Vol. 3 no.5, pp.1-2 Bartsch, R 2012, International aviation law: a practical guide. Farnham, Surrey, Ashgate Pub. Cornwell, A 2014, Boosting competition will see Qantas fly high again, The Australia, Vol.4 no.6, pp.5-12 Forsyth, P 2005, Competition versus predation in aviation markets: a survey of experience in North America, Europe and Australia, Burlington, Ashgate. Grimson, M 2014, Qantas versus Virgin: The fight for Australia's skies, The Australia, Vol.2, pp.4 Holden, R 2014, Qantas can bleed now or later, but capacity war must end, The Conversation, Vol.2 pp.1 Simkin, M 2014, Future of Qantas up in the air, The Australia, Vol.1, pp.2 Orr, A 2014, Perth loses international route in Qantas cuts, WA Today, 9 February, viewed 10 May 2014 < http://www.watoday.com.au/wa-news/perth-loses-international-route-in-qantas-cuts-20140227-33kq8.html#ixzz31WRJ5FmB> Ryan, P 2014, 'Qantas: what's the future for the flying kangaroo?’ ABC News, 16 March, viewed 10 May 2014, Webber, T 2013, High dollar good for Qantas, Sydney Morning Herald, Vol.6 no.5, pp.4 Read More