Business Air Travel Market in the UK - Example

Business Air Travel market in the UK Student’s Name: Subject: Professor: University/Institution: Location: Date: Introduction The UK has a robust business air travel market. The demand for air travel is necessitated to meet clients, participate in events or conferences, meet family and allies, as well as, going for a holiday abroad. In 2012, the revenue from visits to the United Kingdom was £18.6 billion. In 2013, the revenue from visits to the United Kingdom increased by 12.7%. The year 2013 had the highest number of visits to the UK by overseas residents that resulted in a record spending of £21 billion. Visits from North America decreased by 0.3% in 2013 as compared to 2012. However, visits from Europe and ‘Other Countries’ increased by 5.7% and 6.7%, respectively. Holidays remained the primary reason for the visits to the UK with up to 12.7 million visits in 2013. The rise in holiday visits to the UK from 2012 to 2013 was 6.4%. Business visits, as well as, visits to family and friends continued to grow in 2013. The increase in business visits and family, as well as, friend visits was 7.0% and 4.2%, respectively (Beaverstock & Faulconbridge, 2014; p.57-80). The UK residents spent £2.5 billion in abroad visits in 2012. There was a 3.5% increase in the number of abroad visits from 2012 from to 2013. Holiday visits abroad increased by 4% from 2012 to 2013. Visits abroad to allies and family rose by 5.7% from 2012 to 2013. However, business visits fell by 1.9% in the same period. Spending on holidays, as well as, family and friends rose by 8.4% and 11.8% from 2012 to 2013, respectively. Visits to North America that had experienced a slump in 2012 increased by 0.7% from 2012 to 2013. Visits to ‘other Countries’ continued to be on the rise as there was an increase of 3.9% in 2013 compared to 2012. Business Air Travel Market structure The major companies involved in the business air market are: British Airways Plc 31% Virgin Atlantic Ltd 4.9%, Jet2.Com Ltd 3.8%, Monarch Airlines 4.2%, Flybe Ltd 6.3%, and Easyjet Airline Company Ltd 42% (Beaverstock & Faulconbridge, 2014; p.57-80). The market structure is an oligopoly. An Oligopoly is characterized by few organizations that are dominant in the market. However, there is a likelihood of many small firms operating in a market that is dominated by few entities. British Airways, Easyjet Airline Company Ltd, and Virgin Atlantic are the dominant organizations in the UK business air travel market as they have a joint market share that is approximately 80%. However, there are small airlines that offer specialist services or catering for holidaymakers. Determination of price and output in by an oligopolistic firm According to the oligopoly theory, price stickiness implies that firms cannot pursue independent strategies once a price has been determined. For instance, an increase of the ticket price by British Airways Plc will not make rivals raise their ticket prices. Consequently, British Airlines Plc will lose its revenues. Rivals will not increase their ticket prices because it is their competitive strategy to keep their prices constant. The demand curve will be relatively elastic (Von Stackelberg 2010). On the other hand, if British Airways Plc decreases its ticket prices, its rivals will be compelled to lower their ticket prices. The airline will in the long run lose its market share as well as revenues. The price of an oligopolistic firm relies on the price reaction of its rival firm. The demand curve will be relatively inelastic in this circumstance. Figure 1 From figure 1, the demand curve will be kinked at the price P, which is the current price. At price P, the number of tickets sold will be Q. The response of rivals is dependent on the price increase or price decrease of British Airways. The kinked demand curve model presumes that organizations in an oligopoly endeavour to safeguard their market share. An increase of the ticket price from P to P1 by British Airways Plc will not result in competitors raising their ticket prices P1. Consequently, British Airways Plc would then lose revenue and is market share due to relatively inelastic demand. However, if British Airways Plc reduces prices from P to P2, rivals will also reduce their prices to P2. The airline will, in the long run, lose its market share as well as revenues. Entry Barriers There are significant market entry barriers in the air travel market. High set-up Costs such as purchase or lease of aircrafts deters new entrants. Also, strong brand such as that of Virgin Atlantic and British Airways locks in clients. Advertising by incumbent firms also deters new entrants because it is a sunk cost. Pricing of Air Business Travel Services in the UK Price Discrimination There is price discrimination in the air business travel in the UK (Dana & Fong 2011). Price discrimination entails charging dissimilar prices to different segments of clients for the same product. Passengers are categorized as either high-yield travellers or low-fare economy paying economy passengers to optimize earnings and profits. Passengers in the same plane pay differently depending on the travel package they embrace. Price wars Price wars occur when a firm in an oligopoly lowers its price which prompts its competitors to reduce their prices. In the air travel business market, airlines in Europe have continuous price wars because of increased competition. Macroeconomic Environment The sterling pound has depreciated against the US dollar over the past twelve months. The value of the sterling pound is determined by its demand and supply in the foreign exchange market. Also, the value of the sterling pound can be increased or decreased through revaluation by the Bank of England. Depreciation of the Sterling Pound against the US Dollar or Euro results in increased purchasing power of tourists from Europe and North America. Holiday visits from persons hailing from North America and European member countries to the UK will increase. The UK airline will have increased revenues buoyed by the increase in the number of tourists visiting the UK from Europe. However, the purchasing power of UK residents will decrease leading to a decline in the number of holiday visits abroad. Consequently, airline revenues from UK residents going for abroad holiday visits will decrease. On the other hand, appreciation of the sterling pound against the US Dollar will increase the purchasing power of the UK residents. The UK airline will have increased revenues soared by the increase in the number of UK residents going for the holiday abroad. However, the purchasing power of foreign tourists will decrease. Consequently, airline revenue from foreign tourists reduces. A low steady inflation of between 1% and 3% will permit the airline to raise business air travel fares so as to attain higher profits (Blanchard et al. 2010; p.199-215). In addition, employees have increased purchasing power due to organizations increasing employees’ salaries. The airline will increase its supply of air travel services to cater for increased air travel demand when there is a low and steady inflation. However, high inflation decreases the purchasing power of individuals. High inflation implies that there is a persistent increase in the prices of commodities and services. High inflation might lead to UK airline employees demanding higher wages. The profits generated by the airline will decrease due to paying an increased wage bill. The demand for air business travel reduces. Higher interest rates will result in a decrease in the money supply (Hodrick 2014). The purchasing power of individuals will decrease. There will be a decreased demand for business air travel services as people have less money to spend on holiday visits, as well as, visiting friends and family. The supply of airline services will also decrease as airlines have less money to invest in passenger jets and venture into new routes. On the other hand, a fall in interest rates leads to an increase in the supply of money in the economy. Individuals’ purchasing power increases. Demand for air travel increases as people have money to spend on business air travel. The supply of business air travel will also increase due to airlines having money to invest in new jets and operate on new routes. Opportunities Slovakia, Chile as well as, Vietnam are projected to perform well over 2011 to 2016 in terms of growth in the number of long-haul passengers. Favourable rate of exchange and an increase in purchasing power have been touted as the factors behind Chile’s boost in long haul travel. In addition, the Philippines is anticipated to be the fastest growing short haul travel between 2011and 2016, with a compounded annual growth rate of 26%. New route establishment, augmenting popularity of regional travel as well as infrastructure developments are the factors expected to contribute to the growth. Further, short-haul is steadily gaining share in India because of the increased connectivity to smaller towns. Flourishing business, increasing demand as well as rising disposable incomes have contributed to the increased connectivity (Gaggero & Piga 2011; p. 552-577). Threats Fuel price volatility affects profits. Increasing fuel prices can result in increased operation cost. Fuel prices may increase due to speculative agenda or due to natural reasons. The airline also has to gain a market share in new territories that already have established airlines. Consequently, the airline may incur losses due to excess capacity. Primary objectives To offer service and absorb unmet demand in three major categories. Firstly, routes that presently have high demand or are not developed but are either underserved or not served. Secondly, serve niche markets that are poorly served or not served. Finally, meet peak demand of specific and seasonal routes that have inadequate competition. To attain revenues that exceed US $0.74 million in the initial six months of flight operations expansion, and exceed quarterly revenues of US $1.2 million by the end of the second year. To attain net profits that exceed US $0.4 million in the initial six months of flight operations expansion, and exceed quarterly revenues of US $0.6 million by the end of the second year. To identify and create significant interline partnerships, alliances and associations with airlines that are bigger and more established within as well as beyond the target area so as to offer a broad range of connections. Higher interest rates lower revenues and net profits due to a lower purchasing power of business air travel passengers. The revenue and net profit objectives will not be achieved. However, a decrease in interest rates will result in an increase of revenues and net profits due to higher purchasing power of business air travel passengers. The revenue and net profit objectives will be achieved. Favourable exchange rates will result in increased demand for business air travel. Consequently, revenues and net profits objectives will be attained. The airline may lose its market share if its established partners form partnerships with other firms for competitive advantage purposes. Conclusion The business air travel market is set to be stagnant due to increase due to increasing connectivity to new areas. However, new entrants will continue to be deterred from entering the market due to significant entry barriers. References BEAVERSTOCK, V., & FAULCONBRIDGE, J. (2014). “Official” and “Unofficial” Measurements of International Business Travel to and from the United Kingdom: Trends, Patterns and Limitations. International Business Travel in the Global Economy, Farnham (Royaume-Uni), Ashgate, 57-84. BLANCHARD, O., DELL’ARICCIA, G., & MAURO, P. (2010). Rethinking macroeconomic policy. Journal of Money, Credit and Banking, 42(s1), 199-215. DANA JR, J. D., & FONG, Y. F. (2011). Product quality, reputation, and market structure*. International Economic Review, 52(4), 1059-1076. GAGGERO, A. A., & PIGA, C. A. (2011). Airline market power and intertemporal price dispersion. The Journal of Industrial Economics, 59(4), 552-577. HODRICK, R. (2014). The empirical evidence on the efficiency of forward and futures foreign exchange markets. Routledge. VON STACKELBERG, H. (2010). Market structure and equilibrium. Springer Science & Business Media. Read More