Competition – Practice Question

Evidence A

We have a well-developed business model which has enabled the business to grow quickly. Low prices, fast turn around, no frills and we keep our aircraft in the air as much as possible. We aim never to duplicate an existing service. If someone does try to compete with us head-to-head we will ensure that we are always the cheapest carrier on that route. No-one will ever beat us.

We tend to choose destinations with tourist centres within easy reach and with a reasonably large city close by.  In this way, we can attract tourist passengers in the summer and rely on business travellers and contribution pricing in the winter. The reality is that passengers will use our service, regardless of the distance of the airport from the city centre if the price is right.  Demand is price elastic

Adapted from an interview with the Finance Director of a budget airline

Evidence B

BA believes that its future lies in targeting the business passenger segment. Services have been revamped, including a new sleeper service. New staff uniforms have also been unveiled. BA has identified new areas for growth and launched new routes to China and other country where its sees opportunities for premium travel. BA intends to become the world’s leading global premium airline.

Evidence C

Booking a low-cost flight is seldom as cheap as the headline figure, with taxes, handling fees and surcharges. But there’s one fee you won’t find on your ticket – the environmental costs or social costs of air travel.

If air travel is allowed to grow unchecked in this way, it will spell disaster for the planet, say environmentalists.

More flights mean bigger, busier airports, which in turn means more noise and growing problems with air quality for those who live and work close to airports.

The biggest concern is global warming. Burning aviation fuel releases carbon dioxide (CO2) into the environment, leading to the Earth heating up. A return flight from the United Kingdom to Florida produces, per passenger, as much CO2 as a year’s driving by the average British motorist, according to environmental campaign groups. The negative externalities associated with air travel need to be internalised

The problem for environmentalists is that while efforts are being made to cut CO2 emissions from cars and industry, nothing is being done to rein in the airlines.

Questions

1. Define the following:

(a)        price elastic (2)

(b)        negative externalities (2)

(c)        social costs (2)

2. Suggest reasons why British Airways is focusing on the business passenger market segment. (8)

3. Assess the extent to which the airline market may be considered contestable. (12)

4. (a) Examine the potential impact of sudden increases in fuels prices on the airline market. (8)

(b) Evaluate the short-run and long-run effect of cut-price flights on the UK travel market. (12)