Australian Airline Industry – Essay

September 15, 2017 Tourism

Table of Contents Identify a market for tourism or hospitality services in the Asia Pacific region that is essentially oligopolistic in nature. Analyse the pricing and supply strategies of the key firms operating in this market. ? Introduction This report explains the theory of oligopoly and discusses how Australia’s airline industry provides a solid example of an oligopoly market. It uses case studies of Qantas, Jetstar, Virgin and Tiger airlines to demonstrate how they all need to employ profit-maximising strategies that take into account the likely response to the strategies of other firms.

Airline Industry Overview Australia’s airline industry can be classified into three broad categories: ? domestic trunk route airlines ?regional airlines ?International airlines. http://www. aph. gov. au/library/pubs/rp/2002-03/03rp10. htm#dthe It is a well-known fact that every firm wants to be successful in its business. Sometimes it is difficult to decide what kind of actions to take in order to achieve it. Especially, it is hard on oligopoly market because this is one of the most complicated market structures.

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Oligopoly includes many models and theories such as duopoly where there are just two producers, and which pricing decisions remind monopoly, kinked demand curve, which decreases economic profit, and cartel, which brings economic profit just for the short-run. However, to be a successful oligopolistic firm in the long run, managers should include in the planning process such economic theories and models as producer interdependence, the prisoner’s dilemma, price leadership, non price adjustments, and correct using of barriers to entry. number of producers on oligopoly market, the price and output solutions are interdependent.

As a result, firms can cooperate or come to an agreement profitable for everyone. Therefore, they can increase, as it is possible, their joint profits (Pleeter & Way, 1990, p. 129). Further, oligopoly is divided on pure, which is producing homogeneous products, and differentiated, producing heterogeneous products (Gallaway, 2000). Economists Farris and Happel insist that the more the product is differentiated, the more firms become independent, and the more the product differentiation, “the less likely joint profit maximization exists for the entire group” (1987, p. 263). Consequently, it is worth to be interdependent.

The essential factor of an oligopolistic firm is interdependence. Oligopoly involves few producers, which means more than one producer as it is in pure monopoly but not so many as in monopolistic competition or pure competition where it is difficult to follow rival firms’ actions. Therefore, due to small number of producers on oligopoly market, the price and output solutions are interdependent. As a result, firms can cooperate or come to an agreement profitable for everyone. Therefore, they can increase, as it is possible, their joint profits (Pleeter & Way, 1990, p. 129). Cost Leadership

As mentioned earlier, the chief difference between low cost carriers and traditional airlines fall into three groups: service savings, operational savings and overhead savings. Low cost airlines tend to focus on short haul route. To achieve the low operating costs per passenger, this type of carriers need to have as many seats on board its aircraft as possible, to fill them as much as possible, and to fly the aircraft as often as possible. Low cost carriers will affect the traditional airline hub-and-spoke networks poses interesting questions for the airlines industry and policy makers.

Low cost positioning means choosing to perform a system of activities differently from that of traditional rivals and providing a coherent set of key activities that reinforce each other to achieve such position in a sustainable manner (Porter, 1996). What’s the future for the Australian airline industry ? The apparent existence of economies of scale, the gains by way of reduced costs from the increasing size of operations in the domestic airline industry suggests that there may be an on-going need for regulation to prevent monopolisation over the long term. In the absence of effective conomic regulatory oversight of the industry, it has the potential to evolve into a Qantas monopoly. High capital and set-up costs have traditionally contributed to high entry costs and have increased the market power of the airlines currently holding the top position, impeding competition. Should such circumstances continue to prevail over the longer term, it raises the issue of whether Australia’s domestic market is really big enough to sustain competitive supply and whether a lightly regulated oligopoly is still appropriate. http://www. aph. gov. au/library/pubs/rp/2002-03/03rp10. htm Pricing strategy

Budget air carriers have revolutionized domestic travel in Australia, making low cost travel a year-round reality for holidaymakers and business travelers alike. Both Jetstar and Virgin blue’s pricing strategy will be analyzed and discussed in this section. Low cost carriers open a totally new product: no frills, no food, no drinks, no spacious seats, no travel agencies bookings, but a very low price (Barbot, 2004). This “low-cost revolution” (Doganis, 2001) has then greatly affected the full service traditional carriers, they will have to respond this phenomenon progressively. Jetstar and Virgin blue’s pricing strategy is fairly similar.

Both airlines are low cost carriers, they reduced the operating cost by cutting off unnecessary service and charging customers who wants extra service such as extra leg room, on board drink and on board meals. Supply strategy ?Jetstar ?Virgin Blue Recommendation It could be recommended to Jetstar to implement a strategy for customers who missed their plane. When a customer misses a plane, that person needs to buy another ticket to get on the plane which is totally unnecessary. However, Virging blue has already implemented a good strategy for those who missed the plane; customers will only need to pay $50 to get on the next available plane.

Conclusion This report identified oligopolistic airline industry in Asia Pacific region and analysed the pricing strategy and supply strategy of the key firms operating in this market. This report chose Jetstar and Virgin blue which are both low cost carriers presented from traditional full service airlines Qantas and Pacific blue. ? REFERENCES Barbot, C. , 2004. Price Competition amongst LCCs, CETE – Centro de Estudos de Economia Industrial, do Trabalho e da Empresa (Research Center on Industrial, Labour and managerial Economics). Doganis, R. , 2001, The Airlines Business in the Twenty-first Century, Routledge, London.

Farris, M. T. & Happel, S. K. (1987). Modern managerial economics. London: Scott, Foresman and Company. Gallaway, J. H. (2000, August 28). Market structure: Oligopoly. [WWW document]. URL* http://www. smsu. edu/econ/faculty/olsen/courses/eco165/oligopoly. htm* [2000, November 28] Pleeter, S. & Way, P. K. (1990, April). Economics in the news. Addison-Wesley Publishing Company, Inc. Porter, M. E. 1996. What is strategy? Harvard Business Review, November– December, 61-78 http://www. aph. gov. au/library/pubs/rp/2002-03/03rp10. htm#dthe http://www. accessmylibrary. com/article-1G1-55654017/oligopoly-behaviour-trans-tasman. html


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