Economics IA: Microeconomics Commentary on Heathrow Slams Price Cap Put On Airline Fees Word count: 746 Michael Lee The article is about the government trying to control price of airlines of Heathrow Airport. CAA has set a price cap on the fee Heathrow Airport charges the airline firms, wishing that this will lead to lower price in the flights for consumers. Maximum price, also referred as price ceiling, is usually set by government to limit the seller pricing system to ensure a fair and reasonable business practice (Murcko, 2002). Price ceilings are usually set for essential expenses, such as flights in the article. The market in this article is the airport. Heathrow airport is the supplier of places for airlines, and they charge certain amount of price for the service. However, Heathrow Airport argues that the maximum price will decrease the quality of service airlines which can be provided, and the airlines argue that it is a justified intervention, since it will keep the consumers’ price low. Although many airports in the world are owned by the government to prevent over-pricing or supply restriction, Heathrow Airport is owned by various foreign stakeholders, such as Spain's Ferrovial and the sovereign wealth funds of Qatar, China and Singapore. Diagram 1: Maximum price set on charge on airlines for place in Heathrow Airport In the diagram, the demand is from airline companies, and supply is from Heathrow Airport. The price is rent for airlines to keep a place in the airport, and quantity is the number of places in airport for the flight. The original equilibrium was set at Qeq and Peq, as the price mechanism works in the market. However, as the governments set the maximum price at P1, Heathrow Airport will have t... ... middle of paper ... ...nd supply. However, this scheme can be controversial, because Heathrow Airport is owned by foreign capitals, and people will oppose their taxes being spent on out of domestic areas. Also, the government has to consider opportunity cost in spending tax revenue on subsidy, as the opportunity cost of provision of subsidy will be other areas for public, such as healthcare or education. In the last hold, Government can self-provide the flights even if it makes slight loss. The government can use other airports such as Gatwick Airport mentioned in article to provide more various flights, thus increase the supply. Bibliography J. Blink, I. D., 2011. Oxford IB Diploma Programme. ,: Economics: Course companion. Oxford: Oxford, p. 71. Murcko, T., 2002. Businessdictionary. [online] Available at: http://www.investopedia.com/terms/p/price-ceiling.asp [Accessed: 9 5 2014].
In the Travel Pulse article "Airlines Leaving Us Little Choice – Like A Monopoly," posted by Rich Thomaselli, the practice of monopolization is observed in the airline industry. The author criticizes large airlines on their growth that has led to at “93 of the top 100 [airports], one or two airlines controlling a majority of the seats” (Thomaselli). The scornful article was written after recent events that have caused the Department of Justice and five States to sue two of the biggest U.S.
of price versus service in the airline industry as a whole, as well as, the
In my discussion I will use the Australian airline industry to present how oligopolies operate, and to show the different behaviours and strategies that arise from the interdependence of firms. I will mainly concentrate on the domestic airline market in Australia. The domestic airline market consists of a duopoly of two firms, Qantas and Virgin Blue. Since Qantas and Virgin are the only two Airlines supplying domestically in Australia, they account for all of the profits in the market and consequently they are in direct competition with each other. Because only two firms are competing, each firm must carefully consider how its actions will affect the other, and how its rival is likely to react. Thus, strategic considerations regarding the behaviour of competitors in this duopoly are essential in order for Qantas and Virgin to set prices.
In 1978, deregulation removed government control over fares and domestic routes. A slew of new entrants entered the market, but within 10 years, all but one airline (America West), had failed and ceased to exist. With long-term growth estimates of 4 percent for air travel, it's attractive for new firms to service the demand. It was as simple as having enough capital to lease a plane and passengers willing to pay for a seat on the plane. In recent news, the story about an 18-yr British...
In lights of the PESTLE model, the political factors bring both opportunities and threats to Jetstar’s new proposal. Since this proposal focus on the Australia-India low price airline market, the analysis conducts involving Australia and India political environments. There are two potential opportunities in this political environment. Firstly, the Australian government has the incentive to boost the development of tourism between the two countries (Tourism Australia 2012). With the support of government, the start of the new route could be easier. For example, American government erects legislation to increase competition of the airport ‘by forcing these airports to increase the availability of scarce facilities’ (Williams 2015). Such legislations and regulations as well as financing investment or subsidies from government could directly help the airline company cut the cost. Similarly, Australian government could also have powerful intervention to influence aviation market. Thus, it is a big opportunity for Jetstar to the new route expansion if it acquires the
In order to measure the impact of United's price increase, we would need the price elasticity of the demand. The main problem is that there is no agreement as to whether, generally speaking, air transportation is or is not relatively price elastic. There is ample evidence that the introduction of deeply discounted fares by the low cost carriers can be very price elastic, although, each type of traveler has its own price characteristics.
The goal of this settlement is to increase the competition in the airline industry. By having a more competitive industry, it would lead to more choices and more competitive airfares which can be utilized by the customers.
The Economist. 2014. Price or quality—pick one. [online] Available at: http://www.economist.com/blogs/gulliver/2014/02/ryanair [Accessed: 26 Mar 2014].
Recently Qantas has partnered up with Emirates in an effort to channel Europe-bound travellers through Dubai International Airport in a mutually beneficial arrangement, an example of business-to-business geographic segmentation marketing.... ... middle of paper ... ... Indirect Taxes on International Aviation*.
Before we discuss government intervention and its affect on an industry’s competition we must first seek to understand the five forces framework. The theory, discussed in 1979 by Micheal Porter seeks to evaluate the attractiveness of an industry. Throughout this essay I will explore the theory and then relate government action and its well-documented affects on the airline industry.
· Stansted airport, owned by BAA, is one of the most rapidly growing airports i...
British Airways (BA) is the main and largest carrier airline of the United Kingdom. It’s headquarter is located in Waterside. The British Airways Group was established in 1972. It included British Overseas Airways Corporation (BOAC) and British European Airways (BEA). In 1974 British Airways was formed after the dissolution of BOAC and BEA (British Airways, 2015).
In order for revenue management to be successful, four fundamental conditions must be met. The first requires a permanent amount of supply available for sale. Meaning, a fixed amount of seats per aircraft should be available per route. Second, resources sold must be perishable. Seats are a perishable items, if not sold they terminate without value. Third, the most vital portion of r...
As the supply curve moves in the automobile industry, the equilibrium price and quantity sold will change with this shift. When the automobile manufacturers see this shift in supply, they will then raise their prices and the quantity sold will fall. Car manufacturers will also develop...
London Heathrow Airport is one of the major airports owned and operated by privatized company formerly known as British Airport Authority (BAA plc), now Heathrow Airport Holdings. Heathrow Airport Holdings owns and operates four major airports in the UK, including London Heathrow, Aberdeen, Glasgow and Southampton. However, in this case study, London Heathrow would be the writer’s main interest as to look at the effect of its privatization and find the possible impacts that it might have on the economy and society in general.