AIRLINE INDUSTRY

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Jomo Kenyatta University of Agriculture and Technology *

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Economics

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Nov 24, 2024

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2 Contents Introduction .................................................................................................................................... 3 Review of literature on oligopoly by the selected business's distinguishing features and strategies. ........................................................................................................................................ 3 A brief overview of the revenue of the selected business ........................................................... 5 How does oligopoly compare with the other market structures ................................................ 6 Limitation of oligopoly market structure to the airline industry. ............................................. 7 How does the airline business benefit the economy .................................................................... 8 Present how airline business can use strategies to gain high revenue ...................................... 9 Conclusion .................................................................................................................................... 10 REFERENCES ............................................................................................................................ 12

3 Introduction The airline industry is an oligopoly because of the dominance of a limited number of significant companies. A situation where a few very big companies compete for customers is known as an oligopoly. Mainstream airlines like Delta, American Airlines, and United Airlines are examples of such companies in the aviation sector. Keeping up with the ever-changing demands of the aviation sector necessitates a sizeable financial commitment to resources like technology, infrastructure, and people. Airline companies are fighting aggressively for clients in this market by offering various perks and discounts (Siegert & Ulbricht, 2020). A few large companies control the market because new entrants face significant obstacles. Review of literature on oligopoly by the selected business's distinguishing features and strategies. Markets with oligopolies are dominated by a limited number of enterprises that disproportionately influence the market's overall pricing and supply of goods or services (Indounas, 2018). The airline sector is a classic oligopoly since it displays unique characteristics and competitive tactics among its few significant players. The interconnectedness of the enterprises is a defining characteristic of an oligopoly. One company's activities may have far- reaching consequences for other businesses. If one airline in the business cuts its pricing, the others may need to do the same to stay competitive. For the same reason, if one airline launches a new route, its competitors may feel pressured. High barriers to entry are typical of oligopolies and make market expansion difficult for new entrants. High fixed expenses connected with aircraft, infrastructure, and staff are among the airline sector's main obstacles. Since then, the airline sector has shrunk to be dominated by only a few giant carriers. Non-price competition, in which businesses compete on qualities other than

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4 price, such as product quality, customer service, and innovation, is another hallmark of oligopoly (AYOUB et al.,n.d). Airport lounges, frequent flyer programs, and complimentary snacks and drinks are just a few examples of how airlines differentiate themselves in today's market. Strategic conduct is common in oligopolies, in which companies make choices depending on their anticipated responses from rivals. Consider airline-specific examples such as new route launches, route adjustments, and mergers and acquisitions. In oligopolistic marketplaces, understanding these characteristics is critical for companies to survive and thrive. Price collusion, in which businesses collude to set prices to boost profits, is prevalent in oligopolies. Yet, antitrust regulators worldwide see this as criminal behavior and watch it extensively. Another tactic oligopolies employ price leadership, in which one company sets the price, and its competitors follow suit (Guo et al.,2020). That may happen in the airline business if one company increases fares and its competitors do the same to keep their market share. Differentiating one's goods from the competition is a tactic businesses use to get an edge in the marketplace. Airlines may improve customer experience by providing more spacious seats, enhanced in-flight entertainment, and expedited check-in. In an oligopolistic market, mergers and acquisitions are systematic strategies for expanding market share and decreasing competition (Discua Cruz et al.,2020). Due to several mergers and acquisitions, the airline business has become more consolidated. When two or more businesses form a strategic alliance, they work together toward a shared objective. Code-sharing agreements are one example of this since they allow airlines to pool resources, including aircraft, maintenance facilities, and services. Companies competing in oligopolistic marketplaces need to be aware of these tactics if they want to succeed.

5 A brief overview of the revenue of the selected business It's no secret that the airline business is a moneymaker, helping to boost economies worldwide. Airline sector revenue is affected by various variables, including the number of passengers, the distance flown, and the rates paid for such services. There was a considerable rise from 2018's $754 billion to 2019's estimated $838 billion in revenue earned by the global airline sector. Revenue mainly rose due to more passengers and higher average ticket prices (Maneenop & Kotcharin, 2020). North America outperformed all other regions with nearly 40% of worldwide sales. A close second in terms of revenue was Europe, at over 30%, followed by Asia-Pacific at around 25%. There is a wide range of income across airlines in the sector due to the airline's size, the number of routes, and the intense competition in each market. Airline companies like Delta Air Lines, American Airlines, and United Airlines are among the world's most profitable businesses, raking in billions of dollars each. The airline industry's bottom line is buoyed by ticket sales and money made from cargo, frequent flyer programs, and other "ancillary" services (Maneenop & Kotcharin, 2020). Transporting packages and products are under the purview of the cargo department, while frequent flyer programs reward loyal customers with perks like discounted or free tickets and seat upgrades. Accessory services include in-flight meals, checked luggage fees, and seat selection surcharges. As a direct result of the COVID-19 pandemic, the aviation sector saw a worldwide revenue decrease of almost 60% in 2020 compared to 2019. Restrictions on travel, quarantine precautions, and general apprehension about spreading disease all contributed to this reduction in passenger traffic (Maneenop & Kotcharin, 2020). Consequently, several airlines were either unable to operate or saw a significant drop in income due to their inability to serve as many

6 passengers. As a result of the epidemic, airlines have taken different measures to increase profitability, including reducing expenses, renegotiating debt, and lobbying governments for aid. Several airlines have converted their fleets of passenger planes to carry cargo instead. How does oligopoly compare with the other market structures There are many kinds of market systems, and oligopoly is one. Perfect competition, monopolistic competition, and monopoly are further examples of market systems. The number of enterprises, product differentiation, hurdles to entry, and market strength of each company are all distinct characteristics of these various market systems. In a perfect competition market, numerous tiny enterprises compete to offer the same goods to a large pool of consumers. New businesses may join and leave the industry with relative ease in a perfectly competitive market. Prices are, therefore, determined by market forces, and specific businesses have no sway over those forces (Kyle, 2019). Conversely, an oligopoly is characterized by a market structure in which few vast enterprises have disproportionate control over the industry. Several companies provide a variety of items, as in a monopolistic competitive market. Although corporations in the monopolistic competition have some degree of market power, their sway is curtailed by the presence of other rivals offering identical goods (Thisse & Ushchev, 2018). Alternatively, oligopoly corporations may have a more significant influence due to their market dominance and the limited number of competitors in the industry. The monopoly market structure occurs when there is just one company servicing the whole market and no viable alternatives. To maximize earnings, a monopoly's sole owner uses its monopolistic position to charge whatever it wants for the product or service (Alhadeff, 2020).

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7 Under an oligopoly, on the other hand, companies must consider their rivals' responses when making pricing or production decisions. Limitation of oligopoly market structure to the airline industry. The airline sector is characterized by an oligopoly market structure due to the dominance of a limited number of enterprises. The oligopoly market structure may adversely affect certain businesses, like airlines, despite its benefits. Due to the dominance of a small number of enterprises, competition is low in an oligopoly. Customers may pay more if businesses work together to raise prices and keep their market share without competition (Pazhanisamy, 2019). This is particularly true in the airline business since passengers have few other alternatives, and companies have less to lose by charging higher fares. High barriers to entry are a hallmark of oligopolies, making market entrance difficult for new entrants. High fixed expenses for planes, hangars, and employees are a major stumbling block in the airline business (Sun & Wang, 2018). So, new entrants confront formidable challenges when attempting to compete with existing airlines, thereby reducing competition and stifling innovation in the sector. Oligopolies might discourage investment in R&D since companies must instead compete for a limited amount of business. Since competition is low, there is less need to innovate (Pazhanisamy, 2019). Lack of innovation in areas like ticketing, boarding, and in-flight services may lead to consumer discontent and a drop in demand in the airline sector. Unlike businesses operating in more competitive marketplaces, those in oligopolies are less likely to modify prices in reaction to changes in the supply and demand for their products. This is so because they must consider how their rivals could respond (Sun & Wang, 2018). This

8 may lead to inflexible pricing in the aviation business when fares are not adjusted quickly enough to reflect fluctuations in input costs like gasoline or output costs like a demand. As a result, the market may become less efficient, and consumers may be left worse off. Companies in an oligopoly may not make the most effective use of their resources if they are more concerned with preserving their existing market share than with developing and implementing cutting-edge means of production. Because of this, prices may rise, businesses may be less profitable, and consumers may end up worse off (Siegert & Ulbricht, 2020). Because of this, government officials and business moguls must consider these constraints when formulating plans for the aviation sector and other oligopoly industries. How does the airline business benefit the economy As an example of a strategically chosen oligopoly, the aviation sector contributes significantly to the economy. Benefits such as increased employment, GDP, and visitor numbers are only the tip of the iceberg (Tribe, 2020). Millions of people throughout the globe are directly employed by the airline business as pilots, flight attendants, mechanics, or in customer service. The aviation sector employed approximately 600,000 people in the United States in 2019. These positions often provide competitive pay and benefits for workers to provide for their families. The airline business also indirectly supports many jobs in the supply chain, such as those aircraft manufacturing, fuel distribution, and maintenance. These high-impact positions are crucial to the industry's success as a whole. Several nations' GDPs get substantial boosts from the aviation sector. According to a recent study (Klç, Uyar, & Karaman, 2019), aviation contributed $809 billion to the US economy in 2019, or around 4% of the entire GDP. The expenditure of airlines, passengers, and ancillary companies contributes to this.

9 The airline sector plays a crucial role in the tourist industry by making it easier for people to visit other nations and does business across borders. As a result, there is a surge in demand for accommodations, food services, and other tourism-related businesses. Almost 87 million foreign visitors to the United States welcomed in 2019 thanks to the efforts of the aviation sector (Tribe, 2020). Air travel also has indirect positive effects on the economy. They include the improvement of global communication, the promotion of cultural interchange, and the ease of doing international commerce. These advantages are critical to the health of a global economy and may even stimulate more expansion down the road. The airline sector has also been crucial in delivering humanitarian supplies and responding to natural disasters. Airline companies have stepped up to help get people and goods to places hit by natural catastrophes. And in times of crisis, airplanes have aided those in need, including refugees and victims of war and illness. Present how airline business can use strategies to gain high revenue The airline sector, which has an oligopolistic market structure, was chosen for this study. The airline industry has several tools, such as price discrimination, product differentiation, and cost leadership, all of which may be used to increase revenue. By charging different consumers different rates for the same product or service, a business engages in a practice known as price discrimination. Airline companies may increase their profits via pricing discrimination by setting different ticket prices at different times of the day, in different seasons, and in response to varying demand (Yan et al.,2020). When demand is excellent, as it is during the holiday season or for a last-minute trip, airlines often increase ticket costs. Airline companies may enhance their income and more effectively manage their capacity by charging various fees for the same service.

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10 Airlines may increase their profits by using various strategies, one of which is the diversification of their products. There is a lot of competition among airlines, so each one needs to find a way to set itself apart from the others by providing products and services that its consumers won't find anywhere else (Yan et al.,2020). Some airlines provide more perks, such as reclining seats, priority boarding, on-demand movies, and gourmet meals. These additions may entice consumers and bring in more money for airlines. The goal of a cost-leadership strategy is to provide goods or services at prices that are lower than those of rivals. Cost leadership is a strategy that airlines may employ to their advantage by cutting down on operating expenses like fuel, maintenance, and other overhead expenditures (Aji, Ramadhan & Hidayatullah, 2021). Airlines can compete with other modes of transportation by offering more affordable prices to consumers. Because of this, the airline may see an uptick in bookings and fares. Adding new routes and destinations is another method airlines may utilize to increase their income. Airline companies may reach more people and generate more revenue by extending their routes to additional destinations. Alliances and collaborations may also help airlines enhance their earnings. Airlines may provide more complete services to their consumers by forming partnerships with other airlines and service providers to provide connecting flights, airport lounge access, and cross-promotional events. For even more profit maximization, airlines may also use revenue management measures (Yan et al.,2020). Data analytics and dynamic pricing algorithms are used in revenue management to determine prices according to supply and demand. Airlines may optimize their profits by selling as many tickets as possible at the highest feasible price by constantly monitoring demand and modifying prices appropriately.

11 Conclusion The aviation business is a classic oligopoly, with just a handful of giant corporations controlling most of the market share. Interdependence, high barriers to entry, non-price competition, and strategic conduct are all characteristics of the sector that make it difficult for new entrants to compete successfully. The airline sector provides significant advantages to the economy, including job creation, economic development, and the facilitation of commerce and tourism, despite the limits of the oligopoly market structure. Airline companies have several options for differentiating themselves from the competition and growing their bottom line, including offering lower prices or more specialized products, forming strategic partnerships, or merging with other companies. With these methods, airlines may set themselves apart from the competition, increase their market share, and provide their consumers with higher-quality goods and services.

12 REFERENCES Aji, A. I., Ramadhan, K. I., & Hidayatullah, L. (2021). Analysis of cost leadership strategy and core competitiveness points of Air Asia. In International Conference on Industrial Engineering and Operations Management. Alhadeff, D. A. (2020). Monopoly and competition in banking. In Monopoly and Competition in Banking. The University of California Press. AYOUB, A. E. THE ENTRY BARRIERS OF OLIGOPOLY MARKET: JORDAN TELECOM MARKET. In 3rd Ferenc Farkas International Scientific Conference:„Management Revolutions”: Conference Proceedings 3. Farkas Ferenc Nemzetközi Tudományos Konferencia:„Menedzsment forradalmak”: Konferenciakötet (p. 121). Discua Cruz, A., Centeno Caffarena, L., & Vega Solano, M. (2020). Being different matters! A closer look into product differentiation in specialty coffee family farms in Central America. Cross Cultural & Strategic Management, 27(2), 165-188. Guo, H., Chen, Q., Zhang, Y., Liu, K., Xia, Q., & Kang, C. (2020). Constraining the oligopoly manipulation in electricity market: A vertical integration perspective. Energy, 194, 116877. Indounas, K. (2018). Market structure and pricing objectives in the services sector. Journal of Services Marketing.

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13 Kılıç, M., Uyar, A., & Karaman, A. S. (2019). What impacts sustainability reporting in the global aviation industry? An institutional perspective. Transport Policy, 79, 54-65. Kyle, A. S. (2019). Market structure, information, futures markets, and price formation. In International Agricultural Trade (pp. 45-64). CRC Press. Maneenop, S., & Kotcharin, S. (2020). The impacts of COVID-19 on the global airline industry: An event study approach. Journal of air transport management, 89, 101920. Pazhanisamy, R. (2019). Limit Pricing Oligopoly Market: Evidence from Tamilnadu Politics. Siegert, C., & Ulbricht, R. (2020). Dynamic oligopoly pricing: Evidence from the airline industry. International Journal of Industrial Organization, 71, 102639. Siegert, C., & Ulbricht, R. (2020). Dynamic oligopoly pricing: Evidence from the airline industry. International Journal of Industrial Organization, 71, 102639. Sun, Y., & Wang, S. (2018). Competitive Effects of Constraints on Quality: Evidence from the US Airline Industry. Thisse, J. F., & Ushchev, P. (2018). Monopolistic competition without apology. In Handbook of Game Theory and Industrial Organization, Volume I (pp. 93-136). Edward Elgar Publishing. Tribe, J. (2020). The economics of recreation, leisure and tourism. Routledge. Yan, B., Stuart, L., Tu, A., & Zhang, T. (2020). Analysis of the Effect of COVID-19 on the Stock Market and Investing Strategies. Available at SSRN 3563380.

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AIRLINE INDUSTRY

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