Industry Environment Analysis. Identify dominant economic characteristics, forces of change and evaluate the attractiveness of the industry.
Dominant economic characteristics:
* Economies of Scale
Parts of the airline industry are characterised by economies of scale. Economies of scale occur when expanding the production of a service results in a lowering of the average cost of its production. The implication of this is that a larger service provider will achieve lower costs than his smaller competitors, making the latter vulnerable to takeover. In the long run, the implication is that in the absence of government intervention, the industry will gravitate towards a single provider, a concern that underpinned the economic rationale for the two airline policy from its outset.
The policy was based on the premise that if Australia wanted two competing airlines in the domestic market, government intervention was necessary to ensure that both airlines were 'guaranteed' sufficient market share so that each could remain commercially viable over the long term. If economies of scale persist in the industry to this day, this could suggest that there is a need for on-going regulation of the airline industry to monitor and prevent any tendencies towards its monopolisation.
The airline industry is subject to economic regulation by the ACCC under the generic business conduct and competition policy provisions of the Trade Practices Act 1974. The High Court has, in the recent Boral case, addressed these provisions in detail in the context of claims of predatory pricing. The court's conclusions on predatory pricing could have significant longer-term implications for the Australian domestic airline industry; there is a widespread view in the small business sector that the Boral decision 'proved the Trade Practices Act did not protect small business from big-business predatory pricing'.
* Ticket revenue
Airlines assign prices to their services in an attempt...
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