Jan 2011 Economics Unit 3
BA and Iberia (Jan 2011)
1)
Merger between BA and Iberia tend to be horizontal integration. Horizontal integration occurs when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm, e.g.BA and Iberia. In this case both the companies are in the same stage of production and also in the same industry (i.e. airlines industry). The goal of horizontal integration is to consolidate like companies and monopolize an industry. Besides, they can also gain Economic of Scale when doing such strategies. Put another way, they can reduce average cost of production in the long run. For example, according to extract 1, they may also have more buying power when it comes to negotiations to buy new planes from Boeing and Airbus.
2)
Reasons why Iberia made a loss during ‘the usually profitable summer months can be either rising cost and fall in demand. Firstly, a rise in production cost, which is a significant factor of production, has a huge impact on the amount of profit Iberia can make. Fuel costs is a typical example. Put another way, when there is a rise in cost of fuel, it will eventually push up the price as well, which leads to a significant reduction in demand. As a result, we expect to see a loss . Also, there can be other costs that affect the amount of profit, including wages, taxes and so on. Secondly, falling demand is another problem. Apart from higher price, a fall in demand can be due to financial crisis, reduction in consumer confidence or because of recession. In these situations, consumers have no incentive to spend for airplanes tickets while they are not sure about their financial status, especially during a recession. Therefore, revenue of Iberia will fall and they can make a loss even during “ the usually profitable summer months” However, Iberia is not the only company that suffer from this loss. Others airlines have experienced similar problems.
1)
Merger between BA and Iberia tend to be horizontal integration. Horizontal integration occurs when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm, e.g.BA and Iberia. In this case both the companies are in the same stage of production and also in the same industry (i.e. airlines industry). The goal of horizontal integration is to consolidate like companies and monopolize an industry. Besides, they can also gain Economic of Scale when doing such strategies. Put another way, they can reduce average cost of production in the long run. For example, according to extract 1, they may also have more buying power when it comes to negotiations to buy new planes from Boeing and Airbus.
2)
Reasons why Iberia made a loss during ‘the usually profitable summer months can be either rising cost and fall in demand. Firstly, a rise in production cost, which is a significant factor of production, has a huge impact on the amount of profit Iberia can make. Fuel costs is a typical example. Put another way, when there is a rise in cost of fuel, it will eventually push up the price as well, which leads to a significant reduction in demand. As a result, we expect to see a loss . Also, there can be other costs that affect the amount of profit, including wages, taxes and so on. Secondly, falling demand is another problem. Apart from higher price, a fall in demand can be due to financial crisis, reduction in consumer confidence or because of recession. In these situations, consumers have no incentive to spend for airplanes tickets while they are not sure about their financial status, especially during a recession. Therefore, revenue of Iberia will fall and they can make a loss even during “ the usually profitable summer months” However, Iberia is not the only company that suffer from this loss. Others airlines have experienced similar problems.