Profits Sky High within the Flying Industry Executive summary The purpose of my brief report is to analyse the environment surrounding the Airline Industry in New Zealand. It will concentrate on the competitiveness within the airline industry; the agreements airlines have made to increase revenue as much as possible and the major costs within the industry. It will deliver information about how the airline industry makes profits even though there are certain threats that influence the profits. Introduction This report will discuss the airline industry in New Zealand, with the main airlines dominating the market, which are Air New Zealand and Qantas. The report will provide the main issues about other low carrier airlines entering the industry affecting the main airlines profits, which led to the agreement between Air New Zealand and Qantas to still achieve those profits. Also another factor is fuel prices, which is a major cost for airlines especially with the prices fluctuating. These three essentials will affect the industry environment causing some variation in the industry and the way it works. Discussion Competitiveness of the Airline Industry The regional airline industry reveals trans-‐‑Tasman flights as a densely competitive sector given the size of the Australasian markets. The reason is because in 1996 an agreement called ‘single aviation market’ was established to have freedom to travel between Australia and New Zealand with no constraints opening the market, which is known as Trans Tasman (Vowles & Tierney, 2007, p.348). The main two airlines that dominate the Trans-‐‑Tasman are Air New Zealand and Qantas, which have dense rivalry between them with Air New Zealand having 52% and Qantas 39% of the market (Hill, Jones, Galvin, Haider, 2007). Further over the years fifth freedom international mainly Emirates and cost carriers such as
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Pacific Blue entered the Trans-‐‑Tasman market making it “one of the most highly competitive air transport markets in the world” (Vowles & Tierney, 2007, p.348). There is noticeable categorisation between Traditional and Low Cost Airlines in terms of pricing strategy. Taking into account that there is considerable competition between the airlines, consumers ought to have the luxury of price flexibility. However, the market prices for flights do not necessarily indicate the assumed theoretical pricing. In fact, there are only 2 clusters of prices in airline tickets; Traditional airline prices and Low Cost airline prices. The cluster exits due to Price Discrimination, which means “charging different prices to different consumers, where the price difference cannot be fully explained by differences in cost” (Stavin, 1996, p.3). Air New Zealand and Qantas get away with Price Discrimination because they have the market power to charge different prices (Stavin, 1996). Airlines get away with charging different prices for the same service they provide; they can do this because supplying additional seats cost the airlines very little, they try to extract the maximum willingness to pay from each customer and reinforced by Stavin who stated that “firms need to be able to separate consumer groups with different Demand elasticity’s” (Stavin, 1996, p.3). Airlines also get away with charging high prices on more competitive routes (Stavin,...
References: Hazledine, T. (2008). Competition and Competition Policy in the Trans-‐‑Tasman Air Travel Market Retrieved from http://cecil.auckland.ac.nz/Cecil.aspx?SessionID=4ac3700f-‐‑db12-‐‑4263-‐‑ a093-‐‑3e9bcde3f6b1&UserID=57fbe13c-‐‑1e0d-‐‑417e-‐‑8268-‐‑8650da2cafbc Hill, H.W.L., Jones, G.R., Galvin, P., & Haider, A. (2007). Strategic management an integrated approach. Queensland: John Wiley and Sons Australia, Ltd. Loudin, G.F. (2004, December) Financial Risk Exposures in the Airline Industry: Evidence from Retrieved from http://cecil.auckland.ac.nz/Cecil.aspx?SessionID=4ac3700f-‐‑db12-‐‑4263-‐‑ a093-‐‑3e9bcde3f6b1&UserID=57fbe13c-‐‑1e0d-‐‑417e-‐‑8268-‐‑8650da2cafbc Stavin, J (1996). Price Discrimination in the Airline Market: The Effect of Market Concentratiohttp. http://www.bos.frb.org/economic/wp/wp1996/wp96_7.pdf Vowles, T.M., & Tierney, S. (2007, December). The geographic impact of ‘open skies’ policies onTrans-‐‑Tasman air passenger service. Retrieved from http://cecil.auckland.ac.nz/Cecil.aspx?SessionID=69b0fc0e-‐‑41ea-‐‑4618-‐‑bbad-‐‑ 54e0ef30ab37&UserID=57fbe13c-‐‑1e0d-‐‑417e-‐‑8268-‐‑8650da2cafbc
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