Beruflich Dokumente
Kultur Dokumente
(i)
[1]
The greater the market power, the stronger the monopoly power, the higher the prices.
(ii)
[5]
(iii) Describe the trend of the net income of US carriers over the period of 2004 to
2013.
[2]
25,000
20,000
15,000
10,000
5,000
0
-5,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-10,000
-15,000
-20,000
-25,000
Total
-30,000
(b)
(i)
Net income level of the US carriers generally increased over the period of 2004 to
2009 [1]
The net income level of US carriers experienced great fluctuations between 2004
and 2009, but these fluctuations moderated after 2009. [1]
Identify how the market structure for domestic US airlines has evolved since the
early 1970s.
[2]
The deregulation of US domestic airlines in 1978 has caused the industry to evolve
from a more oligopolistic market structure to a more monopolistic competitive market
structure. [1m]
However, consolidation in the 2000s has caused the more monopolistic competitive
market structure to revert to a more oligopolistic market structure. [1m]
(ii)
[4]
o
o
Labour costs were high due to the unionisation of workers that allowed
for a greater bargaining power for higher wages. Airlines were earning
supernormal profits then and hence, were not as stringent with wage
increases.
However, they were unable to cope with the high costs of production
when their revenue fell and hence some resulted in bankruptcy.
Merger of firms occurred, allowing the newly merged firm to reap
internal economies of scale (e.g., bulk buy, managerial economies,
etc.). This may help firms to lower their costs of production and become
profitable.
Consolidation may have occurred because larger firms tend to have greater ability
to deal with demand shocks than smaller firms.
o The 2008 subprime crisis resulted in the global recession and a fall in
demand (both internal and external) for flights. Smaller firms tend to
have less ability to deal with sudden shocks relative to the larger firms.
Hence, the smaller firms may have fallen out of the industry (shut
down) or may have been acquired by the larger firms, resulting in the
consolidation.
Students just need to cite one possible reason for the consolidation to score the 2m.
[8]
Economy
The increased market dominance may worsen market failure and inequity.
o [market dominance diagram to illustrate market failure] The difference
between price and marginal cost is now greater and hence allocative
inefficiency is worsened, with the result being a larger deadweight loss.
o As profits are concentrated in the hands of the merged firms, and firms
enjoy these profits at the expense of consumers who have to bear the
higher prices, there is greater inequity.
Benefits:
Firms
The consolidation might have helped with the survival of some of the major players
that could have filed for bankruptcy, if not for the merger.
o According to Extract 2 and Table 1, Consolidation is finally helping a
money-losing industry become profitable and the airline industry has
been making profits in recent years.
o The merger is likely to improve the firms efficiency by cutting redundant
or unprofitable routes, or replacing aging fleet that was not as fuelefficient.
o By merging to achieve greater scale of production, firms are able to
enjoy greater internal economies of scale through marketing economies
such as bulk purchase of aircrafts or lower unit costs of advertising.
o These have enabled firms to lower their unit cost of production and
hence increase profitability.
Households
The cost savings mentioned above can be passed on to consumers in terms of
lower prices, enhancing consumer welfare.
Stability in the airline industry brought about by the consolidation also allows for
greater stability in employment in the industry.
Evaluation
Even though there is increased market dominance, there has not been a
significant increase in fares. Instead, extract 2 mentioned, Since 2000, the
average airfare has fallen by 18 per cent. The consolidation may not
necessarily result in higher prices and hence the costs mentioned above. This
could be because the internal economies of scale reaped by the merged airlines
and costs savings were also translated to lower prices for consumers.
In particular, the merger between American and US Airways requires them to
divest prime take-off and landing slots at six key airports which will increase the
competition on non-stop and connecting routes throughout the country. The
government can regulate the consolidation such that it allows firms to be profitable
without reducing the level of competition in the market.
Hence, the benefits of consolidation may potentially outweigh the costs, which
perhaps can be inferred from the stance of the Department of Justice in allowing
the merger of American and US Airways.
Other possible costs:
Union loses bargaining power
o Consolidated firms have greater leverage over workers in comparison
to the 1990s where individual firms with smaller market share
Loss in choice of airlines that ply similar routes, lowering consumer surplus.
Other possible benefits:
Higher returns on investment in the airline industry might result in greater investor
4
5-6
L1
1-2
1-2
L3
L2
(c)
Marks
3-4
Assume you are the economic advisor to the CEO of Jetblue. Justify your
recommended strategies for Jetblue to remain competitive in the airline
industry.
Introduction
In view of the recent spate of mergers by major network carries, there are clear
changes in the domestic airline industry. Given these changes, competitive strategies
ought to be reviewed in order to keep abreast with the times. New strategies should
focus on two key aspects, avoiding or mitigating the threats. As well as seizing the
opportunities that are opening up. In order to identify these strategies, one needs to
first recognise the current situation and possible trends in the industry.
Current situation + Possible trends (as seen in Extract 4)
Segmenting of the market:
Clear segmenting of the market into 3 separate segments
o (1) Network carriers American Airways, Delta Airlines
o (2) Low-cost carriers Southwest, Jetblue
o (3) Ultra low-cost carriers Spirit, Frontier
While the industry may exhibit certain characteristics that would take after the
major players, individual firms that belong to the separate segments will still be
able to exhibit characteristics and behaviour that differs from the overall
industry
Mergers of major network carriers:
Industry is evolving to become more oligopolistic in nature due to the various
mergers and acquisitions. As such, the remaining network carriers will be
gaining in market share and power.
Network carriers will then have greater price setting abilities, which further
restricts the smaller firms in the industry to following the prices set
Government stance on mergers in the industry
By allowing the merger of American and U.S. Airways, it implies that the U.S.
government is not against the consolidation of the industry in light of the
possible benefits it brings in comparison to the potential damages if a major
airline closes down
Nonetheless, the ruling for the newly formed American Airways to divest its
5
[8]
slots is seen as guaranteeing a bigger foothold for low-cost carriers at key U.S.
airports and is a signal for other firms in the industry about the governments
attitude towards competition
Business model of low-cost carriers converging to that of network carriers
Higher costs experienced by low-cost carriers due to
o Aging aircraft fleet which would cost more to maintain and will have
lower cost efficiency
o Maturing workforce which will increase labour costs as these workers
are promoted and given wage increments through seniority
Due to this increasing cost of production, low cost carriers increase their fares
to retain their profit margins, hence, fares will given to resemble network
carriers
This results in low-cost carriers losing their competitive edge over network
carriers, which was always the lower fares due to their ability to keep costs low
Growth of ultra low-cost carriers
Emergence of ultra low-cost carriers resulting in a new wave of price
competition by these carriers in an attempt to undercut BOTH network and lowcosts carriers
Increasing emphasis in improving product quality
Customers are placing more value on customer experience and this is resulting
in firms being more willing to invest in improving product quality (e.g. in-flight
Wi-Fi, premium seating options, and operational reliability infrastructure)
Given these current and future trends, Jetblue needs to understand its position as a
low-cost carrier in the U.S. domestic airline industry and the various threats and
opportunities that it faces in order to implement possible strategies.
Threats:
Increasing costs (as explained in the convergence of business models with
network carriers)
Falling demand ! Falling revenue
o Demand for Jetblue may be competed away by network carriers who
would have consolidated and are now better placed to engage in
aggressive competitive strategies (i.e. price wars, advertisements) as
they are able to reap greater internal economies of scales, hence,
incurring lower average costs, directing the profits to these competitive
efforts
o Demand for Jetblue may also be competed away by ultra low-cost
carriers who are able to charge a much lower airfare for the same
product air travel. Customers who are more price elastic in their
demand may choose to switch to ultra low-cost carriers due to the rising
airfares charged by Jetblue due to the increasing cost of production.
These customers tend also to be those who are flying short-haul flights
and are not overly concerned in the disparity between the services
provided on a low-cost carrier like Jetblue and the services that will
incur high ancillary fees on ultra low-cost carriers such as Spirit
Opportunities
Divestment of the newly formed American Airways
6
It is vital to understand that the trends identified can be seen BOTH as threats and
opportunities, depending on how the firm approaches the situation and the strategies
implemented. That will eventually result in the firm Jetblue benefiting or losing due to
these trends.
Strategies in response
Upgrade operations and improve efficiency & buy newer, more fuel-efficient planes
o Lower costs of production ! cope with the rising costs and maintain cost
advantage
o However, one still needs to take into account the high initial cost outlay in
order to replace the entire fleet. As such, a possible suggestion would be to
do so in parts, and to proceed with the replacement when the firm is
earning supernormal profits to sustain this increased expenditure and still
break even (normal profits).
o It would be important to identify the presence of long run cost savings in
order to justify short run expenditure as well
Adopt business model held by ultra low-cost carriers in charging low airfares but
higher ancillary fees so as to compete for market share through low pricing but to
cover its increasing costs through ancillary fees
o The optional ancillary fees will also reduce operational costs since not
every passenger will opt for these added services
o By charging a lower base fare, it might translate to consumers as lower
prices since there will be consumers who might not consume any of the
added services that will be charged ancillary fees
o However, there are several questions should be asked at point of decision:
(1) consider the pros and cons of competing with ultra LCCs, especially
given LCCs rising costs (2) how would a firm that is facing rising costs still
be able to reduce its airfare?
With the sale of taking-off and landing slots to low-cost carriers under the terms of
the settlement, Jetblue could buy the slots in order to expand Jetblues routes and
possible flight timing
o In doing so, it may allow Jetblue to gain a larger market share, hence,
increasing total revenue.
o Prime slots may allow Jetblues flights to shift to certain timings that would
greatly influence the demand of passengers. It may result in Jetblue flights
becoming more price inelastic as well for certain passengers who would
wish to fly at these prime timings and wont mind paying the added
premium to do so.
o Operating flights from these key US airports could also ensure a greater
chance of survival.
Conclusion
Eventually, Jetblue may have to consider if it would be better placed to compete
against the major network carriers, or to complete against the ultra low-cost carriers
seeing how its current category (LCC) might converge with network carriers and may
even be acquired by the network carriers.
Level Description
L3
Marks
5-6
L2
3-4
L1
1-2
1-2
(i)
Explain how the current account of an economy is calculated and suggest [3]
an explanation for the 62% growth in the current account of Singapore from
2009 to 2010.
The current account of the balance of payment contains four items: (1) the
balance of trade in goods; (2) the balance of trade in services; (3) net primary
income flow or net property income from abroad; (4) and the secondary
income flow or net unilateral transfers. [1]
The addition of all positive and negative payments reveals the current
account balance Credit items could include export revenue, dividends from
foreign financial investments and transfer of financial assets from Singapore
to overseas. Debit items could include import expenditure, repatriation of
money from foreign workers in Singapore and grants by the Singaporean
government to developing countries. [1]
The 62% growth from 2009 to 2010 can be explained by the recovery of other
countries from the 2008/9 recession leading to an increase in Singapores
exports. [1]
NOTE: Any reference to recovery from recession and exports will be credited.
(ii) Using Tables 3 and 4, explain the change in relative importance of the USA [2]
and China as Singapores trading partners, from 2007 to 2012.
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
2007
2008
US Imports
2009
2010
US Exports
China Imports
2011
2012
China Exports
The data reveal the relative increase in total trade with China and the relative
decline in total trade with the USA. [1]
10
(b)
Explain one reason why the Chinese government is promoting structural [3]
change.
(c)
Extract 6 reports that the Indian middle class is expected to double by 2016. [4]
Explain how this might affect trade between India and Singapore.
(d)
The rise of a significant middle class in India may boost demand for
Singaporean export goods because Singapores economic growth relies on
exports. [1]
The extracts reveal that Singaporean firms are eager to develop markets
beyond the borders of the city-state. For instance, Charles and Keith may be
able to export to India or engage in outward financial direct investment (FDI)
and set up stores in India. References to SATS will also be credited with 1
mark. [1]
The extracts also refer to Singapores private hospitals. A reputation for high
quality medical service may encourage Indians to seek treatment in
Singapore; adding to Singapores invisible exports. [1]
Similarly, invisible exports may also rise with more Indians visiting Singapore
or travelling on Singapore Airlines. Foreign travel may be income elastic and
the rising levels of affluence may boost tourism, as has been the case with
China. [1]
This essay analyses the potential positive and negative impacts on American
producers and consumers of punitive tariffs imposed by the US government
on imported steel products.
The creation of, or the protection of, jobs in the US steel industry will have a
positive impact on the households of American steel workers. This is a
potential impact on consumers.
Similarly consumers may pay higher prices for goods containing US steel, or
they may switch to buying cheaper imported substitutes. As mentioned
above if steel prices impact on the CPI households may claim higher wages
to protect their real income. A fall in real income may represent a fall in
household material standards of living.
Conclusion
In conclusion, overall the real issue is that dumping is often hard to accurately
identify, because lower labour costs or significant economies of scale may
cause lower prices and marginal costs are not easily measured. If the
allegation is unfounded there may be a long-term negative impact on the US
economy that will impact both US producers and consumers, which suggests
that it is not in the interests of the USA to impose punitive tariffs as they are
only punishing themselves ultimately.
Marks
L3
56
L2
34
12
(e)
L1
12
+2
Discuss the threats and opportunities facing the economy of Singapore in [10]
light of recent developments.
Introduction
This paper examines the threats and opportunities facing Singapores
economy in light of the recent developments in Asia, the USA, and Europe.
What are the major international events or trends that impact Singapores
economy
Asia is facing major economic changes. First, according to Extract 5, China is
restructuring its economy away from an investment and export-driven
economic model in favour of consumption-based growth, and building a more
competitive and vibrant economy that opens China to more private and
foreign participation. Second, according to Extract 6, India has a growing
middle class with a fast growing consumer market with rising incomes. Third,
in Extract 9 there is the rise of Myanmar, with its abundant resources and
cheap labour, which may be a big draw for Foreign Direct Investments (FDI).
Fourth, also in Extract 9, Japan is vigorously re-structuring through its
continued quantitative easing leading to a weakening yen.
The USA is starting to recover while Europe languishes. In Fourth, in Extract
9 it is stated that the USA is recovering, gaining competitiveness due to share
oil and gas, lower wages, and a resurgent industrial policy, while the
European Union (EU) is still in the doldrums, meaning still facing low growth
rates and high unemployment.
Threats
It can be argued that the recent Eurozone crisis and the continued low growth
rates and high unemployment in Europe pose a threat to Singapores
economic growth. As Singapore is a trade-dependent economy and Europe is
one of Singapores major trading partners, weak economic growth and high
unemployment could mean continued falling exports to Europe, which could
potentially hamper Singapores actual growth.
It can also be argued that the rise of Myanmar as a resource-abundant, lowcost producer could draw away FDI from Singapore, thus potentially posing a
threat to Singapores actual and potential growth. This is because Singapore
now faces a new competitor for investments, and Myanmar arguably is a
more attractive investment destination since its opening up from junta rule.
It can further be argued that, while a weakening yen implies cheaper
Japanese imports for Singapore, it means that Singapore exporters will face a
tougher time exporting goods to Japan. This is because the Singapore dollar
will appreciate vis--vis the Japanese yen due to aggressive expansionary
monetary policies and continued quantitative easing (QE) by Shinzo Abe. In
addition, Japanese QE could result in asset bubbles in Singapore, for
instance in the property and stock markets, due to the rapid inflows of cheap
capital. Therefore, the events in Japan could potentially pose a threat to
Singapore.
It can also be argued that if Chinas rebalancing efforts lowers Chinas rates
of economic growth or causes Chinas national income to fall, during the
transition from an investment and export-driven model towards consumptionbased growth, this may negatively impact Singapores exports to China.
13
Opportunities
However, a rising China and India may also provide opportunities for the
Singapore economy. First, rising consumption-based growth in China could
mean increases in Singapore exports to China as well as increases in
Singapore exports to other countries if China reduces its exports, which would
promote actual growth thus increasing Singapores AD, and possibly
promoting investments into export-oriented sectors, thus potentially
increasing Singapores AS. Second, the growing middle class in India with
rising incomes means a fast expanding consumer market for Singapore to
export to. Therefore, this could mean good news in terms of higher growth
and lower unemployment for Singapores economy.
Furthermore, in the USA, recovery could mean rising incomes, which could
potentially translate into more Singapore exports to the USA. This would
eventually raise Singapores AD and thus promote actual growth, and lower
unemployment in Singapore. Therefore, a healthy USA would be beneficial to
Singapore.
It can also be argued that the rise of Myanmar also provides Singapore
companies with a good chance to invest overseas, with many Singapore firms
such as Yoma Strategic Holdings investing in Myanmar. Capital outflows to
Myanmar could possibly result in future inflows into Singapores current
account. In addition, Singapore companies could tap on the comparative
advantages afforded by the relatively cheap land and labour in Myanmar, thus
benefiting from international trade and globalisation. Therefore, a rising
Myanmar may not pose a real threat to Singapore.
What are the major domestic trends facing Singapores economy
Extract 5 reveals that the exchange rate mechanism may be creating
problems for the many service based industries in Singapore. The Monetary
Authority of Singapore (MAS) has a policy stance of allowing a gradual
appreciation of the Singapore dollar. Tourism, for example, does not rely on
imported raw materials and therefore there is no mitigation from the
appreciating Singapore dollar. Tourism may be relatively price elastic as there
are other holiday destinations that may be close substitutes.
Furthermore, restrictions on the growth of foreign workers may result in wage
cost-push inflation. These threats can be managed if Singaporean businesses
can take advantage of the incentives offered by the government to increase
productivity.
Evaluative Conclusion
In conclusion, the various recent events will have an impact on Singapore, but
the extent of the threats or opportunities depends heavily upon how the
Singapore government responds to these changing circumstances. Through
the judicious use of exchange rate policy and supply side policies to manage
the economy, Singapore can weather the vicissitudes of economic change.
To a large extent, the developments in Asia will likely impact Singapore to a
larger extent compared to the changes in the USA and Europe because of the
economic rise of Asia and the varied myriad economic changes in Asia.
Level Description
Marks
L3
68
L2
35
14
L1
12
+2
15