Developed and Efficient Transport System †Myassignmenthelp.Com

Question: Discuss About the Developed and Efficient Transport System? Answer: Introduction The need for an efficient transport system prevails in every country. That is true for Australia also. For making progress, a country must have a developed and efficient transport system. These transport networks include transport on road, water and on air. In Australia, both the government legislation and public investments schemes are working towards improving the transport system. The domestic air transport is one of the major components of the transport sector of Australia. However, the domestic airlines industry is dominated by few airlines, namely Virgin Blue, Qantas Airways, Air North, Skywest Airlines, Aeropelican, JetStar Airways, National Jet, Tiger Airways Australia, and Rex Regional Express (Ozflightsguide.com.au 2017). Since, Australia is geographically located far from the major population and trading centers of the world, it is highly dependent on air travel of passengers as well as cargo, internationally and domestically. Hence, the economic performance of the country , and the welfare of the society are heavily dependent on the proficient and competitive markets for the airlines and the markets for supporting services to the airlines (Bitre.gov.au 2017). However, the level of competition is not much to have a significant effect on the performance of the airline industry. It is known that greater competition helps to achieve more efficiency in performance. This report focuses on the advantages and disadvantages of competition on the Australian domestic airlines industry, and the extent to which the country will be benefited from greater competition in the airlines industry. Industry overview: The airline industry of Australia is classified in three major categories: Regional, Domestic Trunk routes and International. A domestic airline is one with regular transport service with high capacity fleet containing more than 38 seats or a payload of over 4,200 kg. The domestic trunk route airlines encompass the main air passenger service network domestically. There is deregulation in this industry as the federal government ended two airline policies in 1990. Another important section is the regional airlines, which operate mainly in the domestic regions of the country like intra-state and inter-state services. The fleet size varies from 8-10 passengers to more than 200. The regional airlines are treated as economic lifelines in the regional markets and service centers enabling easy and swift transportation of passengers, cargo, tourists, and regional produce across the island (Aph.gov.au 2017). The main players in this section are Qantas and Virgin Blue as per their current marke t share and revenue. The international category is the one that flies overseas. Figure 1: Regional airlines map (Source: Ozflightsguide.com.au 2017) Over the last decade, the growth of the regional and domestic airlines has been massive. The number of passengers travelling across the country has increased significantly. These passengers include business travelers, students and tourists. It also indicates that, with the growth of the economy, the number of business transactions have increased, and tourism has increased too (CAPA 2015). Regulatory environment The domestic airlines market of Australia is fairly liberalized as per international standards. When there were regulations on routes and prices, the airlines earned moderate profit. But, as the regulations of IATA were removed and the industry was liberalized in November 1990, the airlines started to make policies for earning excessive profits with sky high prices and lack of competition (Littlechild 2012). Current status of the industry According to a report by Airlines Network News and Analysis, it has been found that, by May 2016, the demand for domestic air transport increased by 1.7% and reached to 58.3 million passengers than in previous year. The government data shows that, eight, out of top 10 domestic city pairs, reported growth in the routes of Melbourne to Gold Coast. That results in the increase in passengers by 7.2% to 1.89 million. Due to this increase, this particular route came up to seventh position from ninth in the ranking of the busiest domestic air routes of the country. Another biggest domestic trunk route is the one from Sydney to Melbourne. Almost 8.77 million passengers flew in this route in 2016, which is an increase of 3.9% than in 2015 (anna.aero 2016). Market structure: The domestic airline industry in Australia follows oligopolistic competition. Few large airlines dominate the total domestic airlines industry. The products and services are slightly differentiated and those are close but not perfect substitutes of each other (Tyers 2014). Oligopoly is a market structure where few large firms dominate a large market. There are many buyers. Product differentiation exists in the market and the products are not perfect but close substitutes of each other. The other main characteristics of oligopoly market are (Gwartney, Stroup and Clark 2014): The firms act like a group. One firms decision or action affects the others. There is price rigidity in the market. If one firm reduces its price, other would respond in the same way to retain their market share. Such behavior leads to price war, which causes loss for every firm in the market. Non-price competition exists in the market due to high level of product differentiation. There are high barriers to entry for new entrants. The existing firms often form a cartel to practice monopoly behavior and create barriers for new firms. Thus, there is lack of competition in the market. In the context of domestic airline industry, it is seen that: There are less than ten airlines dominating the entire domestic passenger and cargo transport of the nation. The main service of the airlines is the transport of the passengers and cargo. Along with that, the airlines provide other services such as, comfortable seats, variety of meals, baggage etc. These services vary from one carrier to the other. Therefore, the airlines provide goods and services that are differentiated. These are close but not perfect substitutes. The airlines practice price discrimination and non-price competition. All the airlines act like a group. The action or decision of one airline affects the others, hence they tend to respond in the same way. To create high barriers to entry for a new potential entrant in the market, they act like a cartel and practice monopoly pricing and behavior (Tyers 2014). Thus, it is evident that there is lack of competition in the domestic airline industry of Australia. The concept of Cartel in aviation industry: In the above context, the concept of Cartel fits best. A cartel is defined as a formal group of independent producers or service providers, who join in agreement to act in a way to increase the collective profit. For that, they follow various restrictive practices such as, price fixing, limitation of supply etc. The producers in a cartel usually act as a single producer and regulate or manipulate prices for collective profit maximization. They generally control the selling prices and ensure lack of competition. Cartel is a typical form in oligopoly market, under collusive oligopoly. Sometimes, the producers do not enter into a formal agreement; however, they are in mutual understanding to form a cartel (Hyytinen, Steen and Toivanen 2013). The example of informal cartel can be the domestic airlines industry of Australia. They are not in any formal agreement to form a cartel. Although, they act together in a way that their collective profit is maximized. There is competition among the airlines, but the airlines have created high level of barriers for any new entrant. They act together to set the market price in such a way that it becomes difficult for a new airline to enter the industry and make profit (Aguirregabiria and Ho 2012). The firms in a cartel have less market power than a monopoly, where a single producer or firm has total control over the entire market. In cartel, few firms act jointly, hence, the market share is divided among them. There is negative effect of cartel on the consumers, as they impose higher prices and restricts the supply (Stellios and Hancock 2014). Figure 2: Price and output determination under Cartel (Source: Author) The above figure shows the way of price and output determination for two firms under cartel. Here, in (c), AR is the aggregate demand curve for both the firms, and MC is the sum of MC1 and MC2, for firms 1 and 2 respectively. The final output of the industry is determined as per the MC and MR curve of the industry. P and Q are the industry price and output in figure 2(c). This level of total output is shared by both the firms. This is done by a horizontal line, drawn from the industry equilibrium point E towards the MC curves of the organizations. The equilibrium points for the firms are at E1 and E2 respectively. The supply of firm 1 is at Q1 and that of firm 2 is at Q2. Q = Q1 + Q2. This level of supply leads to joint profit maximization of the member firms. The Australian airlines also follow these characteristics of a cartel. The entire market share is divided among the few airlines, such as Qantas, Virgin Blue etc. No single airline can control the entire market. These airlines practice various types of high prices for various services. Thus, consumer welfare gets reduced. The absence of regulation and presence of liberalization in the airlines industry have led to unfair practices by the airlines (Borenstein and Rose 2014). Cartel and competition: The practices of the airlines do not provide much benefit to the customers. The passengers are stuck in an imperfectly competitive market, and they are paying very high fares for slightly differentiated products and services. The entire market is ruled by a few airlines who charge very high prices. The entry of a new or expansion of an existing low-cost airline is extremely difficult and is discouraged by the bigger airlines. Hence, the competition is minimized and the airlines keep their prices higher; and frequency and quality of service lower without any formal agreement with the other airlines in the industry (Fallon 2013). According to Alfred Kahn, former Chairman of the Civil Aeronautics Board, greater competition would definitely increase the efficiency of the services and it would also increase the consumers welfare. He said that, if some new airlines could enter the airlines industry and charge any price, then the overall fare would drop faster and more customers would prefer to fly. However, airlines have quite high fixed cost of operation due to expensive capital-intensive equipment; and there is very little product differentiation. Thus, in a more competitive environment, all the airlines would face losses. After deregulation in November 1990, the airlines got engaged in a price war and finally incurred heavy losses (Kuttner 2017). The airlines behave as they are in a group. They make a hub of their service network in different airports and they all stay out of each others hubs. They monitor each others pricing decisions; hence, true price competition is not prevalent much. The domestic airlines industry of Australia transformed to an unregulated cartel from being a regulated industry. The quality of service was reduced, restoring profitability of the airlines by compromising with passenger convenience and economic efficiency (Joy 2012). Benefits from competition: Competition leads to more choices, better service and lower fares in the aviation industry (OECD 2014). If the barriers to entry are reduced, the benefits are as follows: New airlines can enter the market. More routes, more destinations will be available; number of flights will be increased, flexible departure time will be scheduled; quality service will be provided; there will be more innovation towards cost efficiency; and fares will be reduced due to increase in number of choices. Hence, the overall efficiency and profit of the system and welfare of the passengers will be increased due to competition in the market (The Conversation 2013). Disadvantages due to lack of competition: One of the major disadvantages of lack of competition is the price discrimination. The airlines practice a high degree of price discrimination. They charge different prices to different customer groups. The criteria also vary for different groups. Some passengers prefer convenience and comfort over price. Their demand for the flight ticket is price inelastic. On the other hand, the other group prefer cheaper tickets over comfort (Homsombat, Lei and Fu 2014). Hence, the airlines have Business and Economy class with different ticket prices. Apart from that, the airlines charge extra money for meal, baggage charge, alterations in the tickets such as change in schedule, seat allocation etc. The lower fare comes with higher restrictions like inconvenient departure time, while the higher fare comes with low restrictions. Thus, the airlines practice monopoly power regarding price and quality of supply (ACCC 2016). These airlines engage in high level of non-price competition due to the products and services being close substitutes. For example, every airline has their own frequent flier programs, priority passenger facilities, extra services on board, flexibilities regarding tickets etc. Although they make it appear to be cost saving and exclusive than that of the rival airlines, yet there are many hidden fees in these programs. They make up the loss in the ticket price by charging extra for baggage, meals on board, extra facilities like blanket, headphones, books or magazines, alcohol etc. Thus, the amount of benefit of the passengers gets reduced by these hidden fees of the airlines (Zhang and Czerny 2012). The domestic airlines mostly follow hub-and-spoke network system rather than flying directly. It wastes time of the passengers and fuel for the airlines. In the aviation industry, the system of flying more miles than required for reaching a destination is called circuity. These are profit-making strategies promoted by the airlines, which gives the false image of efficiency, because in reality these increase the cost of the systems at the expense of the passengers (Adler and Gellman 2012). Conclusion The current business model of the domestic airlines takes the advantage of lack of competition in the industry and includes more conditions rather than good pricing and quality service. This reflects the arrogance, which comes with monopoly power. If there is greater competition in the market, the structure of the market would be monopolistic competition. There would be more airlines dominating the industry. There would be control in the price rise and price discrimination. As the supply of services increase due to entry of new airlines in the industry, the flexibility of routes, destinations and fares increase too; and the price would drop and people would have more options to choose from. Hence, it can be concluded that, with greater competition in the domestic airlines market in Australia, the nation would definitely be benefitted. References: ACCC, 2016. Lack of competitive pressure facilitates high profit margins at airports. [online] Australian Competition and Consumer Commission. Available at: https://www.accc.gov.au/media-release/lack-of-competitive-pressure-facilitates-high-profit-margins-at-airports [Accessed 25 May 2017]. Adler, N. and Gellman, A., 2012. 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