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To what extent is the UK airline industry a contestable market?

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Introduction

UK AIRLINE INDUSTRY To what extent is the UK airline industry a contestable market? The UK airline industry is seen as a contestable market ever since after the deregulation of the industry between 1987 and 1997 where air transport within European Union was deregulated. With deregulation, subsidies that were previously given to national carriers were removed, allowing fair and free competition between European carriers. The UK airline industry was already independent by state subsidies since the privatisation of British Airways in 1987. We can see that UK airline industry is growing and becoming more competitive due to an increasing demand. The percentage of UK household income that is spent on holiday also rises as they have a higher standard of living compared to 20 years ago. Nowadays, there are plenty of options of flights with a range of prices and we can buy an airline ticket through the internet. Passengers are expected to benefit from lower fares, higher flight frequency and more routes. It is important for the UK government to implement strict policy to make sure the airline companies are running the industry in the general interests of the public. It has been stated that the aviation industry directly provides jobs for over 180,000 people in the UK which contributes �10.2 billion to UK gross domestic product. Therefore, airline industry in the UK plays a significant part in the economy. ...read more.

Middle

Have any of the theoretical benefits of contestability been recognised in the UK airline industry? The government performed the deregulation of airline industry when they decide that the industry can be more efficient in many ways when they are run by private sectors, which changed the industry into a contestable market. In a contestable market, there would tend to be more number of companies and this would lead to competition. In theory, competition brings the price down since every airline is trying to attract passengers and try to develop loyalty to them in the future. The demand for air transport tends to be pro-cyclical, such that air traffic growth generally expands with increased economic growth but at a much faster rate or vice versa. So it explains that the income elasticity of demand is positively high - probably less for 'no frills' airlines. In 1978, only 275 million people took to the skies - a number that more than doubled to 600 million in 1997. It makes having a vacation to other countries more accessible for a normal household these days since the deregulation. As the standard of living of people in UK rises, the proportion of their household income spent on travelling as leisure purposes increases. Another significant tool for an airline company to determine fares is the price elasticity of demand. ...read more.

Conclusion

These are important to keep the airlines competitive in the market, such that they need to advertise through the media to let the consumers well aware of their latest promotion. In the end, they have to agree with a certain range of price and this made non-price competition important. Up to now, most activity has been in terms of airline alliances. Most airlines have joined alliances, and then passengers can benefit from points by frequently travelling with the airline. This would create loyalty of passengers to the airline as when they reach a certain number of points, it could worth a flight. These arrangements allow international carriers to cooperate in terms of ticketing, frequent flier miles, priority flier clubs, joint discount fares and single check-in service. Alliances are the closest to mergers most airlines will come to merging in the future, given national interests and antitrust hurdles. Star Alliance accounted the biggest share of the world alliance with 26% which consists of big airlines such as United Airlines and Lufthansa. The British flag carrier British Airways joined the One World alliance along with American Airlines. In these terms, the UK air transport industry was further advanced in competitive terms than the rest of Europe for most of the 1990s. Against this background, the structure of the UK airline industry has grown and changed significantly in the last ten years. This report examines the trends and underlying factors that have changed UK airlines in recent years. ...read more.

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