Most important factor when choosing which airline to fly with on holiday, 2002-06 Base: adults aged 15+ who have travelled by air in the last 12 months
Source: GB TGI, BMRB Winter 2002 & 2004 & Q1 2007/Mintel
In fact, consumer in this industry are extremely sensitive to price and this is mainly due to the fact that there are a lot of substitutes in the industry. For example if a consumer is not happy with the price of a service offer by EasyJet on a destination, he/she can easily switch by simply visiting others carriers. Another factor of to demand that I am going to analyse is the promotional strategies (this includes incentive such as website, gift vouchers, discounts, sales etc...). According to the Mintel Oxygen report for July 2007 on No-frills/Low-cost Airlines - UK - July 2007 “customers in this industry are impulsive, responsive to alerts and offers”. A typical example of this is Ryanair selling 3million summer seats for £10(taxes and charges included). As you know this could also increasing demand.
To sum up my analyses of the low-cost airlines industry, I am going to determine what type of market it is. After analysing the market I came up with the conclusion that that Low-cost Airlines market was a contestable market as it displays the characteristics of one. In fact, in the Low-cost Airlines we have got firm like EasyJet, Ryanair, Air Berlin and many more that give the impression that the industry is very competitive so that they can keep their customers. Also in this Industry Ryanair is known as a predatory pricing company. Basically, what Ryanair does is to lower its prices until weaker new company in the industry is out of the market. Finally, one of the main barriers to exit in this market is the element of sunk cost. In a competitive market like Low-cost Airlines element of sunk cost might block entrance to new firms willing to enter the market. For example, WIZZ a new company that opted to lease his airplanes instead of buying them therefore at the end of lease, they will not have to worry about the airplanes before leaving the industry.
Now I am going to discuss how firm in a monopoly industry behaves
There is a monopoly when one company is the main player in the industry and there are no other substitutes for the products/services. This is the case in the Railway Infrastructure industry where only one company (Network Rail) is trading. “Network Rail is a private non profit company limited by guarantee which owns, manages and maintains the railway infrastructure in the UK. The company is headquartered in London, UK and employs about 31,580 people.”
In this industry unlike in the low-costs airline, Network Rail has control over the price; basically it is a price maker and this is mainly due to the fact that there are no substitutes in the industry. This constitutes a huge factor to demand. In fact, Network Rail has recently uncovered a £ 2.4 billion rail expansion program and according to Network Rail’s chief executive, John Armitt this is due to fact that “the railway is thriving. Demand for rail continues to grow and this is the way Network Rail’s response to those demands” . Another difference between the low-costs airline and Railway Infrastructure will be the pricing strategy. Unlike in the low-costs airline, Network Rail pricing strategy is to skim the market. As an example we can mention the new computer based interlocking system. In fact, for Network Rail this new technology has been able to charge a quit high price for it as it is the only company in Europe that manufacture this product. This has played an import role in the company record breaking profit since 2003(£468 million during the 2006 fiscal years). Despite that record breaking profit the main objective of the company is not to make a profit but to put a stamp on the market. This is mainly due to the fact “Network Rail's not-for-dividend structure means this money can be re-invested in the network rather than returned to shareholders”. However, Network Rail should make sure that they are in the best interest of the public when setting their prices otherwise the Office of Rail Regulation (ORR) the railway regulator will take action against them. The ORR also sets targets that Network Rail should achieve.
Furthermore, I will develop the barriers to entry that exist in this industry. The first point I will develop will be the Economies of scale. This is one of the main barriers to entry in a monopolistic market. In fact, as the firm expands its productions and size, it is able to reduce its cost per unit. As a result of this, big monopoly firm like Network Rail becomes, more efficient as it has more market share. Therefore, it would be really difficult for a new company to penetrate the market and gain any market share. Legal forms are also barriers to entry in the Railway Infrastructure. In fact, Network Rail license granted by ORR allowed the company to be the only to operate in the industry.
Conclusion
This report has allowed me to have an inside on how different economic theory applies to businesses in real life. Especially, how firm in a contestable market differ from the one in a monopoly market and the factors that affect the demand in each market.
Reference
www.airberlin.com/
http://alpha.fdu.edu/~koppl/note19.htm
www.flymonarch.com/
www.wizzair.com/
(2007) Revision Guru [website] available for :< 22 November 2007> http://www.revisionguru.co.uk/economics/contest.htm
http://www.tutor2u.net/
Word count 1493
Keith J. Mason, (2001) Marketing low-cost airline services to business travelers, , 31(January), ), March 2001, pp 103-109.Avalaible from: ScienceDirect. [ Accessed 23 November 2007]
Mintel Group (2007) Mintel Oxygen [website] available from :< http://0-academic.mintel.com.lispac.lsbu.ac.uk/sinatra/oxygen_academic/search_results/show&/display/id=219233/display/id=288865?select_section=288864>[Accessed 20 November 21, 2007]
Mintel Group (2007) Mintel Oxygen [website] available from :< http://0-academic.mintel.com.lispac.lsbu.ac.uk/sinatra/oxygen_academic/search_results/show&/display/id=219233/display/id=288865?select_section=288864>[Accessed 20 November 21, 2007]
Marketline Global (2007) Marketline [Website] available from:< E3B97FE6CCCD&N=4294840115&selectedChapter=IDA43WKD#IDA43WKD> [Accessed 20 November 21, 2007]
Marketline Global (2007) Marketline [Website] available from:< E3B97FE6CCCD&N=4294840115&selectedChapter=IDA43WKD#IDA43WKD> [Accessed 20 November 21, 2007]
Marketline Global (2007) Marketline [Website] available from:< E3B97FE6CCCD&N=4294840115&selectedChapter=IDA43WKD#IDA43WKD> [Accessed 20 November 21, 2007]