A2 Transport Markets: Air, Rail, Bus

Notes on all transport markets, with references to aims of deregulation & privatisation, competition, contestability and whether they have been beneficial. 

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  • Created on: 20-01-13 11:50
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Aviation industry
Why is the demand for air travel rising?
The demand for flights is a derived demand. Increasing world economic growth and economic
integration means more international passenger travel and movement of freight. 25% of the
UK's visible trade is carried by air. Demand also increases from:
Falling ticket prices e.g. Entry of budget airlines ­ makes air travel more affordable to
consumers, and hence increases their demand.
Rising price of substitutes e.g. Increasing rail fares ­ makes rail travel more
expensive relative to air travel and hence makes air travel more attractive as it is
relatively cheaper.
Increases in income, make it easier to travel more often (short break holidays) and
further (long haul holidays) ­ especially as air travel is highly income elastic and a normal
Low cost carriers opened new short haul routes, increasing the
availability/supply of flights and hence choice to consumers.
Contestability and the air market
The high start-up costs of acquiring a fleet of planes, landing slots and promotion
costs to establish market brand are deterrents to entry.
Significant economies of scale enjoyed by incumbent firms.
Increasing alliances between national flag carriers restrict non-member new
High sunk costs - On exit firms may not recover fees paid for landing slots. Market
costs are irrecoverable.
LCCs (low cost carriers)
Deregulation of the EU airline market in the 1997 has removed a legal barrier to entry. Any
carriers from any Member State can fly on any route throughout the EU and set its own
`deregulated' prices.
LCCs have increased competition in the: Short haul, budget and leisure segments - resulting in
lower fares - new destinations and greater frequency on popular routes.
EU-US Open Skies Agreement
The Open Skies Agreement (OSA) came into effect in March 2008. It inaugurated new
arrangements which mean that all EU airlines are now permitted to fly to any destination in the
The agreement has also deregulated access to Heathrow Airport (LHR) allowing its use on the
transatlantic route by all US and EU carriers. The OSA can be expected to result in more
competition on the route between LRH and JFK ­ Kennedy Airport in New York City.

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Because before OSA just four airlines were allowed to operate the world's most profitable
passenger air route ­ British Airways (BA), Virgin Atlantic, American Airlines and United Airlines.
Competition for these four airlines came from several so-called `fifth freedom' carriers (Air India
and Kuwait Air) operating flights originating in third countries.
Aims of deregulation
Deregulation aims to increase competition - likely to increase consumer choice. - a
higher number of substitutes for consumers to choose from, resulting in increased
price elasticity of the market.…read more

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More capacity ­ more runways, hangar space and available airports are
available. This meant that new airlines were not asked to pay extremely
high take off slot fees to airports as the supply of these was relatively
Branding was less significant ­ customers placed less emphasis on
branding and viewed short haul airlines as good substitutes for one
another.…read more

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Good points about the long haul sub market
Consolidation in long haul market ­ originally had a large number ­ over
time ­ naturally consolidated. Argument ­ mergers ­ improved efficiency ­
bigger economies of scale.
Oligopoly market ­ kinked demand curve ­ price competition won't take
place ­ only non-price competition will take place in reality.
Evaluation points on competition
Reduced economies of scale ­ if firms no longer produce at min. AC ­
productive inefficiency.…read more

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Over-consumption occurs (L2) as consumers fail to see the true social costs of
their actions / don't pay the true price ­ hence air travel is under-priced (L3)
o A misallocation of scarce resources occurs (L2) as too many resources will be
used producing goods & services which society does not want (L3)
o Increased pollution from plane emissions (L2) worsens asthma and incurs cost
to the NHS (L3) OR to innocent local residents (L3).…read more

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Normal profit diagram ­ drive down prices, move to more efficiency,
benefit for customers
Privatisation: Fragmenting the industry
o In 1992, the UK rail industry was privatised and split into four sections:
o Infrastructure: Network Rail, owns and operates track, signalling and stations.
Revenue comes from charging TOCs for use of the lines and substantial
government subsidies.
o Passenger Operations: TOCs are private sector firms that run rail passenger
services, leasing and managing stations from Network Rail.…read more

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Time limits on franchises ­ get into market, but lose franchise after 4/5 years
­ not much incentive to have long-term investment in infrastructure and
rolling stock.
o Huge economies of scale ­ rail market is a natural monopoly because the fixed
costs are so high.…read more

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However, in
my opinion the impact on the rail market has been limited.
The nature of the infrastructure means that the industry is likely to be classified as a
natural monopoly, meaning that a diluted market share and the smaller firms within this
market are unlikely to be able to achieve the same kind of productive efficiency as a
nationalised monopoly with very large economies of scale.
Despite the obvious incentive for prices driven down in a competitive market, in reality
prices have risen.…read more

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Over time the market has consolidated itself
Now have regional oligopolies/monopolies.
Firms agree not to compete with each other ­ reduces amount of competition
¾ of bus services are commercially provided by private bus companies.
Government still subsidises the bus market - 2.5 billion pounds a year
Bus use has been declining significantly over the past 50 years (outside of London).…read more

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Instability in head-to-head competition ­ one loses, pushed out of market.
Incumbent operators not accepting multi network tickets ­ have more frequent
buses ­ their network tickets ­ seen as inferior to smaller network tickets.
Tacit collusion ­ agreements not to encroach on others markets.
Economies of scale ­ in order to operate routes profitably.
High degree of concentration. Evidence: The five largest operators (Arriva,
FirstGroup, Go-Ahead, National Express and Stagecoach) provide 69 per cent of local bus
service.…read more


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