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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…

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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…

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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
plentiful.
Branding was less significant ­ customers placed less emphasis on
branding and…

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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…

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o 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…

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o 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…

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o 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.
o Lack of…

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efficiency and should create a better service and more consumer welfare. 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…

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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…

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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…

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