Airlines: Too Many For Their Own Good?
| Key Words
||Losses, laid off, consolidation, profit margins, costs, pay
increases, customer desertion, foreign ownership, cost-savings, mergers
| News Story
In the week after the September 11 hijackings, traffic on U.S. airlines
fell 35 percent, while that on other carriers fell 20-25 percent. Widespread
losses are expected. Swissair and Sabena face collapse. About 120,000
workers have already been laid off.
The U.S. government has promised $15 billion to carriers to offset the
closure of U.S. airspace for 4 days. However, the European Commission
does not want governments to forestall what it sees as a necessary consolidation
of airlines. Profit margins average only 3 percent worldwide. Costs are
high. Companies are capital intensive, so when revenues recede, costs
continue. Airlines have been willing to concede generous pay increases
to groups, especially pilots, to avoid customer desertion.
Government is also to blame. Each wants a national airline as a matter
of pride. There are limits on foreign ownership that prevent the cost-savings
that result from mergers. When times are hard, governments tend to bail
the airlines out.
(Updated November 1, 2001)
||Draw a diagram of a European airline that approximates a monopoly.
Include the demand and marginal revenue and average total and marginal
a. Show the initial profit-maximizing equilibrium fare and traffic
of the airline.
b. Show the effect of the September 11 hijackings on the equilibrium
fare and amount of traffic, and the resultant profit.
c. Add an average variable cost curve such that there are high fixed
costs. Explain why you have drawn the curve as you have.
d. What are the major advantages and disadvantages of high fixed costs?
e. Can a monopoly airline go out of business? Explain.
||Draw another diagram of a European monopoly airline.
a. Show the effect of pay increases for pilots on the equilibrium
fare and amount of traffic.
b. Why is this preferable to a strike and a loss of customers?
||If some European airlines were to merge,
a. What economies of scale would result?
b. How would that affect the equilibrium fare and amount of traffic?
Explain your reasoning.
c. Would consumers agree that airlines should merge? Why or why not?
|| Michael Skapinker, "Crowded
Skies," Financial Times, October 10, 2001.
Return to the Monopoly
©1998-2002 South-Western. All Rights Reserved webmaster