Airline Industry in Australia

Economics Airline Industry in Australia Executive Summary Australian Airline industry is highly concentrated sector and it is confined to just 2-3 big players like Qantas, Virgin and Jetstar Airways. As per the given data of Airline Industry in Australia and concentration ratio analysis on them, it was tried to analyse Concentration Ratio and Herfinadahl-Hirschman Index (HHI) both economic model were taken to study the market concentration/share of top 3 airlines of Australia, based on that, concentration of airline market are as following

Economics
Airline Industry in Australia

Executive Summary
Australian Airline industry is highly concentrated sector and it is confined to just 2-3 big
players like Qantas, Virgin and Jetstar Airways. It is oligopolistic in nature as per the
economic analysis of the sector using two economics model, Concentration Ratio and
Herfinadahl-Hirschman Index.
Some of the aspects of Oligopolistic market structure is not good for consumer but is very
good for airline industry’s perspective. Due to monopolistic nature of the sector, industry
earns more than its cost and for them it is very good. This sector is price rigid because of
oligopolistic nature of business. It is necessary for consumer’s point of view that Airline
industry’s pricing should be regulate by government.

Introduction
Airline industry in Australia is highly concentrated and it is monopolised within a few players
like Qantas, Virgin and Jetstar Airways. As per the given data of Airline Industry in Australia
and concentration ratio analysis on them, it was tried to analyse Concentration Ratio and
Herfinadahl-Hirschman Index (HHI) both economic model were taken to study the market
concentration/share of top 3 airlines of Australia, based on that, concentration of airline
market are as following:
Two Economic models
Economics models, that is, concentration ration and Herfinadahl-Hirschman Index (HHI) are
applied to assess the concentration ration of airline industry in Australia:
Top 3 (three) firms in Airline industry’s in Australia:
a) Concentration Ratio:
Concentration Ratio: 38.2% + 30.9% + 19% = 88.1%
As you can see that, top 3 firms, that is Qantas, Virgin and Jetstar Airways in Australia has
concentration ratio of 88.1%, which is highly concentrated and these 3 firms dominated the
market share in Australian Airline industry. These kind of highly concentrated market where
to 3 firms market structure is more than 88% can be consider as Oligopolistic market.
b) Herfinadahl-Hirschman Index (HHI):
Squaring the percentage market share of each firm in the market and summing these
numbers calculates the HHI Index.
HHI Index = (38.9%) + (30.9%) + (19%) = 1513.21 + 954.81 + 361 = 2829.02
Generally, HHI above 2000 consider as highly concentrated and Oligopolistic market
structure.
After looking at the both the index, that is, Concentration ratio and HHI index it can be easily
be concluded that airline industry in Australia is highly concentrated and can be said that its
market structure is Oligopolistic in nature. Both the index has high level of concentration
ratio, which is mere three firm controlling the market of 88% and above and HHI index is
indicating level of 2829.02 which is way above concentration marks of 2000 as expert
suggest to categorised as highly concentrated market. So one can conclude that since there
is more than one firm operating in market and it is more than two also, it can easily be
categorised as an oligopolistic market. Because of such high level of concentration Australian
airline industry decide the prices and capacity of seats for flyer and keep the prices at higher
level which cannot get reduced due to market compulsion and increasing oil prices.
Economic consequences of oligopolistic market structure:
It will be given below as (4 Economic Effects of Oligopoly, 2019):
a.) For Consumers:
 Price exceeds average cost:

In oligopolistic market, entry of new firm are restricted, hence price remain above
the average cost. So, for consumers in oligopoly market structure has to pay more
than market structure like perfect completion. Because here firms are very few who
are offering the services or products.
 Selling cost:
Oligopolistic market generally faces high cost of promotional activities. This is done
to get maximum share of market and also capture rival market share. This type of
market structure does not give customer value for money as prices are always set
higher than cost price. Customer does not get maximum satisfaction as per selling
cost.
 Price Stability:
Oligopolistic market faces fixed prices, they cannot change their prices because
limited competitor may not follow firm price rise, and generally they do not follows
in oligopoly market. Hence, prices generally remain very stable in this type of
market.
 High concentration ratio not good for consumer:
If there is very high concentration ratio is there in market, which is generally the case
in Oligopolistic market, it is not good for market because it reduces consumer
competitive advantage, which is there in case of perfect competition. Os, it is one of
the major deficiencies in this short of market structure. Higher the number of
participants in the market better it is for consumer (Regoli, 2019).
c) For Suppliers
 Restrictions on output:
Oligopoly market signifies less production since number of firm is also less and also
signifies high prices by the operating firm under this market. Firm restrict their
output so that keep the prices at higher level and do not let the price change very
frequently it remain rigid.
 Lower efficiency:
Oligopoly market does not work under efficient level because output is determined
by them. They produce only upto their market share, hence its production reached
upto their potential level. That is why oligopolistic never able to achieve optimal
level of production with the help of economies of scale. Sometime this type of
market structure face fluctuation in production due to the fact output not
determined optimally.
 More offer and promotion to gain maximum market share:
In their endeavour to capture maximum market share, oligopoly do all types of
promotional activity to gain maximum market share and keep their market share

intact. These promotional activities like providing cash back on every flight, providing
loyalty bonus to regular fliers, etc.
 Deliberate attempt to restrict ne w players from coming into market:
Oligopolies sometimes try to create barrier deliberately through the things like
acquired the smaller firm and do all kind promotional activities and things which
discourages new players from entry into market. Existing players also take advantage
of high entry barriers in their favour to prevent new player’s entry into market.
Things like this keep on happening on regular basis, which is sometime visible and
most of the time not visible. It is regulator job to keep a close watch on things like
this to not allow to market go in single player hand or create a situation like duopoly
(Regoli, 2019).
Kinked Demand Curve
For Oligopoly it is critical issue to balance output level and price of the services and products
they offer, doing so would impact their profit margin because competitors will not raise their
price, which may ultimately force them to bring back the price to previous level. Oligopolistic
market faces inflexible demand curve for longer period of time or till the time market structure
of firm does not get changed. As it can be seen in above diagram that segment dP is more
elastic demand than segment PD which has somewhat similar to inelastic. Two parts are
separated with kinked in between two part namely at point P in above diagram. It can be seen
in above diagram that price is at point P and out is at the point OM (Kinked Demand Curve,
2019).
Above theory works under the following two assumptions, that: The competitors will follow
promptly any price cut by any firm operate under this market structure and second, just
apposite, any increase in price above the prevailing prices by form will not be followed by
competitor firms.
Price change and elasticity under Kinked demand curve

Monopolistic Market and Profit
It is well known fact that monopolistic market does not face competition like perfect
competition face and the product they produce is entirely different and un-substitutable. They
have total control in prices and production, means, they remain in a position to decide at what
level to produce, and what will be the price of its product so that its profit is maximum. For
monopolist it is challenge to choose appropriate level of price and quantity to produce, where it
can maximize its profit (Hatch, 2019). Biggest problem with monopolist is that at higher level of
production they cannot charge higher level of prices they charge relatively lower prices, they
can charge higher price at lower level of production but here profit will not be maximum. So for
monopolist, to maximize their profit they have to balance appropriately production level at
which they can maximize profit for the firm and fixed the prices which is affordable and
competitive, so that passenger volume should not hit severely (Tabarrok, 2019).
Oligopolistic Market and Price regulation:
Airline industry generally operate in oligopolistic market structure, where there is only a very
few players operate and prices are decided as per their wisdom and all the existing firm in
given market structure accept that price, if they have to operate in that market structure.
Oligopolists price more or less remain stable they can only change their output for profit
maximization, which is not good for airline customers; because of the oligopolistic nature of
market they do not able to avail the benefit of economies of scale. Government role should
be to interfere in this type of market structure and regulate the prices taking industry
players into confidence. There should be some type cap in fixing the maximum price of
airline industry/services from Australian government, either through the regulation or
through some kind of negotiation with industry players, so that oligopolists do not charge
exorbitantly high prices. Measures like these can help stabilizes the prices and help industry
achieve some kind of optimal level of pricing. But, it would be prudent to direct the airline
industry to regulate their prices without any interference from government and government
should only regulate the price is industry fails to do so and kept the prices on upper
trajectory ("How a Profit-Maximizing Monopoly Chooses Output and Price – Principles of
Economics 2e", 2019).
If government regulate the prices of airline industry in Australia, it will somewhat impact the
margin of major airline players, who has maximum market share, and other small player may

also get impacted from it. It is also possible that reduced prices or capped prices will benefit
their airline industry in terms of increasing the volume of passenger and recoup the losses,
they might incurred, due to capped price by government. Here, government role will be to
balance the thing, so that airline industry as well as user of the airline both gets benefited
from it. Only addressing problem of one party would aggravate the problem of another. So,
both parties will have to take into confidence, so that neither airline industry nor the
customer get impacted negatively and ultimately losses for Australia as a whole. If
government regulate the prices of industry it may encourages the customer to use airline
more frequently and help the industry gaining more ground and traction ("Price caps on
airline fares: Is the aviation ministry divided on pricing regulation? - Firstpost", 2015).
Conclusion:
Finally it can be concluded that airline industry in Australian is very concentrated business
and it needs to be regulated, so that consumer would get services under good price rate and it
should be affordable to all. Airline industry should not allow dominating by few players.
Australian government needs to take steps in this regards, so that this oligopolistic sector
should not start working arbitrarily.

References (All are in APA format)
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