Australian Airline Industry: A Duopoly Market Structure Analysis

This report provides an economic interpretation of the Australian airline industry with a special focus on Qantas airline. It analyses the market structure, characteristics, number of sellers and buyers, entry and exit conditions, short run versus long run profits, price determination, and non-price competition.

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
Name of the student:
Name of the University:
Author note

1PRINCIPLES OF ECONOMICS
Table of Contents
Introduction:...............................................................................................................................3
Information of the chosen organization:....................................................................................3
Structure of the selected industry:..............................................................................................4
Economic interpretation of the selected industry:......................................................................5
Characteristics of the chosen industry:......................................................................................6
Number of sellers and buyers:................................................................................................6
Entry to and exit conditions from the market:.......................................................................6
Short run versus long run profits:...........................................................................................6
Price determination:...............................................................................................................7
Non price competition:...........................................................................................................7
Conclusion:................................................................................................................................7
Reference:..................................................................................................................................8

2PRINCIPLES OF ECONOMICS
Introduction:
Australian economy is one of the fastest growing economy in the western nations that
has been growing through its 27th consecutive growth stage (McCombie & Thirlwall, 2016).
With the aim to achieve sustainability Australian economy is cannon balling the annual
growth rate with the rapid production in the mining industry as well as substantial
improvement in the GDP share of the service sector (Byrne, Fernald & Reinsdorf, 2016). In
addition to this, it has been found that the economy is having high flow of foreign tourists to
the Australia that has been making it one of the sustainable economy in the world. Well, in
this regard it is important to mention that various
Australian airline industry plays a significant role in the growth of the country’s GDP.
Combining all the airline industries, it can be seen that they represent 1.2% of country’s GDP
and has produced more than 35,000 jobs in the economy (Zhang et al. 2018).
Considering the importance of the airline industry in the Australian economy, this
report is aimed to study the airline market with special focus to the Qantas airline and find
out the insight details regarding the market structure of the same. In addition to this, the
report is aimed to provide economic interpretation of the market structure and provide
contrast to the characteristics of the chosen industry.
Information of the chosen organization:
C and it is the third oldest airline in the world. Introduced back in 1920, it was
initially focused to provide air service to the domestic passengers and during 1935 it went for
its first international flight (Shaffner, Mills & Helms, 2017). According to the statistics of
2014, Qantas is accounted for 65% of providing service to 65% of domestic customers and
when it comes to the international customers then it enjoys a healthy share of 14.9% out of
total out going passengers (Domestic aviation activity, 2018). It has at least 11 subsidiaries,
which are focused on the trunk roads to gain higher amount of profit and deter the new

3PRINCIPLES OF ECONOMICS
entrants to enter into the Australian airline industry. Since 2008 post recession though the
profit share of the Qantas has fell substantially, however it enjoys sustainable income from its
domestic and international flights combined. The firm has produced 29,596 employment in
the year 2017 and with the 806% of passenger load factor it can be stated that the firm is
performing goof business with their effective strategies to control the market (Australia
domestic airline market outlook, 2018).
Structure of the selected industry:
Australian airline market is a duopoly market, which is another type of oligopoly. In
Australian airline industry there are only two large players who enjoy 92% of the market
share making the existence of the other players minimal (Forsyth, 2018). Under the duopoly
market structure the Qantas is accounted to 62% of the market share alone and its nearest
competitor, which is virgin blue enjoys 30% of the total airline market share (Australian
Airline Industry – Parliament of Australia, 2018). According to the same source, contrary to
Qantas and Virgin Blue, 8% of the market share is enjoyed by the other firms. However, post
2002, Australian airline market was an oligopoly market, where the large three players were
present, namely Qantas, Virgin Blue and the Ansett and there were small regional airline
service providers too who used to enjoy considerable amount of market share. During that
time Qantas was accounted for 39% of total airline market share and the market leader was
Ansett with market share of more than 42% (Domestic aviation activity, 2018). However,
post 2003, Ansett closed its operation and the market transformed into a duopoly market,
where only two players, namely Virgin Blue and Qantas operate and the prior one has
become the market leader with 62% of market share (Australia domestic airline market
outlook, 2018). Considering the market share statistics, it can be seen that that the present
firms are highly diverse in case of market share that makes it hard for the Virgin Blue with
the Qantas. And on the other hand trunk airlines are nowhere near to the potential of the

4PRINCIPLES OF ECONOMICS
Qantas that has made it the market leader as well as the price setter. In addition to this, it has
also been seen that the trunk airline duopoly has went to an end during 2003 due to the
absence of Ansett all the market share has been absorbed by the Qantas (Helmreich &
Merritt, 2017). Thus, though prior to 2003, Australian airline industry was an oligopoly
market, however, over the time in absence of Ansett it has become a duopoly market. And
when the trunk road is considered, then it is a monopoly market, where the market is
controlled by the Qantas.
Economic interpretation of the selected industry:
The selected industry is an Australian airline industry, which operates under the
duopoly framework. According to the duopoly model of economy, it is a special form of
oligopoly where the number of market player is limited to two. Considering the case of the
Australian airline industry it can be seen that the Australian airline has two market player,
which are namely Qantas and Virgin Blue that makes it a duopoly market (Zhang, Sampaio &
Fu, 2016). On the other hand oligopoly is the market framework, where the number of
players in the market is higher than two. Under the duopoly market, products are
differentiated and each product have some amount of customer loyalty that provides the firm
some amount of monopoly power (Feng, Li & Li, 2014). On the other hand like oligopoly as
the policy to promote the product, duopoly utilize the advertising technique and for deterring
the new entrants brand loyalty as well as price cut is utilized by the firms. In case of the
Australian airline industry same principal can be observed, where the market is controlled by
the Qantas that provides it much amount of monopoly power and along with the brand
preference of customers the Australian airline deters the new entrants through price cut or
coordinating pricing strategy.

5PRINCIPLES OF ECONOMICS
Characteristics of the chosen industry:
Number of sellers and buyers:
As it has been observed through analysing the Australian airline industry, there are
only two prominent market players are present. These are Qantas and the other one Virgin
Blue. When it comes to the number of sellers, then there is more than 5.28 million passengers
in Australia who uses Australian airline service as their medium of transportation frequently
(Andrew et al., 2015).
Entry to and exit conditions from the market:
Australian market performs under the duopoly framework and analysing the same, it
can be seen that the airline duopoly of Australia is potent to deter any new entrants. Both the
firms are almost same in size considering the actual potential of them, thus it makes the
chances for the new entrant to penetrate the market is almost zero (Baker, Merkert &
Kamruzzaman, 2015). Though the competition between the Qantas and Virgin Blue is not as
much severe as it used to be between the Qantas and the Ansett, however both of them are
not willing to let the other player enter into the market. Thus there is entry barriers to a high
magnitude and when it comes to exit, then the firm faces barriers too. Considering the case of
the Ansett, it can be seen that the firm has lost all of its physical capitals that has caused them
good amount of loos. Thus the barrier in the case of exit is also present.
Short run versus long run profits:
Considering the duopoly market structure, Qantas in short run earn normal profit,
where the price equilibrium occurs where the marginal cost and average cost equates. On the
other hand during long run Qantas enjoys supernormal profit, because the willingness to pay
is higher compared to the prevailing market price (Goeters, 2017).

6PRINCIPLES OF ECONOMICS
Price determination:
Between the two market players, Qantas is the largest one which enjoys almost 62%
of market share; on the other hand only 30% of market share is enjoyed by the Virgin blue
("Australian Airline Industry – Parliament of Australia", 2018). That makes the Qantas
market leader. However, when the potential of the firms are judged, they are almost same,
that makes the situation tough for both the firm. Though the price is being determined by the
Qantas, however, when it comes to leisure travel, then Virgin Blue is the market leader.
Non price competition:
Under duopoly market structure, other than price competition there need to non-price
competition too. In case of the Australian airline industry, it uses advertising and brand
loyalty along with the price cutting as the means of non-price competition.
Conclusion:
From the above discussion it can be seen that the Australian airline industry is a
duopoly framework, where only two large players namely, Qantas and Virgin Blue operates.
Due to the considerable amount of market share, Qantas acts as the market leader and decides
the price. On the other hand, the firms opts for collusive pricing strategy in order to reduce
the monopoly power of each other. Thus to conclude, it can be stated that through the
duopoly airline market structure, Australian economy has performed well, that has shared
substantial amount of share to GDP and produced great amount of job annually.

7PRINCIPLES OF ECONOMICS
Reference:
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Characteristics of patients transported by a paramedic-staffed helicopter emergency
medical service in Victoria, Australia. Prehospital Emergency Care, 19(3), 416-424.
Australia domestic airline market outlook: Qantas Group reins in capacity as Virgin continues
growth. (2018). CAPA - Centre for Aviation. Retrieved 16 April 2018, from
https://centreforaviation.com/insights/analysis/australia-domestic-airline-market-
outlook-qantas-group-reins-in-capacity-as-virgin-continues-growth-218946
Australian Airline Industry – Parliament of Australia. (2018). Aph.gov.au. Retrieved 16 April
2018, from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/rp/rp0203/03RP10#aair
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growth: cointegration and causality analysis in Australia. Journal of Transport
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productivity slowdown or a measurement problem?. Brookings Papers on Economic
Activity, 2016(1), 109-182.
Domestic aviation activity. (2018). Bitre.gov.au. Retrieved 16 April 2018, from
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Goeters, K. M. (Ed.). (2017). Aviation Psychology: Practice and Research. Routledge.

8PRINCIPLES OF ECONOMICS
Helmreich, R. L., & Merritt, A. C. (2017). Culture at work in aviation and medicine:
National, organizational and professional influences. Routledge.
McCombie, J., & Thirlwall, A. P. (2016). Economic growth and the balance-of-payments
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Shaffner, E., Mills, A. J., & Helms Mills, J. C. (2017). Reading Qantas History: Discourses of
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Emerald Publishing Limited.
Zhang, Y., Sampaio, B., & Fu, X. (2016). Duopoly competition between airline groups with
dual-brand services: the case of the Australian domestic market.