Economic Assignment: Market Structure of Australian Airlines Industry

This report provides an economic analysis of the Australian airline industry, focusing on its market structure, particularly the oligopolistic nature characterized by a few major players like Qantas. The report explores key aspects such as the number of sellers, market knowledge, barriers to entry, product differentiation, and the determination of short-run and long-run profits. It also delves into price determination using the kinked demand curve model and non-price competition strategies employed by airlines. The analysis highlights Qantas's position in the market, its competitive strategies against rivals like Virgin Blue, and the factors contributing to its profitability. The report concludes by summarizing the key findings and emphasizing the importance of the aviation industry to Australia's economy.

Running head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................2
Number of sellers.............................................................................................................................2
Market Knowledge..........................................................................................................................2
Ease or difficulty of entry or exit from the market..........................................................................3
Type of the Product.........................................................................................................................3
Short run and long run profits..........................................................................................................4
Price determination..........................................................................................................................4
Non – price competition..................................................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
In economic market defines an exchange relation between buyers and sellers. Different
forms of market exists depending on the extent of competition and pricing mechanism.
Commonly known forms of market are perfect competition, monopoly, monopolistic competition
and oligopoly. Each has its own characteristic. The report describes a specific form of market
structure in Australia. The market structure of Australian airline structure industry is chosen for
this purpose. Specific characteristic of one of the leading airline company, Qantas is considered.
Number of sellers
The aviation industry in Australia presently has a number of airline companies operating
in the country and across the globe. The geographical position of Australia and Australia’s
thrives towards economic growth gives aviation industry immense importance. The majority of
visitors in the country come by air, as the country is an island. There are three main kinds of
airlines in Australia – domestic trunk airline, international airlines and regional airlines
(aph.gov.au 2017). The major airline players in Australia are West Australian Airways, Eastern
Australia Airlines, Australia Air Express, Qantas, Virgin Blue, Air Link, Skytrans Airlines and
Maroomba Airlines. With few large players in the airline industry, the market structure is similar
to an oligopoly market structure.
Market Knowledge
In the oligopoly market, buyers and sellers possess imperfect knowledge about the
market. There are strategic interdependence among sellers in oligopoly market (Nicholson and
Snyder 2014). In the domestic airline industry, Qantas faces extensive competition with Virgin
Blue, Impulse Airlines and Ansett Australia. When one of the airline companies reduces ticket

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fair, other follow the same. Recently Qantas attempts to build a cost effective arrangement to
compete with discounted packages provided by Virgin airlines and corresponding low fair.
Ease or difficulty of entry or exit from the market
In the oligopoly market, few large firms dominate the market. Lower the market
competition, greater is the concentration in the hands of the major players. The big firms intend
to make entry of the new players difficult in the market in order to retain their market share. The
barriers in the airline industry exits in the form of high cost, existing intense competition and
government regulation (Cowen and Tabarrok 2015). Purchase of airplane fleet is a considerable
barrier for new comers in the industry. Fuel cost is another major component of airline
companies cost constituting nearly 50 percent of the total cost. With presence of Qantas, Virgin
Blue and other big companies it is difficult for any new companies to create its place in the
market.
Type of the Product
Firms in the oligopoly market generally sell differentiated products. However,
homogenous products are also often sold in market. In the airline industry, differentiation is
observed in terms of trip packaging and other customer oriented services. Qantas provide a
secure air tour to its passengers. Safety is the first priority of this airline group. The company
always look after to avoid any delay and cancellation of flight and offers customers scheduled
services. In case unprecedented events like natural disaster, bad weather it attempts to fix the
problem at least possible time. Goods and services can be reliably delivered to over 500
destination across the world. Qantas provides custom freight and specialty service to its
customers. Q-Go Pharmaceutical offers safe and timely arrival of pharmaceutical products. Q-Go

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delivers fresh meat, plants, flowers and other perishable items. Other services are Q-Go Secure
and Q-Go custom (freight.qantas.com 2017).
Short run and long run profits
Profit in a market is defined as total revenue less total cost. In the short run, the
oligopolistic firms can enjoy just normal profit or above normal profit. In the long term, as well
firms can retain their supernormal profit because of the market power enjoyed by the large firms
(Rubinfeld and Pindyck 2013).
Qantas enjoys a high profit margin in the domestic market. The increasing profit
generated from growth of domestic flight and loyalty business. Profit in 2017 has reached to a
recorded high level of 1.53 billion. The rising profit is generated from strengthening of its
domestic wings and exceeds market consensus (theaustralian.com.au 2015). The turnaround
program of Qantas helps the company to do efficient business and increase operating profit
margin. The business strategy underlies customer satisfaction and give Qantas opportunity to
grow.
Price determination
Kinked demand curve is a social feature oligopoly market. The demand curve has two
different elasticity at two different parts. At the joint of elastic and inelastic portion a kink occur.
When firms charges price lies on the elastic part of the demand curve then firm loses its share
(Mahanty 2014). The price war triggers when one firm charge price below the equilibrium price
and others follow the same.

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Figure 1: Kinked demand curve and price war
(Source: As Created by Author)
ABC is the kinked demand curve. The equilibrium price is P1 as obtained from the intersection
point of marginal revenue and marginal cost. Qantas and Virgin involve in a price discounting
war to attract larger number of passengers. In order to attract business travelers Virgin heavily
invests in infrastructure and strengthen its corporate customer’s base (smh.com.au 2013). In
response, Qantas takes strategies to protect its strong holding in the industry.
Non – price competition
Non-price competitions competition among sellers without involving additional cost. In
times of price war, firms often incur loss from selling goods at a low price. The examples of non-
price competition are brand names, advertising, promotion of sales, special offers and others.
Qantas provides scheduling features such as frequency of route, number of stops, direct flights

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and compressive coverage. Services are provided to enhance comfort of passengers. The
packaging program include in-flight meals and drinks, entertainment and seat width. The brand
name of Qantas is a leading tool of marketing.
Conclusion
The report analyzes marketing structure of airline industry in Australia. Being an Island
country aviation industry is important for the economy. Qantas is one of leading domestic and
international airline company of Australia. The Airline industry has an oligopolistic market
structure with some large players. Qantas and Virgin airline compete in the domestic market to
capture domestic market share. However, Qantas still manages to maintain its profit margin and
market share.

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References
Aph.gov.au. (2017). Australian Airline Industry – Parliament of Australia . [online] Available
at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/rp/rp0203/03RP10 [Accessed 3 Nov. 2017].
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave Macmillan.
Freight.qantas.com. (2017). Custom freight services and solutions | Qantas Freight. [online]
Available at: https://freight.qantas.com/freight-services/custom-freight-specialty.html [Accessed
3 Nov. 2017].
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Rubinfeld, D. and Pindyck, R., 2013. Microeconomics. Pearson Education.
Theaustralian.com.au. (2015). Qantas, Virgin price war over: S&P. [online] Available at:
http://www.theaustralian.com.au/business/business-spectator/qantas-virgin-price-war-over-sp/
news-story/360d9b382b5be1c44972bdc1b34f3373 [Accessed 3 Nov. 2017].
Webber, T. (2013). Wounded Qantas is no predator. [online] The Sydney Morning Herald.
Available at: http://www.smh.com.au/business/wounded-qantas-is-no-predator-20131125-
2y5ki.html [Accessed 3 Nov. 2017].