MBA 525 Spring 2020 Final Take Home Exam: Airline Industry Analysis

This assignment analyzes the airline industry through the lens of managerial economics, focusing on the oligopolistic structure and its impact on consumers. It examines how major airline carriers exert control over pricing and service standards, often through informal agreements and yield management strategies. The assignment explores how airlines optimize flight numbers and share data to maximize profits, even during lean seasons. It also delves into the ethical implications of airline practices, such as refusing to lower fares despite falling oil prices and overusing aircraft, potentially compromising passenger comfort and safety. The analysis draws on insights from journalists James B. Stewart and Clive Irving, highlighting the tension between profit maximization and ethical business practices within the airline industry.

Question 1
Journalist James B Stewart explained the oligopoly like the arrangement between the US Airline
Carriers with the help of a term called “discipline.” This discipline is imposed by the summit
body of Airlines Carriers. James presented comparative data of the Airline industry, four major
operators and are sharing a load of 80 percent traffic and controlling the pricing structures and
other service standards (Stewart, 2015).
In the past, the regulatory authority of the USA came up with some arrangement to ensure an
optimum load on each airline to create a perfect competition market for the benefits of the
customers. However, the giants in the market are striking mergers and other informal
arrangements (hidden cartels) to restrict the choices of the customers. For instance, they are
hiding the fare structures from the customers and deliberately aborting the services on certain
routes to support the bookings of other airlines for mutual benefits (Fieldstadt, 2015). The
presence of this oligopoly reflects in the pricing structure of the tickets. Even during the low
season's customers are paying more because of the policy of “discipline” adopted by the cartel of
Airlines in the market.
Question 2
To come up with a “yield management” from the limited resources during a lean season, airline
companies are deliberately optimizing the number of flights on any given route. To achieve this
status they are sharing inquiry data and allowing only a single player to operate on a single route.
They are also taking the support of the robots to hide, necessary information from the customers.
The policies set by the regulatory authorities allow airlines to keep the price on the higher tab
following the demand of the tickets. Apart from it, a flight running with full capacity brings

down their operational costs quite considerably. To bring out the best yield from the operations,
an unofficial cartel of airliners is limiting the seats, several flights and inflating the price of each
unit by limiting the supply of the options in any given region.
Journalist James B Stewart indicated an interesting fact when he said that despite no significant
increase in the numbers of the passengers the profit of the airline industry doubled. The overuse
of Air crafts ahead of their stipulated capacity is another tactic adopted by the cartel of airlines
(Stewart, 2015).
Question 3
Author Clive Irving presented an argument where he said that there is nothing wrong with
earning profits while trading in a capitalist economy. However, the ethics of the same economy
promotes the concept of sharing the profits with the customers to increase the consumption of the
goods. Airline companies adopted an unethical method when they refused to bring down the air-
fares despite a fall in the oil prices. Another issue was related to the depreciation of the fleet,
they overused Plains to increase the yield from the investment (Erving, 2017). The breakdown of
a plane in the air and the discomfort of the passengers is an outcome of this mad rush for
increasing yield from the operations. The service ethics associated with air transportation clearly
describe punctuality and comfort as two primary parameters. Under the current practices,
Airlines of the USA are compromising on both these aspects of the services provided by them
and this is unethical on the scale of business standards.

References
Erving, C. (2017). The Cartel That Makes Sure Airplane Tickets Never Get Cheaper. Daily
Beast, https://www.thedailybeast.com/the-cartel-that-makes-sure-airplane-tickets-never-
get-cheaper.
Fieldstadt, E. (2015). United Airlines Customers Outraged after being put up in Military
Barracks. CNBC News, https://www.nbcnews.com/news/us-news/united-airlines-
customers-outraged-after-they-are-put-military-barracks-n375131.
Stewart, J. (2015). Discipline’ for Airlines, Pain for Fliers. The New York Times,
https://www.nytimes.com/2015/06/12/business/airline-discipline-could-be-costly-for-
passengers.html.