Griffith University: Economics of Aviation - Compass vs Virgin Blue

This report delves into the economics of the aviation industry, focusing on the Australian market and comparing the failures of Compass Airlines with the success of Virgin Blue and Jetstar Airways. The study examines the application of economic principles such as supply and demand, cyclical dema...Read More

Running head: ECONOMICS IN AVIATION
ECONOMICS IN AVIATION
Name of student:
Name of University:
Author Note:

1ECONOMICS IN AVIATION
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Economic Principles of Aviation industry...................................................................................2
Reasons for the failure of the Compass Airlines.........................................................................4
Virgin Blue and Jetstar Airways..................................................................................................5
Conclusion.......................................................................................................................................6
Reference List..................................................................................................................................9

2ECONOMICS IN AVIATION
Introduction
The Airline Industry of Australia was deregulated in 1990 with the introduction of a low
cost carrier airlines. It was a start-up company known as the Compass Airlines that was operated
in December 1990. However, the company stopped operating within 12 months from its launch
which led to the introduction of a new airline known as the Compass II in the airline industry.
Although, it started operating from August 1992, yet it again failed operation in March 1993. On
the other hand, Virgin Blue was operated in 2000 and continued with effective profits until the
Global Financial crisis affected its revenue in 2009. Thus, it is crucial to study the reasons behind
the failure of the Compass Airlines for two successive periods and making a comparison with
Virgin Blue. It is important to follow the economics behind the operation of the aviation industry
in order to generate a greater success in the long run. Thus, the aim of the paper is to interpret the
effectiveness of aviation economies and the way it can affect the growth of the airline companies
by making a comparison with respect to Compass Airlines and Virgin Blue and determine its
strength and weakness.
Discussion
Economic Principles of Aviation industry
The law of supply and demand is effective for the operation of the aviation industry in
order to understand the equilibrium state and enact accordingly for extraction of enormous
profits. It has been said by that airline industry often goes through a relentless period of over
capacity that has it obvious impacts in the economic profits. Demand for air travel is highly
cyclical though the inventory cannot be stored. The overall cost is extremely high and the burden
is because of high fixed cost of operation. City pair product offerings are geometrically increased
from hubbing and accordingly overlapping hub networks are created for effective performance of

3ECONOMICS IN AVIATION
the airlines. New aircraft needs to be ordered few years before the delivery time as production of
airplanes and airlines requires several process, cost and time (Mankiw, 2020). Aircrafts are
ordered in good times such that when the flow is quite high and delivered in bad times when the
airport sector deliberately feels that there is need for increasing operations and using newer ones.
The supply curve shows a S-shape such that the curve is more shifted towards market share when
the frequency is low and vice-versa.
The airline industry requires a high level of investment which is often considered
irrational by investors and cannot be provided by investors alone. That is why government
financing is important and export financing is provided by the government such that companies
are able to export goods and airlines can generate revenues (Kille, Bates & Murray, 2013).
However, bankruptcies can be common when the flow is low although it does not eliminate
capacity. Capacity cannot be reduced as it rises the unit costs and lowers the level of product
offering which has a bad impact on the firms as per significant changes in market based statistics
and outcomes. On the contrary, inventory seats cannot be lowered even of demand is low and
therefore, lower prices is not effectively good for airline industry (Murphy et al., 2015). This is
because demand is dependent on seasons, day of the week and time of the day and accordingly
airplanes are either fully loaded or partially.
Demand for air travels can have a huge impact on the airline firms, industry and economy
as a whole. The efficiency of the economy is adequately based on the movement of people and
goods across economies. Accordingly, income and the annual revenue generated from the people
are denoted (Ma et al., 2015). Globalization has led to a decline in domestic growth due to
changes in telecommunication sector that has reduced the market share of air travel. Thus,
performance for air travel is effectively based on the demand and the business structures because

4ECONOMICS IN AVIATION
accordingly trade takes place (Graham, 2018). This can adequately change the value of people as
per effective changes in market related strategies and outcomes.
Reasons for the failure of the Compass Airlines
Compass Airlines was established by Bryan Grey in 1990, who previously worked for
East Wet Airlines. Australian airline industry had a duopoly market structure that was dominated
by Ansett and Australian Airlines during that time. In order to break the duopoly market
structure, Compass Airlines offered cheap fares and extract huge profits. However, the industry
was highly regulated and Compass Airlines was only allowed to operate through regional centers
and not across major cities. This did not stop compass from performing well as their low fares
revolutionized the air travel market in the Australian economy (Srisaeng, Baxter & Wild, 2015).
Moreover, the rival firm Ansett was in a bad financial state and to worsen it, Compass offered
extensive lower fares that shifted customer demand for the airline.
On the contrary, Ansett acquired the East-west Airlines while Compass operated with a
single A310 airlift and four leased Airbus A300. Yet, the failure of financial negotiations
refrained Compass Airlines from taking up more orders of Airbus300 and the company took
resort to British charter carrier Monarch airlines for leasing the airlines (Hayward et al., 2015).
Ansett airlines knew how to play the game and significantly sold the tickets below the break-
even point of Compass airlines so that it runs out of cash first. According to economies,
breakeven is defined as a point where the total cost bore by the firm sis similar to the total
revenue and a price lower than break-even would lead to loss due to rising costs. This theory
worked well for Ansett as they grained customer demand, trust and they were back in the
business (Mankiw, 2020). As a result, Compass tried to raise capital which was not possible as
the aviation industry was under a period of economic crisis in 1991 and investors were

5ECONOMICS IN AVIATION
disinterested in investment on airlines. The company did not get much support from the Federal
Government and government enacted its disputes before the peak period of Christmas that led to
failure of organization. Moreover, the operations were disrupted due to by a computer attack on
the reservation system (Srisaeng, et al., 2015). This led to the formation of Compass II which
was conceived as the Southern Cross Airlines although it decided to trade under the Compass
brand which had popular support.
On the other hand, the share float marketing was very disappointing as the investors did
not believe that the airlines can survive in the Australian market. Due to this, travel agents did
not book for Compass as Compass I has already failed them. Along with this it was claimed that
Compass II did not deliver an order which led to final demise Compass MkII (Rosenburg, 2020).
The chairman was accused of theft and was jailed. Thus, the company failed due to four
important reasons, lack of money or investment or capitalization, loss of passenger trust,
disrupted computer system, acquisitions and reputation in the markets.
Virgin Blue and Jetstar Airways
The company was formed in August 2000 with two Boeing aircraft, among which one
was leased from the sister airline. It offered seven return flights which originally operated
between Sydney and Brisbane that expanded to cover all the major Australian cities.
The company successfully operated and expanded its operations in several markets that
has effectively improved its sales and revenues (Glover, 2015). The most crucial reason for the
success of Virgin blue was because it came in the market after the airline industry was passing
over the recessionary period and there was not much airline companies to support the Australian
economy. It was able to fill the gap that was created by one of the successful companies in the
airline industry of Australia. The provision of lower prices worked well for Ansett until the

6ECONOMICS IN AVIATION
airline industry went through recession and investors stopped investing. It was hard to continue
with the costs and to combat this effect, airline industry came into the market (Greson et al.,
2015). It has been argued that the entry timing of Virgin Blue has been effective for a good
performance. It did not keep much lower fares as it knew that the fixed costs are really high and
in short run there wouldn’t be much profits.
The company rapidly grew in the market and came to be known as the Australia’s second
domestic carrier. It did not remain as a cut price alternative or lower prices than the standard rate
to the other firms who were well established in the market and generated enormous profits as per
effective changes in the market based statistics and outcomes. This feature allowed Virgin blue
to access the terminal space and get effective return on the market price without which growth
world have been limited to only certain areas (Zhang, Sampaio, & Fu, 2016). This can create
enormous profits as per significant changes in market based strategies and outcomes. Moreover,
investors and government became very supportive and helped with several financing.
In comparison to this, Jetstar Airways performed very efficiently by launching low cost
carriers. It acquired Impulse Airlines in in 2001 but began passenger services in 2004. It started
international services from 2005 to New Zealand and Christchurch (Aryal, Ciliberto & Leyden,
2020). The demand for airlines was continuously increasing due to growth of business
environment. It was formed as a low cost domestic subsidiary in the Australian economy.
Conclusion
The main reasons why Compass Airlines failed are similar to the reasons for the success
of Virgin Blue and Jetstar Airways. The economies in Aviation helped to understand the market
of airlines. The industry requires huge cost for operation and creation or production of newer

7ECONOMICS IN AVIATION
airlines or aircrafts takes several years (Srisaeng, 2015). The fixed costs are generally very high
and the level of profits are adequately based on the demand. Moreover, airlines forms needs a
well-deserved before it is implemented as the execution is very high as there are a range of costs
that can come up and hamper its growth.
However, Compass was not well prepared for the market. It tried to provide seats at low
fares in order to raise demand, although it is ineffective as demand is highly seasonal and is
always fluctuating (Markham et al., 2018). It needed government support which could be
provided by the federal government as its costs were relatively large. Compass tried to perform
well by taking leases but failed due to capitalization. The strategy further failed when its rival
firm offered seats lower than the breakeven point of Compass. The company had very little
market share and repetitive losses lowered the revenue in great deal. It already lost trust due to
Compass I and creation of Compass II within a year could not generate much trust. On the other
hand, Virgin Blue performed efficiently as it came at a time when the airline industry in
Australia was under a deep financial crisis and investors started investing. Moreover, Virgin
Blue had a well-planned market structure and was supported by Virgin Group (Chandu, 2018).
It had the advantage of not facing the recessionary period when the investors did not
invest and the industry was falling. Moreover, it has its own terminals that allowed it operate on
a wide range of routes. This shows how Blue Virgin came into the market after it has effectively
planned its operations, kept adequate capital and created own terminals so that other firms cannot
interfere its performance. Compass had the leave the market so early because of its financial
problems and its losses. Similarly, Jetstar come several periods after Compass. It had a lot of
backups which helped in performing very well.

8ECONOMICS IN AVIATION
The emergence of trade and business sector has effectively enhanced the performance of
the airline sectors in Australia. It had potential capital to expand its operations in regional and
international borders. This helped in generating huge demand as the cost was effectively low.
Thus, provision of low fares for air travels is only significant when the market is flourishing,
there is adequate demand and capital, firms are backed by government or other big investing
groups. So, it is recommended that forms should have adequate capital before they start
operating. Firms may not recover adequate costs in the short run, yet in the long run they will be
able to do so. It is effective for firms to have their own terminals and should be supported by
several investors and government agencies for financing.

9ECONOMICS IN AVIATION
Reference List
Aryal, G., Ciliberto, F., & Leyden, B. T. (2020). Coordinated Capacity Reductions and Public
Communication in the Airline Industry.
Chandu, A. (2018). Pioneering flying: The vision and the failure of Australasian Aerial
Transport, 1919–20. The Journal of Transport History, 39(1), 92-109.
Glover, D. (2015). An economy is not a society: Winners and losers in the new Australia (Vol.
7). Black Inc..
Graham, A. (2018). Managing airports: An international perspective. Routledge.
Gregson, S., Hampson, I., Junor, A., Fraser, D., Quinlan, M., & Williamson, A. (2015). Supply
chains, maintenance and safety in the Australian airline industry. Journal of Industrial
Relations, 57(4), 604-623.
Hayward, J. A., O'Connell, D. A., Raison, R. J., Warden, A. C., O'Connor, M. H., Murphy, H. T.,
... & Jovanovic, T. (2015). The economics of producing sustainable aviation fuel: a
regional case study in Q ueensland, A ustralia. Gcb Bioenergy, 7(3), 497-511.
Kille, T., Bates, P., & Murray, P. S. (2013). Measuring success: the search for assessment criteria
in determining the impact of deregulation in regional aviation. International Journal of
Aviation Management, 2(1-2), 4-34.
Ma, W., Wang, Q., Yang, H., & Zhang, Y. (2019). An analysis of price competition and price
wars in Australia's domestic airline market. Transport Policy, 81, 163-172.
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.

10ECONOMICS IN AVIATION
Markham, F., Young, M., Reis, A., & Higham, J. (2018). Does carbon pricing reduce air travel?
Evidence from the Australian ‘Clean Energy Future’policy, July 2012 to June
2014. Journal of Transport Geography, 70, 206-214.
Murphy, H. T., O’Connell, D. A., Raison, R. J., Warden, A. C., Booth, T. H., Herr, A., ... &
McIvor, J. G. (2015). Biomass production for sustainable aviation fuels: a regional case
study in Queensland. Renewable and Sustainable Energy Reviews, 44, 738-750.
Rosenburg, R. F. (2020). Australia & New Zealand.
Srisaeng, P. (2015). Utilizing advanced modelling approaches for forecasting air travel demand:
a case study of Australia’s domestic low cost carriers.
Srisaeng, P., Baxter, G. S., & Wild, G. (2015). Forecasting demand for low cost carriers in
Australia using an artificial neural network approach. Aviation, 19(2), 90-103.
Srisaeng, P., Baxter, G., Richardson, S., & Wild, G. (2015). A forecasting Tool for Predicting
Australia's Domestic Airline Passenger Demand Using a Genetic Algorithm. Journal of
Aerospace Technology and Management, 7(4), 476-489.
Zhang, Y., Sampaio, B., & Fu, X. (2016). Duopoly Competition between Airline Groups with
Dual-brand Services-The case of the Australian domestic market.