Economics (AS & A Level) · Oct / Nov 2021 · Paper 42 · Question 1

Competition in the skies over Europe In the sixteen months to April 2019 thirteen airlines ceased trading in Europe. This reflected a global trend where small airlines found it increasingly difficult to compete against large airlines, which have continued to grow. Large airlines charge a price for a flight that includes meals and entertainment for passengers. Smaller airlines charge a price for the flight only and passengers need to pay extra for other services such as meals. Large airlines benefit from economies of scale. Without these cost-reductions some smaller airlines have gone bankrupt. The reduction in the number of airlines has not reduced the overcapacity in the market because the aircrew and aircraft of the bankrupt airlines were acquired by the remaining companies, which have developed into super-airlines. This has left passengers with fewer airlines to choose from and more expensive fares. It was predicted that this would lead to an increase in the market share for the top five European airlines from 50% of the European market in 2019 to match the top five United States (US) airlines, which control 77% of the US market. The development of super-airlines took place at the same time as increasing regulation of the airline market. For example, the European Union (EU) will only grant operating licences for flights between EU countries to an EU airline. This has prevented non-EU airlines from competing on EU routes. For the super-airlines, large scale is the easy way to avoid the stresses and strains of open competition. For passengers this will lead to higher prices and poorer service. Sources: adapted from Financial Times, 6 October 2017 and The Economist, 27 April 2019

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