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APA
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Mathematics & Economics
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English (U.S.)
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Topic:

Australian Airline Industry and the Factors Affecting Its Profitability

Essay Instructions:

PART A – Case Study (40 marks; minimum word count: 1,500 words; maximum: 2,000 words)

Choose an Australian industry and analyse the most important factors affecting its profitability by using the relevant concepts and theories we have studied in Lectures 1-9. You should choose the three, four or five factors that have had the most influence on profitability. You can choose factors that are currently affecting your chosen industry, or factors that seem likely to affect the industry’s profitability in the near future. Some possibilities to consider are:

 Internal rivalry and the market structure: Which market structure best describes the market (i.e. perfect competition, monopoly etc.)? Why? Things to consider here are the nature of the firms’ output (homogenous vs. heterogeneous), barriers to entry, “pricetaking” vs. “price-making,” and market concentration (a small number of large firms vs. a large number of small firms). Provide measures of industry concentration if you can. Do you have reasons to believe that the market structure is likely to change in the future? Is the struggle for market share and increased profitability reflected mainly in price competition or in non-price competition? If it is non-price competition, what form does it take?

 Barriers to entry: Are there barriers to entry in your chosen industry? That is, is it difficult for new firms to enter or is there free entry? Have any significant new firms entered the industry in the recent past? Consider how brand loyalty, economies of scale, intellectual-property law (e.g. patents and copyrights), and government regulation can each contribute to barriers to entry.

 Substitutes and complements: Are there important substitutes and complements (in consumption) that could affect industry profits? You can consider related products that are either currently available or might soon become available.

 Bargaining power of buyers: Is the input of your chosen industry bought by few large buyers with market power or a multitude of price-taking buyers with no market power? How does that affect profits? Have producers made relationship-specific investments with their buyers?

 Bargaining power of suppliers: Is the market for inputs in your chosen industry concentrated or competitive? Here, you can choose to consider the markets for labour, land, raw materials, and capital. How does the relative concentration in that market affect input costs, and how can input costs affect your chosen industry’s profits? Have the producers in your chosen industry made relationship-specific investments with their input suppliers (for example, moving their factory close to a supplier’s business)? Can the supplier exploit this situation and how would that affect profitability? Are there substitute inputs that producers in your chosen industry can turn to?

 Costs: What sort of cost structures do the firms in the industry face? Do the firms face any economies/diseconomies of scale, scope, and/or learning? How are these cost structures likely to affect firms’ relative sizes or their profit-maximising decisions? 

Essay Sample Content Preview:

Application of Key Economic Concepts
Student’s Name
Institution
Course Number and Name
Instructor’s Name
Date
Application of Key Economic Concepts
Part A
Australian Airline Industry: An Introduction
The Australian airline industry is a key economic sector in the country. It contributes to the creation of employment and revenue generation through tourism and investments. In particular, it contributes to about 5% of the economy, $35-$69 billion in value-added, and about 700,000 jobs (Australian Parliament House, 2020). It comprises domestic and international travellers, with domestic travellers accounting for a significant number of overall travellers (The Department of Infrastructure, Transport, Regional Development, Communications and the Arts, n.d.). In recent years, it has experienced significant challenges following the coronavirus pandemic and the recent surge in oil prices. It has also experienced labour shortages, which continue to affect its operations. Below are several factors that impact its profitability.
COVID-19
COVID-19 has had considerable effects on the airline industry. Specifically, the COVID-19 pandemic has hurt the industry's profitability in the short run and continues to have long-term effects. In 2020 when the pandemic hit, the airline industry reported revenue of $26.94 billion, a decline of almost $20 billion from $45.98 billion in 2018 (Common Wealth of Australia, 2022). This decline in revenues affected the profitability of the airline industry. One key reason for the decrease in revenue was a reduction in the volume of passengers as the Australian government imposed travel restrictions and international border controls to curb the spread of the pandemic (Australian National Audit Office (ANAO), 2022). As the demand for air travel declined, so did the revenues generated in the industry. By the end of 2020, the operating profits of four major airports had reduced by 55%, and this decline continued into 2021 (Australian Competition and Consumer Commission (ACCC), 2021). Airline companies reported significant losses due to the pandemic.
The industry has started to recover in a post-pandemic era. According to ACCC (2023), the airline has started reporting profitability as many travel restrictions and border control measures have been eliminated. For instance, Qantas Group, one of Australia's major airlines, reported a profit of $ 1.43 billion for the years 20222-23. More passengers have started using air travel because the immediate threat of COVID-19 has been eliminated. However, in a report released by the International Air Transport Association IATA (2023), the resurgence of COVID-19 in China in 2023 poses a risk to the airline industry. In fact, some countries have started imposing travel limitations to control the spread of the virus, and Australia has introduced additional measures as well. But the Australian government relaxed those measures in March 2023, and travellers from China to Australia are not required to undergo COVID-19 testing upon arrival (Smart Traveller, 2023). The removal of such measures means that travellers will not be restricted to travelling using air, and their continued use of air travel will increase demand and generate more revenues. H...
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