Demand situation. Different customers have different taste and

Demand
and supply:

http://www.straitstimes.com/singapore/more-economy-seats-on-sias-superjumbos 

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Analysis:

Economics:

Economics is the social science
that studies the economic tendencies, or what is likely to occur when
individuals make certain choices, and how it influences the production,
distribution, and consumption of goods and services in a certain market
structure.

 

Demand and Supply:

Demand constitutes the quantity
that is being demanded of the amount of product individuals are willing to
purchase at a certain price. This relationship between the price and quantity
demanded is known as the demand relationship. While supply refers to the
relationship between the quantity supplied at a certain price, in other words,
how much market is willing to offer.

 

Applying Economics Concept to
Demand and Supply to the article:

 

Demand:

Based on  the new release of
Airbus A-380, it is inferred that SIA is trying to appeal to the tastes and
preferences of consumers as an attempt to increase the low demand for premium
air travel. However, it is noticeable that this strategy might not work due to
the many alternatives of air lines for consumers to choose from. As such,
despite the SIA’s attempts at trying to increase demand from the consumers
through an increase in the supply, it is an inefficient strategy; consumers
have the power of choice and preference to not purchase air tickets from SIA.In
addition, SIA is said to charge “at least 20 per cent more than rivals
like Cathay Pacific, Emirates and Qatar Airways.” The price of substitutes
like cathay pacific is lower, as such, there is a resultant increase of
quantity demanded for cathay pacific, this in turn leads to a decrease in
demand for SIA. Since there are a great number of substitutes, in the form of
cathay pacific and the like, demand for SIA flight tickets is more price
elastic, and that the improvements made by the SIA does not aid in moving SIA
out of this disadvantageous situation.

Different customers have
different taste and preferences for the airline company they would prefer to
travel with. For example, some customers might prefer SIA over other
competitors, due to their safe track record; or perhaps out of habit. Likewise,
some customers might also prefer other airlines where factors such as quality
of service, comfortability of flight all factor into which airline they rather
choose to travel with. 

 

Supply:

Ceteris
paribus is a Latin phrase that means
“other things being equal.” In economics, Ceteris paribus is the
assumption that all the other variables except those under immediate
consideration are held constant. As SIA charges 20% more than its competitors,
this would lead to an increase in the quantity supplied of airplanes, ceteris paribus.
As a result of the changes in the progress of technological advancements, there
is now a greater ability to produce many Airbus A-380s, that caters to the
demands of the consumers. With more seats available, the supply of the SIA
flight tickets would increase.  

 

Conclusion: 

In accordance with the new
release of the Airbus A-380 by the SIA, the supply curve will shift rightwards
and demand curve will shift leftwards. As a result, the equilibrium price and
equilibrium quantity would increase. 

Analysis
Singapore’s technological advancements and high standard of living has resulted
in more Singaporeans travelling out of the country. With many budget airlines
entering the Singapore aviation market in the recent years, the demands for
tickets has increased over the years. With the increase in sales of airline
tickets, the market has been more competitive than ever. Airline tickets are
into 2 different categories, long-haul and short-haul. The categories are
further divided into sub-categories which are business and leisure. The
airfares for long-haul business trips market are usually more  price
inelastic while the airfares for short-haul leisure trips market are usually
more price elastic.

Long-Haul Airline tickets for business purposes are price inelastic due to some
determinants of price elasticity of demand. The determinants are the
availability of substitutes, habit and it being a necessity instead of a
luxury. Thus, consumers will be less responsive to the price changes. When a
good is price inelastic it means that the percentage change in price is more
than the percentage change in quantity demanded. An increase in price of an
inelastic good will result in a lower percentage decrease in the quantity
demanded, so less consumers will be affect by the price change and the amount
of consumers will not change as much. There are very little budget airlines
selling long-haul tickets so there are very little substitutes available for
businessmen to consider, making the airline tickets more price inelastic. Most
business trips are also habitual, making the demand for long-haul business tickets
more price inelastic. Travelling for businessmen is a necessity and not a
luxury, so the demand for the tickets will be more price inelastic. Hence,
Long-Haul airline tickets for business purposes are more price inelastic as
consumers are not likely to respond to the price change.

Short-Haul Airline tickets for leisure purposes are price elastic due to
determinants of price elasticity of demand. The determinants are availability
of substitutes, proportion of income spent on good and it being a luxury instead
of a necessity. For short-haul trips, there are many budget airlines to buy
tickets from making the demand for short-haul airline tickets more price
elastic. Since the tickets are bought for leisure purposes, the consumer will
tend to buy tickets for his family as well. This increases the proportion of
income spent on the airline tickets, making the demand of the good more price
elastic. Travelling for leisure purpose is a luxury and not a necessity as
travelling overseas is not needed for everyone. Since short-haul airline
tickets for leisure is a luxury, its demand will be more price elastic. Hence,
short-haul airline tickets for leisure is more price elastic as consumers are
more sensitive to the change in price.

Conclusion
Airline tickets can be price elastic as well as price inelastic depending
on the consumer’s purpose of travel and whether the flight is long-haul or
short-haul.

 

Analysis
In SIA, the fixed resources are the airplanes, while the variable resources are
the facilities added in the airplanes and employees hired to operate the airplanes.
The airplanes in SIA have not been upgraded since 10 years ago. Hence, the
facilities inside the airplanes are outdated and old. This caused a short-run
situation. Thus, this might have caused a stagnation in their revenue due to
the similarity in other airlines. This is also due to the law of diminishing
returns. As more and more units of variable resources like employees are hired,
the marginal product will ultimately decline. This means that the aircraft will
not produce as much revenue in a short run. Moreover, the cost incurred for the
employee’s salaries will continue to increase over the years due to rising cost
of living. This means that the expenses increase but the revenue did not, hence
causing the profit to decrease over the years.

With the upgrade of the facilities in A380 aircraft, it is expected in the
article that the yields will increase in the premium cabins. Moreover, in the
economy cabins, the increased seat density would cause a higher revenue even if
the yields stays the same. This is because, people are anticipated and
attracted to the new facilities that A380 brings.

This is a long-run situation. As the output which is the plane changes, average
costs will initially decline because of the economies of scale, while the more
space in the plane allows for a more extensive division of labour. Hence, this
situation will maximise profits.

Conclusion
To maintain this situation, SIA
should

Oligopoly

 

https://www.channelnewsasia.com/news/business/singapore-airlines-plans-wide-ranging-initiatives-to-reclaim-9285762 

 

Summary of article:

Singapore Airlines (SIA) has
plans to pursue a three-year-plan to reclaim its market leadership. Through
this, SIA hopes to “continues to be a leader in customer service, and to
claim market and financial leadership once again”. Of which, SIA has
“handed two of regional arm SilkAir’s routes to budget carrier Scoot, and
merged part of SilkAir’s finance team with its parent and offered unpaid leave
to cabin crew.” Through the mergers, SIA aims to “generate efficiencies and
ensure a consistent product at the full-service end of the market” so as to be
able to compete with its international rivals rom the Chinese and the Middle
East, as Singapore lacks the domestic flight markets to offset the competition.
The carrier has already merged budget arms Scoot and Tigerair Singapore and
folded its cargo arm back into Singapore Airlines. SIA has been in the past an
able cost leader in the full-service airline business, a position that has
“eroded” over the years.

 

Analysis:

Oligopoly:

Oligopoly is the market structure
that is characterized by a small number of relatively large firms supplying
most of the output in the market. An oligopoly is similar to that of a
monopoly, except that rather than one firm, two or more firms dominate the
market. 

 

Horizontal Merger:

When 2 or more firms legally
combine to form a larger firm; a firm combines with another firm that produces
the same product

 

Price Leadership:

An informal or tacit type of
collusion with a price leader. A price leader is a firm whose prices are followed
by the rest of the industry.

 

Applying Economics Concept of
Oligopoly to the article:

 

The
Market Structure of the Airlines Industry:

 

The market structure of the
airline industry is an oligopoly. The market is dominated by a small number of
sellers, of which it can result in a collusion between the sellers to reduce
competition, and lead to higher prices for consumers. In an oligopoly market
structure, the sellers are the price setters rather than the price takers,
where they are able to maximise profits as a result. In Singapore, the airline
industry comprises of a few merged airlines, such as how SIA has merged with
Scoot and Tigerair Singapore into SIA to maximise profits. With SIA as one of
the few airline companies consumers can purchase their tickets from, consumers
have to choice but to purchase from SIA. The barriers to entry are high in this
oligopolistic market, where new companies can be pushed out of the market by
strategic actions from the bigger players in the market to discourage these
companies. There exists a few airline companies in Singapore whereby the action
of the price leader (SIA) can influence the actions of the other companies With
sellers merging under one firm, as in the case of SIA with Tigerair Singapore
and Scoot, this oligopoly have perfect knowledge of their own cost and demand
functions, and access to advance technology for further improvements and
advancement to provide them that edge in this market. Alternatively, consumers
have imperfect knowledge – to only price, cost and product.

 

In this horizontal merger by the
SIA, where SIA is the cost/price leader, the implication is that of when SIA
raises its price above the current existing price, there is that risk whether
the competitors will follow suit or not. In the event the other competitors do
not follow, SIA would end up selling their plane tickets at a higher price,
which would discourage consumers from buying from SIA – resulting in the SIA
losing their market share in the airlines industry. Likewise, when SIA lowers
their prices, their competitors would follow suit in order not to lose their
consumers and in turn their market share so as to not lose profits entirely. As
such, it is evident that the prices above the current existing price is
elastic, while the prices below that existing point is inelastic.

 

Conclusion:

In conclusion, SIA is pushing the
airline industry to be more oligopolistic in nature with SIA as the price
leader, to maximise profits in a more cost effective and efficient method.
Consumers can expect further probable changes from SIA that lean towards a more
oligopolistic market in the future.