IS THE AIRLINE INDUSTRY A NATURAL MONOPOLY 181 In a low margin industry, these gains are generally seen as a necessary condition for the airlines’ financial survival. Secondly, there will be positive externalities and pro-competitive effects, in that the airlines can be more flexible and quick in reacting to changes in supply and demand. The airline industry is indeed characterised by a high level of fixed costs and low flexibility. Carriers continuously seek a supply and demand equilibrium, as they have to adjust capacities to the fluctuations and forecast in demand. Over-capacities automatically involve lower profitability or losses22. The airlines have created networks of routes from bases that generate economies of scale, density and scope, which result from the concentration of the fleet, crews, dedicated maintenance services, infrastructure and marketing among airport bases. These economies play on both the supply-side (cost) and the demand-side (quality and brand awareness). Supply-side economies are generated by the dilution of operating costs among higher volumes of flights and because of more diversified routes from a single base. On the demand-side, greater awareness by customers will result from more efficient operations, higher quality and lower prices, and providing higher levels of service at a lower cost will generate gains. More flexible capacities from a large base will enable carriers to better adjust to fluctuations in demand. Economies of scale are reached because of a higher level of production. Sufficient scale allows carriers bargaining power over airport providers (ground handling, customer services, catering and fuel) and the ability to invest in their own facilities (check-in desks or customer information counter). Airport bases enable optimised hotel and accommodation costs (the crew having their place of leaving near the airports). Better operations will be enabled by the presence of a stand-by aircraft or the re-allocation of aircraft across the network. The presence of a dedicated maintenance centre will reduce the time and cost of technical incidents (AOGs: “Aircraft On Ground”) and will enable to avoid the costs associated with passenger rights obligations in case of disruption. Consumer satisfaction will result in better punctuality and smooth operations. Moreover, marketing campaigns can target several routes departing from the base generating a better awareness from the public, while the costs can be diluted in lower unit costs. Distribution channels and travel agent costs are more easily bypassed as the strong presence of a base attracts passengers directly to the airline websites. 22 Oliver Wojahn, IATA, Key Policy Issue, 2012, Explaining over-capacity in the airline industry: “Since 1981, the listed airline industry earned meaningful economic profits only in 1984. For a further five years, the industry approximately covered its cost of capital (1985, 1988, 1997, 1998 and 1999)”.
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