Question:
1. What did European governments do in the years following the end of WWII? Which
type of model would, in your opinion, best represent the post-war market arrangements in
Europe? (1.5 values)
2. Given the information provided in the case, what do you think would be the likely
outcome of opening the European air travel market to international competition? (1.5
values)
3. How did European air travel companies perform in the period discussed in case (A)?
What were the reasons behind that performance? (1 value)
4. What do you think is the potential impact of the introduction of wide-bodied aircraft like
the Boeing 747, in the 1970s, on the structure of airline travel markets? Would the impact
be the same in intercontinental air travel vis–vis domestic air travel? (2 values)
5. Taking into account the cost structure of an airline company, how important are
advanced computerized reservation systems, networks of travel agents and retail shops, as
well as a very diversified range of in-flight amenities and differentiated pricing? (1.5
values)
6. What is the rationale behind leasing aircraft? Why is it especially attractive for new
companies? (1 value)
7. Why do you think the Civil Aviation Authority encouraged the establishment of BCal?
Who would win with the creation of this company? Would someone be hurt? (1.5 values)
8. What were the major improvements for British Airways in the years following its
privatization? What caused this change? Quantify your answer with the data you have
available. (1.5 values)
9. Give an estimate of how much you think BA and Aer Lingus could save per passenger
on a Dublin-London roundtrip if they were as efficient as its American counterparties.
10. Give an estimate of what the operating profit of BA could have been in 1986 for an
average Dublin-London roundtrip if it was able to have a load of 85% (assume in 1986 the
load was 65%). Use the data you have available. (1.25 values)
11. What market share could Ryanair get with its 44-seat turboprop plane on the
Dublin-London route? Use the data you have available. (1 value)
12. Given all the information provided, would you classify Ryanair’s entry strategy as an
“aggressive” strategy or a small-scale, “passive” strategy? Explain. (2.5 values)
13. Given your answer to the previous question, how do you think Aer Lingus and British
Airways will respond to Ryanair’s entry? Will their response likely be the same? Explain.
(2.5 values)
Answer:
1. What did European governments do in the years following the end of WWII?
Which type of model would, in your opinion, best represent the post-war market
arrangements in Europe? (1.5 values)
Due to the treat of the privately owned American companies’ dominance in air travel,
European governments decided to use IATA (a government endorsed cartel) to establish
international fares to avoid the American competition. Governments also colluded, by
doing bilateral agreements that set the dominance of certain airlines over some routes and
by setting capacity and revenue restraints.
The model that suits these post-war arrangements the best is the oligopoly one, with
certain characteristics such as collusion in prices, capacity and routes that allowed these
companies to maintain a certain profit without entering price wars or other kind of
competition, making it impossible for other companies to enter the market due to
government barriers to entry.
2. Given the information provided in the case, what do you think would be the likely
outcome of opening the European air travel market to international competition? (1.5
values)
Since American companies were, without a doubt, more efficient than the European ones,
if they were allowed to enter and operate freely in the European market they would have
surely get the biggest market share of the international air travel market. European
companies had high costs, excess staff and small capacity aircrafts that would not allow
competing with the prices established by the American companies.
American efficiency can be seen in exhibit 2, were it is possible to observe a much better
staff/passenger ratio per aircraft that allows lower costs and therefore more competitive
capacity.
All these factors would limit the European participation in the international market that
would probably focus (until it became more cost effective) on intra-country routes and
Europe air space routes.
3. How did European air travel companies perform in the period discussed in case
(A)? What were the reasons behind that performance? (1 value)
It can be seen through exhibit 1 a clear timeline of European air companies along the
period between the post II World War and 1985. After the war, it is possible to observe a
period of positive profits due to pooling arrangements by national governments, these
pooling arrangements allowed European companies to avoid competition and charge
equivalent and high prices without fear of price wars, thus leading to positive results.
Afterwards, with the growing dissatisfaction with the high prices and the market
liberalization, charters airlines were created to boost efficiency (more frequent flights,
lower prices). Although profits were negative due to high investment in the first years
(investment in new airlines can be very costly), there is return on investment after that
investment period, until about 1970. National airlines fought back and invested in
wide-body jets to face competition and, once again, are noticed negative profit in the first
years (once again as a result of costly investments). Afterwards it is possible to note some
kind of constant negative profitability as a result of the oil crises and the huge increase in
operating costs that increased ticket prices and led to a smaller demand.
4. What do you think is the potential impact of the introduction of wide-bodied
