Chapter 1 Introduction to Aviation Economics The economic characteristics of the Airlines Business

Chapter 1 Chapter 1 Introduction to Introduction to Aviation EconomicsAviation Economics

The economic characteristics of The economic characteristics of the Airlines Businessthe Airlines Business

Introduction to Airline industryIntroduction to Airline industry

Air travel remains a large and growing industry.Air travel remains a large and growing industry.

It facilitates economic growth, world trade, international investment It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in and tourism and is therefore central to the globalization taking place in many other industries.many other industries.

Travel for both business and leisure purposes grew strongly Travel for both business and leisure purposes grew strongly worldwideworldwide

Introduction to Airline industryIntroduction to Airline industry

• In domestic and international competitive market, aviation economic should be well managed with the existence of LCC airline companies.

•To compete with the LCCs, To compete with the LCCs, aviation fraternity should aviation fraternity should understand the concept of understand the concept of aviation economics aviation economics characteristics and characteristics and strategies.strategies.

OverviewOverview Economists usually describe the certificated airline Economists usually describe the certificated airline

industry as industry as an oligopolistic economic structurean oligopolistic economic structure That is, this industry composed of few firms (can be 5/ That is, this industry composed of few firms (can be 5/

10/ 100) producing either similar or differentiated 10/ 100) producing either similar or differentiated products. products.

Apart of few sellers and typically characterized by Apart of few sellers and typically characterized by high high barriers to entrybarriers to entry

Airline business also has its own distinguish featureAirline business also has its own distinguish feature Q: Name other possible oligopolistic industriesQ: Name other possible oligopolistic industries

Other characteristics of oligopolistic Other characteristics of oligopolistic industry industry

Substantial economic scale: Substantial economic scale: Increase of size in Increase of size in operations leads to decrease of firm’s costs in a operations leads to decrease of firm’s costs in a long term long term Large scale of production afforded by intensive labor and Large scale of production afforded by intensive labor and

management specialization of job responsibilities, management specialization of job responsibilities, technological and products utility efficiency make possible technological and products utility efficiency make possible of low costs of low costs

So, if market demand only sufficient to support few large So, if market demand only sufficient to support few large firms of optimum size, only few such firms will survivefirms of optimum size, only few such firms will survive

It’d be hard for new and small firms to compete with these It’d be hard for new and small firms to compete with these large firmslarge firms

Growth merger: Growth merger: Many of oligopolies resulted Many of oligopolies resulted from mergers of competing firms (i.e. Am Bank, from mergers of competing firms (i.e. Am Bank, CIMB)CIMB) The purpose of “merging” is to gain The purpose of “merging” is to gain

Substantial increase in market shareSubstantial increase in market share Greater economies of scaleGreater economies of scale More buying power in purchasing of resourcesMore buying power in purchasing of resources

Other characteristics of Other characteristics of oligopolistic industry oligopolistic industry

Mutual Dependence: Mutual Dependence: When there are only few When there are only few firms in a market, it matters very much what their firms in a market, it matters very much what their rivals do (i.e. Malaysia Airlines vs. Air Asia)rivals do (i.e. Malaysia Airlines vs. Air Asia) The competitor’s reactions play a vital role when The competitor’s reactions play a vital role when

setting pricessetting prices In these games, the participants try to win by In these games, the participants try to win by

formulating strategies that anticipate the counter-formulating strategies that anticipate the counter-reactions of their opponentsreactions of their opponents


Price rigidity and non-price competition: Price rigidity and non-price competition: Firms Firms are more likely to maintain their constant prices are more likely to maintain their constant prices As a result, firms engage in various forms of non-As a result, firms engage in various forms of non-

price competition like advertising and customer price competition like advertising and customer serviceservice

Price reductions occur only under severe Price reductions occur only under severe pressures resulting from weakened demand ad pressures resulting from weakened demand ad excessive capacity (i.e. The case of Malaysia excessive capacity (i.e. The case of Malaysia Airlines)Airlines)


However, other economic However, other economic characteristic:The Airlines as an characteristic:The Airlines as an Oligopolists?Oligopolists? We have discussed earlier on characteristics of We have discussed earlier on characteristics of

oligopolistic industryoligopolistic industry Apparently the airline industry also share some of Apparently the airline industry also share some of

the oligopolistic features: the oligopolistic features: Small Number of carriers and market shareSmall Number of carriers and market share High barriers of entryHigh barriers of entry Economies of scaleEconomies of scale Growth through mergerGrowth through merger Mutual DependenceMutual Dependence Price rigidity and non-price competitionPrice rigidity and non-price competition

Number of carriers and market shareNumber of carriers and market share

Recently there has been increment in airline Recently there has been increment in airline firms with the addition of small certificated firms with the addition of small certificated airlines and demise of some larger airlines (A airlines and demise of some larger airlines (A once in a blue moon in M’sia but an apparent once in a blue moon in M’sia but an apparent situation in the U.S. and Europe)situation in the U.S. and Europe)

BUT, they either liquidated, merged or never BUT, they either liquidated, merged or never operated or decertified.operated or decertified.

So, the largest airline own and retain the power So, the largest airline own and retain the power in market sharein market share

Unquestionably, with this small numbers of Unquestionably, with this small numbers of airline companies and concentration of market airline companies and concentration of market share (Just like the aviation climate in M’sia)..share (Just like the aviation climate in M’sia)..

It meets the first characteristic of oligopolistic It meets the first characteristic of oligopolistic industriesindustries

Number of carriers and market Number of carriers and market shareshare

High Barriers of EntryHigh Barriers of Entry

In recent years, it is difficult to get access to In recent years, it is difficult to get access to many markets due tomany markets due to Difficulty to obtain terminal space at many hub Difficulty to obtain terminal space at many hub

airportsairports The financial outlays risk (i.e., advertising, The financial outlays risk (i.e., advertising,

personnel and aircraft operation cost) compete personnel and aircraft operation cost) compete with the airline at its hubwith the airline at its hub

Airport terminal capacity (i.e. Air Asia competing Airport terminal capacity (i.e. Air Asia competing with M’sia Airlines at KLIA)with M’sia Airlines at KLIA)

So, it is difficult to enter the airline industry So, it is difficult to enter the airline industry and it is even harder during the start-up stage and it is even harder during the start-up stage as the major airlines dominated the power to as the major airlines dominated the power to buy in the marketbuy in the market

This phenomenon match with the second This phenomenon match with the second criterion of oligopolistic firmscriterion of oligopolistic firms


• Defunct airlines


AIRLINE IATA ICAO CALLSIGNCOMMENCEDOPERATIONS

CEASEDOPERATIONS

Borneo Airways

FlyAsianXpress D7 August 1, 2006September

30,2007

Ked-Air January 20, 2004 2006

Malaysia-Singapore Airlines MH MAS MALAYSIAN 1966 1972

Pelangi Air PG PEGPELANGI AIRWAYS

1989 2001

Saeaga Airlines SG SGG SAEAGA 1995 1998

Silverfly Airlines 2009 2010

Growth through MergerGrowth through Merger

Airlines in particular growth through merger Airlines in particular growth through merger (Although, it is not the case in M’sia)(Although, it is not the case in M’sia)

Merger can Merger can Increase market shareIncrease market share Increase market power (greater ability to control Increase market power (greater ability to control

the market for and the price of its service than the market for and the price of its service than does a smaller, more competitive producer)does a smaller, more competitive producer)

Eliminating bankruptcy and competition Eliminating bankruptcy and competition

Like in the U.S: Merger decrease no. of Like in the U.S: Merger decrease no. of certificated airlines (From 17 in 1950 to certificated airlines (From 17 in 1950 to remaining 12 in 2002)remaining 12 in 2002)

This merger for growth feature makes the airline This merger for growth feature makes the airline business fits as oligopolistic businessbusiness fits as oligopolistic business

Growth through MergerGrowth through Merger

Mutual DependenceMutual Dependence

Airlines industry involves rivalry among a Airlines industry involves rivalry among a number of airlines number of airlines

An action taken by a particular airline would An action taken by a particular airline would yield counter-reactions of their rivals or yield counter-reactions of their rivals or opponentsopponents

Like, MAS vs. Air Asia (at domestic level) and Like, MAS vs. Air Asia (at domestic level) and MAS vs SIA (at international level)MAS vs SIA (at international level)

It is a fact that rivalry in airlines industry counter It is a fact that rivalry in airlines industry counter react with one another for profit gainreact with one another for profit gain

Price Rigidity and Nonprice Price Rigidity and Nonprice CompetitionCompetition

Airline industry also oligopolistic in its priceAirline industry also oligopolistic in its price Airliners are much comfortable maintaining Airliners are much comfortable maintaining

constant price rather than rocking the boat, so to constant price rather than rocking the boat, so to speak…speak…

Why?Why? Mutual DependenceMutual Dependence Fear of Price WarFear of Price War

Oligopolistic pricing has become the norms in Oligopolistic pricing has become the norms in airline industryairline industry

The Airlines Special Economic The Airlines Special Economic Characteristics:Characteristics:

Government Financial AssistanceGovernment Financial AssistanceHigh Technological TurnoverHigh Technological TurnoverHigh Labor and Fuel ExpensesHigh Labor and Fuel ExpensesSensitivity to Economic FluctuationsSensitivity to Economic FluctuationsClose Government RegulationClose Government Regulation

Government Financial AssistanceGovernment Financial Assistance

Unlike other oligopolistic industries (i.e. Mobile Unlike other oligopolistic industries (i.e. Mobile and Internet services), the government units and Internet services), the government units have played a major roles in the growth of have played a major roles in the growth of airport-airways systems (i.e. Malaysia Airlines)airport-airways systems (i.e. Malaysia Airlines)

National airways system was maintained by the National airways system was maintained by the federal government at minimal cost to users of federal government at minimal cost to users of the systemthe system

Most commonly, the fees charged for landing Most commonly, the fees charged for landing aircraft, maintaining office and operational space aircraft, maintaining office and operational space do not repay the operating costs of the airport do not repay the operating costs of the airport (Take the case of LCCT)(Take the case of LCCT)

As a result, airline industry benefited from the As a result, airline industry benefited from the financing of the airport-airways system (which is financing of the airport-airways system (which is the major cost element)the major cost element)

Government Financial AssistanceGovernment Financial Assistance

High Technological TurnoverHigh Technological Turnover

Technological advances in flight equipment over Technological advances in flight equipment over the short span of 30 years have come at an the short span of 30 years have come at an extremely rapid paceextremely rapid pace

Airlines spend lots of money on flight re-Airlines spend lots of money on flight re-equipment cycle, approximately at every 8 yearsequipment cycle, approximately at every 8 years

Plus, capital spending in hiring and training Plus, capital spending in hiring and training personnel, and in modifying facilities to personnel, and in modifying facilities to accommodate the new aircraft and associated accommodate the new aircraft and associated equipment equipment

High Labor & Fuel Expenses High Labor & Fuel Expenses

These are two biggest expenses (Typically 60%)These are two biggest expenses (Typically 60%) LaborLabor: Airline employees are men and women : Airline employees are men and women

with highly developed skills and with with highly developed skills and with correspondingly high incomescorrespondingly high incomes Plus, airline needs a large number of manpowerPlus, airline needs a large number of manpower

FuelFuel: No other industry has been subjected to : No other industry has been subjected to the severe increases of fuel prices that the the severe increases of fuel prices that the airlines have experienced over the past 15 airlines have experienced over the past 15 years.years.

Fuel price Costs Ticket Price = Less Fuel price Costs Ticket Price = Less Passenger, Less Profit…Passenger, Less Profit…

At times, purchasing fuel-efficient aircraft (that At times, purchasing fuel-efficient aircraft (that burn less fuel than others) also can be very burn less fuel than others) also can be very costly than do less-efficient aircraftcostly than do less-efficient aircraft

Moreover, the actual price of fuel far outside any Moreover, the actual price of fuel far outside any airline’s span of control airline’s span of control

High Labor & Fuel ExpensesHigh Labor & Fuel Expenses

Sensitivity to Economic Fluctuations Sensitivity to Economic Fluctuations (Recession)(Recession) Unlike other durable good like automobile Unlike other durable good like automobile

industries, whenever recession takes place, it is industries, whenever recession takes place, it is much slower for the airline industry to recovermuch slower for the airline industry to recover

Why? Because of the apparent impacts of Why? Because of the apparent impacts of recession on air travelrecession on air travel People postpone long-distance travelPeople postpone long-distance travel Companies cut back business trip/ no/ of people Companies cut back business trip/ no/ of people

sent on a given tripsent on a given trip Fewer people travel first classFewer people travel first class

Unlike other industries, airlines still have to Unlike other industries, airlines still have to continue make payments to creditors and continue make payments to creditors and outstanding debtors (primarily flight equipment) outstanding debtors (primarily flight equipment) even during recessioneven during recession

Further, although airline can furlough certain Further, although airline can furlough certain volume related employees, it’d involve extensive volume related employees, it’d involve extensive retraining costs when personnel are brought retraining costs when personnel are brought back or new personnel are hiredback or new personnel are hired

Sensitivity to Economic Sensitivity to Economic Fluctuations (Recession)Fluctuations (Recession)

Impact on generating the economics activities.Impact on generating the economics activities. Carry the country’s name to a worldwide Carry the country’s name to a worldwide

standard.standard. Avoid accidents of surely death that would harm Avoid accidents of surely death that would harm

the country’s value.the country’s value. Avoidance of terrorist, illegal product Avoidance of terrorist, illegal product

enter the country. enter the country.

Close Government RegulationClose Government Regulation

The major questionsThe major questions If the airline industry is oligopolisticIf the airline industry is oligopolistic

How can a new airliner enter and survive in this industry?How can a new airliner enter and survive in this industry? How would existing airliners compete with the new airliner How would existing airliners compete with the new airliner

and retain themselves in the industry?and retain themselves in the industry?

How to overcome to these oligopolistic barriers How to overcome to these oligopolistic barriers in airline business?in airline business? Airlines can independently make profits in each areas of Airlines can independently make profits in each areas of

aviation economic activitiesaviation economic activities

This is where aviation economics deals with This is where aviation economics deals with profit making and lowering costs in aviation profit making and lowering costs in aviation activitiesactivities

Airlines Profitable Economic Airlines Profitable Economic ActivitiesActivities

There are five major parts of economic activities:There are five major parts of economic activities: Part I:Part I: The Demand for Airline Services The Demand for Airline Services Part II:Part II: Airline Route Feasibility/ Planning Airline Route Feasibility/ Planning Part III:Part III: Fixed-Base Operation (FBO) Fixed-Base Operation (FBO) Part IV:Part IV: Fleet Planning Fleet Planning Part V:Part V: Maintenance, Repair, Overhaul (MRO) Maintenance, Repair, Overhaul (MRO)

Each of these share the aims on how to lower Each of these share the aims on how to lower the costs and gain profitthe costs and gain profit

Part 1: The Demand of Airline Part 1: The Demand of Airline ServicesServices

Demand is defined as the various amounts of a Demand is defined as the various amounts of a product or service that consumers are willing product or service that consumers are willing and able to purchase at various prices at a and able to purchase at various prices at a particular period of timeparticular period of time

Determining the demand would the help the Determining the demand would the help the airlines in setting the price, estimating and airlines in setting the price, estimating and managing their costs and calculating how they managing their costs and calculating how they can gain profits can gain profits

This is where the airlines will deal with how This is where the airlines will deal with how certain forecasting methods can help the airline certain forecasting methods can help the airline gain profit gain profit

Forecasting is Forecasting is The attempt to quantify in a future time periodThe attempt to quantify in a future time period It is about predicting and estimating some future It is about predicting and estimating some future

volume or financial situationvolume or financial situation

Part 1: The Demand of Airline Part 1: The Demand of Airline ServicesServices

Part 2: Airline Route Planning/ Part 2: Airline Route Planning/ FeasibilityFeasibility

This where airlines deal with the application of This where airlines deal with the application of forecasting method in determining the costs of a forecasting method in determining the costs of a route of one flight from one destination to route of one flight from one destination to another eitheranother either Domestic orDomestic or International International

In terms of …In terms of … Flight personnelFlight personnel Fuel consumptionFuel consumption Facilities and Airport costFacilities and Airport cost Passenger Movement and Air CargoPassenger Movement and Air Cargo

PART 3: Fixed Based Operations PART 3: Fixed Based Operations (FBO)(FBO)

In the aviation industry, a In the aviation industry, a fixed base fixed base operatoroperator (also known as (also known as fixed base of fixed base of operationoperation), or ), or FBOFBO, is a service center at , is a service center at an airport that may be a private enterprise an airport that may be a private enterprise or may be a department of the municipality or may be a department of the municipality that the airport serves.that the airport serves.

At a minimum, most FBOs offer aircraft fuel, oil, At a minimum, most FBOs offer aircraft fuel, oil, and parking, along with access to washrooms and parking, along with access to washrooms and telephones. Some FBOs offer additional and telephones. Some FBOs offer additional aircraft services such as hangar (indoor) aircraft services such as hangar (indoor) storage, maintenance, aircraft charter or rental, storage, maintenance, aircraft charter or rental, flight training, deicing, and ground services such flight training, deicing, and ground services such as towing and baggage handling.as towing and baggage handling.

FBOs may also offer services not directly related FBOs may also offer services not directly related to the aircraft, such as rental cars, lounges, and to the aircraft, such as rental cars, lounges, and hotel reservations.hotel reservations.

PART 3: Fixed Based Operations PART 3: Fixed Based Operations (FBO)(FBO)

Among services provided by FBOs areAmong services provided by FBOs are Ground HandlingGround Handling

Cabin ServiceCabin Service CateringCatering Ramp ServiceRamp Service Passenger ServicePassenger Service

Field Operations ServiceField Operations Service

Ground HandlingGround Handling

Many airlines subcontract ground handling to an airport Many airlines subcontract ground handling to an airport or a or a handling agent,handling agent, or even to another airline. or even to another airline.

Ground handling addresses the many service Ground handling addresses the many service requirements of a passenger aircraft between the time it requirements of a passenger aircraft between the time it arrives at a terminal gate and the time it departs on its arrives at a terminal gate and the time it departs on its next flight. next flight.

Speed, efficiency, and accuracy are important in ground Speed, efficiency, and accuracy are important in ground handling services in order to minimize the turnaround handling services in order to minimize the turnaround time (the time during which time (the time during which

the aircraft must remain parked at the gate)the aircraft must remain parked at the gate)

Airlines with less-frequent service or fewer Airlines with less-frequent service or fewer resources at a particular location sometimes resources at a particular location sometimes subcontract ground handling or on-call aircraft subcontract ground handling or on-call aircraft maintenance to another airline, as it is a short-maintenance to another airline, as it is a short-term cheaper alternative to setting up its own term cheaper alternative to setting up its own ground handling or maintenance capabilities.ground handling or maintenance capabilities.

Most ground services are not directly related to Most ground services are not directly related to the actual flying of the aircraft, and instead the actual flying of the aircraft, and instead involve other tasks.involve other tasks.

Ground HandlingGround Handling

Cabin ServicesCabin Services

These services ensure passenger comfort. They These services ensure passenger comfort. They include such tasks as cleaning the passenger include such tasks as cleaning the passenger cabin and replenishment of on-board cabin and replenishment of on-board consumables or washable items such as soap, consumables or washable items such as soap, pillows, tissues, blankets, etc.pillows, tissues, blankets, etc.

CateringCatering

Catering includes the unloading of unused food and Catering includes the unloading of unused food and drink from the aircraft, and the loading of fresh food and drink from the aircraft, and the loading of fresh food and drink for passengers and crew. drink for passengers and crew.

Airline meals are typically delivered in Airline meals are typically delivered in trolleys.trolleys. The The empty or trash-filled trolley(s) from the previous flight is empty or trash-filled trolley(s) from the previous flight is replaced by a fresh one. replaced by a fresh one.

Meals are prepared mostly on the ground in order to Meals are prepared mostly on the ground in order to minimize the amount of preparation (apart from chilling minimize the amount of preparation (apart from chilling or reheating) required in the air.or reheating) required in the air.

Ramp ServiceRamp Service

This includes services on the ramp or apron, This includes services on the ramp or apron, such as:such as: Guiding the aircraft into and out of the parking Guiding the aircraft into and out of the parking

position (by way of Aircraft marshallingposition (by way of Aircraft marshalling Water cartage (to refill fresh water tanks)Water cartage (to refill fresh water tanks) Refueling, which may be done with a refueling Refueling, which may be done with a refueling

tanker truck or refueling pumpertanker truck or refueling pumper Passenger stairs (used instead of an aerobridge Passenger stairs (used instead of an aerobridge

or air stairs, some budget airlines use both to or air stairs, some budget airlines use both to improve turnaround speed) etc.improve turnaround speed) etc.

Passenger ServicePassenger Service

This includes services inside the airport terminal such This includes services inside the airport terminal such as:as:

Providing check-in counter services for the passengers Providing check-in counter services for the passengers departing on the customer airlines.departing on the customer airlines.

Providing Gate arrival and departure services. The Providing Gate arrival and departure services. The agents are required to meet a flight on arrival as well as agents are required to meet a flight on arrival as well as provide departure services including boarding provide departure services including boarding passengers, closing the flight, etc.passengers, closing the flight, etc.

Staffing the Transfer Counters, Customer Service Staffing the Transfer Counters, Customer Service Counters, Airline Lounges, etc.Counters, Airline Lounges, etc.

Field Operation ServiceField Operation Service

This service dispatches the aircraft, maintains This service dispatches the aircraft, maintains communication with the rest of the airline communication with the rest of the airline operation at the airport and with Air Traffic operation at the airport and with Air Traffic Control.Control.

PART 4: Fleet Planning; Aircraft PART 4: Fleet Planning; Aircraft Lease and PurchaseLease and Purchase

Aircraft leasesAircraft leases are a number of types of are a number of types of leases used by Airlines and other aircraft leases used by Airlines and other aircraft operators. operators.

Airlines lease aircraft from other airlines or Airlines lease aircraft from other airlines or leasing companies for two main reasons; leasing companies for two main reasons; to operate aircraft without the financial to operate aircraft without the financial burden of buying them, and to provide burden of buying them, and to provide temporary increase in capacity. temporary increase in capacity.

The industry has two main leasing types, The industry has two main leasing types, wet wet leasing leasing which is normally used for short term which is normally used for short term leasing and leasing and dry leasingdry leasing which is more normal for which is more normal for the longer term leases. the longer term leases.

The industry also uses combinations of wet and The industry also uses combinations of wet and dry when for example the aircraft is wet-leased dry when for example the aircraft is wet-leased to establish new services then as the airlines to establish new services then as the airlines flight or cabin crews become trained they can be flight or cabin crews become trained they can be switched to a dry lease.switched to a dry lease.


When purchasing aircraft, it allows an airline to purchase When purchasing aircraft, it allows an airline to purchase additional aircraft in the future at an agreed price and additional aircraft in the future at an agreed price and datedate

When placing orders for new aircraft, airlines commonly When placing orders for new aircraft, airlines commonly obtain obtain optionsoptions from the aircraft manufacturer, for from the aircraft manufacturer, for example Airbus or Boeing. example Airbus or Boeing.

These options allow the airline to delay the purchase of These options allow the airline to delay the purchase of additional aircraft until market conditions become clearer additional aircraft until market conditions become clearer and the purchase can be justified. It also reserves the and the purchase can be justified. It also reserves the airline a place in the manufacturing queue, for a airline a place in the manufacturing queue, for a guaranteed delivery slot. guaranteed delivery slot.

PART 4: Fleet Planning; Aircraft PART 4: Fleet Planning; Aircraft lease and Purchaselease and Purchase

When the airline finally exercises its options, it When the airline finally exercises its options, it can place its order without having to join the can place its order without having to join the beginning of the queue which otherwise may beginning of the queue which otherwise may delay the delivery of the aircraft for years. delay the delivery of the aircraft for years.

If future conditions don't justify expansion of the If future conditions don't justify expansion of the airline's fleet, the airline is not obligated to airline's fleet, the airline is not obligated to purchase the aircraftpurchase the aircraft


Depending on economic conditions, Depending on economic conditions, manufacturers often sell aircraft purchasing manufacturers often sell aircraft purchasing options below the real value of the aircraftoptions below the real value of the aircraft

Therefore, in this case determining of the Therefore, in this case determining of the demand, need and costs is important for an demand, need and costs is important for an airline to decide whether to lease or purchase airline to decide whether to lease or purchase aircraft.aircraft.


PART 5: Maintenance, Repair and PART 5: Maintenance, Repair and Overhaul (MRO) Overhaul (MRO) Aircraft MROAircraft MRO is the overhaul, repair, inspection is the overhaul, repair, inspection

or modification of an aircraft or aircraft or modification of an aircraft or aircraft componentcomponent

Maintenance includes the installation or removal Maintenance includes the installation or removal of a component from an aircraft or aircraft of a component from an aircraft or aircraft subassembly, but does not include:subassembly, but does not include: Elementary work, such as removing and Elementary work, such as removing and

replacing tires, inspection plates, spark plugs, replacing tires, inspection plates, spark plugs, checking cylinder compression, etcchecking cylinder compression, etc

Servicing, such as refueling, washing windowsServicing, such as refueling, washing windows Any work done on an aircraft or aircraft Any work done on an aircraft or aircraft

component as part of the manufacturing process, component as part of the manufacturing process, prior to issue of a certificate of airworthiness or prior to issue of a certificate of airworthiness or other certification documentother certification document

PART 5: Maintenance, Repair and PART 5: Maintenance, Repair and Overhaul (MRO) Overhaul (MRO)

Question 1

The market structure of airline industry has undergone important changes that construct a dynamic economic model structure.

a)Describe what do you understand about the general characteristics of oligopolies and prove that aviation industry is oligopolistic. (9 marks)

b) Name three other possible oligopolistic industries. State your reason. (3 marks)

c) From your opinion why competition in aviation industry has been has been substantially increasing in Malaysian market? (3 marks)

Question 2

The aviation industry faced one of the biggest development in the new era, riding on the wave of the new economy and a greater demand for travel.

a)Explain in your own word the airlines special economic characteristics. (8 marks)

b) Discuss the concept of price rigidity and non-price competition in aviation industry. Provide example to support your answer. (4 marks)

c) From your observation, why food and education industries are not badly impact as aviation industry to economic downturn. (3 marks)

Question 3 Airlines can independently make profits in each areas of aviation economic activities which deals with profitmaking and lowering costs in aviation activities.

a)Explain in your own word the airlines profitable economic activities.(9 marks)

b) What are the two major operating expenses in airline industry and why are they so high? (3 marks)

c) In your own words, which aviation economic activities could obtain the highest gross profit and state your reasons. (3 marks)

Question 4 In the aviation industry various factors such asauthorities, airports, airlines and passengers combine to determine the affect the airline strategy and business organization.

a)Explain in your own word the reason for the small number of certificated airliners.(5 marks)

b) Define economies of scale, and discuss how they relate to the airline industry. (5 marks)

c) In your own words, discuss the types of aircraft leasing. Which types of aircraft leasing would you prefer and state your reason. (5 marks)

Documents

Chapter 1 Introduction to Aviation Economics The economic characteristics of the Airlines Business