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The Airline Industry is One of The Key Economic Drivers in The UK

  • 10 Pages
  • Published On: 11-12-2023

Introduction

The airline industry is one of the key economic drivers in the UK, with an average annual growth rate of 4.1% in the context of demand for the connectivity of global air. The growth has been recognized to build a US$ 5 trillion market for new aviation services over the next two decades. The UK airline industry is considered the third largest aviation network, and it is also known as the second-largest aerospace manicuring in the world. Moreover, it is also identified that the industry is anticipated to touch an annual turnover of more than £60 billion, which contributes more than £20 billion to the nation’s annual GDP. Also, the aviation sector in the UK is witnessed to offer more than one million employees across different sectors within the industry (Sustainable Aviation, 2016). In this assignment, the primary focus point will be on the Trend in Airline company’s sales and the structure of the Airline industry. There will be a discussion of the significant changes in the rate of sterling change and the impact of the value exchange of sterling in the UK.

The trend in Sales of the Airline Companies in the UK

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The airline industry of the UK refers to the oligopoly types of market structure that is a form of imperfect competition where very few organizations are dominating the entire airline business industry. There is a "strong debate" on the airline business industry by arguing that the UK airline industry is "an oligopolistic market" or not. In the market structure of oligopolies, the decision of the price of "British airways'' is dependent on the findings of the rival companies (Alderighi et al., 2017).

The UK aviation sector is strongly dominated by a large number of local and global aviation service provides. However, the overall market is strongly dominated by the domestic airline service providers, namely EasyJet and British Airways. According to the annual report of 2019, it has been reported that British Airways earned revenue of 13,290 million, which is an increase of 2.5% in comparison to the yearly sales of the airline services provided by the company in 2018. The annual sales in the year 2018 were recorded £12,965 million (British Airways Plc, 2019). However, in the year 2020, the outbreak of COVID-19 has radically outshined its dominating position in the UK aviation industry. The annual revenue of the company in 2020 was reported £3.9 billion.

Simultaneously, the aviation services offered by EasyJet have also been considered significant attention due to its comprehensive and short-haul flight services. Despite the ongoing uncertainty in the European aviation industry following the UK’s exit from the EU, EasyJet managed to increase its annual revenue by 8.3%, i.e., £6,385 million in 2019 in comparison to its annual sales of £578 million in 2018. The organization’s relentless focus on minimizing costs and increasing its operational efficiency in airline services enabled easyJet to avert undesirable earning in the year 2019 (easyJet Plc, 2019).

In an oligopolistic market, such as the UK’s aviation sector, the industry is dominated and controlled by a limited number of firms. The business strategies or actions of these firms are independent. The market structure facilitates the dominant players due to the dynamic oligopolistic pricing system. For instance, in dynamic oligopolistic pricing, the shift of ticket price is often recognized to rise by the approaching departure date of the tickets. This specific type of tendency can be considered as a critical example of intertemporal discrimination of price for any goods/services. In this type of market structure, the aggressive and highly competitive strategic move of the existing key market players often diminish opportunities for new entrants in the specific sector. When talking about the oligopoly market structure in the UK’s airline industry, several entry barriers, such as "economies of scale, control of the physical resources, or the legal restriction for the competition." This also includes promoting innovations and intimidating potential competition (Choo et al., 2018). Just similar characteristics like monopolies, the oligopolies also frequently maintain their dominant positions as it is highly challenging and costly for new firms to enter into the market (Alderighi et al., 2017). Therefore, it can be said that the airline industry in the UK has been strongly driven due to the exploitative performance of the dominant aviation service providers and is currently a difficult market for new entrants.

(a) Explaining Reasons for significant changes in the rate of sterling changes the rat

From a general perspective, the changes in the currency exchange rate for different countries are usually occurred due to few common economic factors. The common factors that tend to impose a significant effect on currency exchange rate include economic or GDP growth rate, inflation of price, monetary policy, confidence and sentiment, and the balance of payments (Lazarev, 2013).

Change in Exchange Rates (UK pound (sterling) against the USA dollar between 1st June 2016 and 1st January 2020)

The neoclassical economic theory refers to the importance of the market state, where the market of The UK airline market is not having a healthy competitive environment as there is an oligopoly market structure that provides significant control of the entire market to a few dominant players. According to this theory, different reasons have contributed to the sterling exchange rate that are interest rate, inflation, public debt, balance, competitive changes, and others. These various reasons for the sterling exchange rate are discussed below.

Uncertainties in interest rates can be considered as one of the primary reasons for the sterling exchange rate, where the sterling exchange rate causes appreciation, and the cutting of the interest rate is the leading cause of the depreciation. If the interpretation of the UK rises, then it will become much more attractive for depositing money in the UK (Nasir and Morgan, 2018). Due to the interest rate, the sterling exchange rate is changed, and it has a significant effect on the airline industry of the UK

Also, competitive change is one of the main reasons for the sterling exchange rate as it has a difference in the market behavior of the UK airline market. The changes in the competitive environment are the leading cause of the sterling exchange rate that has a significant impact on the UK airline industry. If the Goods of the British become more competitive and attractive, then it will cause the value of the exchange rate, and there will be a change in the exchange rate of the UK.

(b) Impact of this Change in the Value of Sterling against US Dollar

The pound sterling or GBP is identified as the most popular currencies considered in trade in the foreign exchange (forex) market. In general, exchange rates have significant impacts on the price of any product/service. The more robust exchange rate of a domestic currency significantly reduces the cost of goods/services imported from other countries. Therefore, the impact of this change in the value of sterling against the dollar on a USA airline firm depends on the rate of changes in the product inflation and interest rates in the UK. Some different effects or impacts are affected due to the sterling exchange rate, such as goods price, inflation, and exchange rate. Inflation and product rate are also significant effects of the sterling exchange rate that refers to the speed of product rate. Due to this sterling exchange rate, the inflation of the product rate has increased, and this impacted the people of the USA as there will be an issue of the price of the ticket (Teuling et al., 2019).

Also, the impact of exchange rates in the US dollar and sterling can significantly impact US firms when selling airline tickets in the UK market due to the inverse relationship between demand and foreign exchange rates. From a theoretical viewpoint, the need for foreign exchange faces a significant drop in case of a substantial rise of exchange rates and when it rises when the foreign exchange rate falls. Therefore, the airline ticket price of the US based firm in the UK will be significantly affected due to the significant difference in exchange rates of currencies among these two nations.

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Conclusion

UK Airline is one of the largest Airline industries in the global and in the UK Airline market; the “Easy Jet” is one of the biggest airline companies that is based in the United Kingdom. The primary focus of this assignment was on the trend in airline company revenues and the structure of the airline industry, as well as a discussion of significant changes in the rate of sterling change and the effects of sterling value exchange in the UK. After discussing the general assignment, it can be concluded by stating that there are different barriers for the new organization while they enter the UK airline business market as some major companies are being an obstacle for them, though these barriers can be resolved through a proper mitigation process that will help to expand the Airline business of the UK.

Reference list

Alderighi, M., Gaggero, A.A. and Piga, C.A., 2017. The hidden side of dynamic pricing: Evidence from the airline market. Available at SSRN

Barnes, J., 2017. Measuring service quality in the low-cost airline industry.

Bilgin, Y., 2018. The effect of social media marketing activities on brand awareness, brand image and brand loyalty. Business & Management Studies: An International Journal, 6(1), pp.128-148.

Choo, Y.Y., Corbo, L. and Wang, K., 2018. Joint impact of airline market structure and airport ownership on airport market power and profit margin. Transport Policy, 72, pp.67-78.

easyJet Plc. (2019). Results for the year ending 30 September 2019. [Online] Available from https://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/results-centre/2019/fy19-release.pdf [Accessed April 05, 2021].

Hammoud, G.A., Tawfik, H.F. and Elseyoufi, T.S., 2017. Challenges Facing Airline’s Social Innovation. Journal of Tourism and Hospitality Management, 5(1), pp.62-72

Lazarev, J. (2013). The Welfare Effects of Intertemporal Price Discrimination: An Empirical Analysis of Airline Pricing in US Monopoly Markets. Mimeo.

Maertens, S., 2018. A metric to assess the competitive position of airlines and airline groups in the intra-European air transport market. Research in Transportation Economics, 72, pp.65-73.

Nasir, M.A. and Morgan, J., 2018. Pre-Brexit: the EU referendum as an illustration of the effects of uncertainty on the Sterling exchange rate. Journal of economic studies, 45(5), pp.910-921.

O’Connell, J.F. and Connolly, D., 2017. The strategic evolution of Aer Lingus from a full-service airline to a low-cost carrier and finally positioning itself into a value hybrid airline. Tourism Economics, 23(6), pp.1296-1320.

Sustainable Aviation. (2016). UK Aviation Industry Socio-Economic Report. [Online] Available from https://airlinesuk.org/wp-content/uploads/2016/02/SA-Socio-Economic-Report-Final.pdf [Accessed April 05, 2021].

Teuling, A.J., De Badts, E.A., Jansen, F.A., Fuchs, R., Buitink, J., Hoek van Dijke, A.J. and Sterling, S.M., 2019. Climate change, reforestation/afforestation, and urbanization impacts on evapotranspiration and streamflow in Europe. Hydrology and Earth System Sciences, 23(9), pp.3631-3652.

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