Question

In this discussion, give an example of a market failure in the aviation industry and where the government either (a) stepped in to correct the action and its effects on the market, or (b) when the government did not step in to take corrective action and address the effects on the market.

Answer 1

Introduction

The aviation industry has been one of the key micro economic industries which has grown up and above most other ones in the recent times. The sector has been facilitated in most countries because with it, comes other means of development which lead to higher availability of jobs in numerous other sectors and helps in promoting tourism as an industry as well.

Most countries previously enabled the industry for government companies only since the capital requirements was relatively extremely high, gradually as the country adopted globalization and saw companies which could afford to enter the industry. This process was known as deregulation in which resulted in private companies taking control of the industry in most countries.

That said, in most countries the government strictly regulates the practices and has correction mechanisms with aviation boards in place that regularly monitor and control these airlines and can take corrective actions against the same. In the United States this board is referred to as the Federal Aviation Administration.

This regulation is necessary to control prices beyond a certain level and formation of cartels if any. It also aims at ensuring that the rights of the customers get protected in the sense that they get the promised services and time lags between actual departure and arrival should be justified and reasons are looked into. Further any issues with the staff is also catered to appropriately.

Case Specifics

In this case, we have used the example of Kingfisher airlines which primarily failed due to market conditions. It was found by the United Brewery Group in India and at one time was said to be the best airline in the industry. Since, most companies require money for working capital requirements the company turned up to Indian Banks which usually tend to have higher interest rates than European counterparts which can go as high as 14% per annum considering the nature of the economy.

This spiked with higher aviation fuel costs in the country because of increasing costs of imports lead to the company unable to meet up to the required standards or pay any taxes for parking its airplanes at airports. Further salaries of staff were not paid for months which resulted in the need for government to come into play.

The government regulated the industry by implementing some changes to the way these companies operated and played in the industry. This meant paying advanced taxes and maintaining a credit rating to be able to operate in the industry. Further, the government stepped and took the company off the aviation radar which has since then never operated. Also, oil pricing in the country for aviation fuel has become a lot more competitive.

Please feel free to ask any doubts in the comments section