Question

At an international conference, at which 95 % of the world’s airlines were represented, it was said that the global airline industry would have a $6 billion loss for the year 2005. Only parts of the industry were said to be profitable. Although there had been a growth in travel and revenue in Asia and Europe, increased costs in North America and high fuel prices were estimated to outweigh that. It was stated that losses from 2001 to 2004 had already exceeded $36 billion. Globally, non-fuel costs were forecast to fall by 4.5 % in 2005. This was particularly the case in Asia where labour costs were low. European airlines were recording profits due to increased traffic and some industry mergers. However, the biggest obstacle to growth in the industry was North America, where airlines recorded large losses. In North America labour costs and airport taxes were high. In addition, competition from the smaller low-cost airlines charging cheap fares was causing a fall in the profits of the larger companies. The airline industry also criticised the high taxes, averaging 26%, which are imposed on ticket sales in North America. To try to improve profits the industry launched some major projects to cut costs, which included the complete replacement of paper tickets with electronic tickets by 2007.

(a) Calculate the estimated average yearly loss between 2001 and 2005. Show your working (2)

(b) Identify four causes of the airline industry’s losses in North America. [2] (c) Discuss whether (i) fuel and (ii) labour would be classified as a fixed or a variable cost for the airline industry. [4] (d) How might the replacement of paper tickets affect the demand for each of the factors of production by the airlines? [4] (e) A company is making losses. Discuss what policies it might adopt. [8)