Airline Industry In Hong Kong

I. EXECUTIVE SUMMARY

The Airlines Industry was originally initiated in USA as a fastest and luxury mean of travel in the 30sЎЇ. With the tremendous development on technological, we have numerous airlines in the world. Yet, just like any industry, there are always winners and losers in the long run. This paper is use to analyze the factors from an economics perspective that drive the industry prospect and their threats in the recent years.

In the report, we have analyze, based on the data from industries and also their associates, the impact on the followings,

Ѓ6¦1 Supply and demand ЁC regional and global

Ѓ6¦1 Technological advancement leading to economies of supply ЁC reduction in production cost

Ѓ6¦1 Profit maximization ЁC price discrimination vital for the Airlines Industry

Ѓ6¦1 Government intervention ЁC deregulation and liberalization.

Ѓ6¦1 Trends ЁC formation of alliances

Along the process, we have adopted the principles from both microeconomics and macroeconomics in evaluating the influence to the internal (the firms) and the external (whole economy). Based on the analysis, we have observed that the industry environment is changing, from Oligopoly to a more competitive environment (oligopoly still exists but at a lesser effect), gradually even after the evolution of ÐŽohub and spokeÐŽ± because of deregulation. In the end, local airlines need the support from the government in dealing with agreement.

II. Introduction

The Airlines Industry has evolved in the past decades. To travel in an airplane from one place to another used to be a big event involving a high sum of money which was only attainable by the privileged few. In contrast, Airlines now are accessible to most levels of society with reasonably affordable fares. Hence the number of air travellers has grown and naturally the number of Airlines has grown too. But some Airlines have survived longer than others. From the surprise collapse of Pan Am in 1970 to the emergence of alliances recently, we continued to be intrigued by this high profile industry that used to be looked upon as a symbol of a nationЎЇs pride.

This paper will analyze and evaluate the recent and future market trends of the Airline Industry in Hong Kong. With the opening of China market and the intense competition between Airlines in the region, what is the trend of the industryЎЇs behaviour in Hong Kong? And what will be the future market trends?

Background

Hong Kong has one of the world's leading international airports, handling 3.09 million tonnes of cargo and 36.3 million passengers in 2004. According to a report commissioned by the Hong Kong Airport Authority, cargo volumes handled at Hong Kong International Airport will grow by an average of 5.6% a year up until 2005, surging by 6% a year between 2006 and 2010. Further development of the Airport is on-going and will target an increase of capacity of 9 million tonnes of cargo and 87 million passengers a year in the long run.

Hong Kong Airport is served by more than 70 scheduled airlines with over 4,500 flights providing services to and from almost 140 destinations worldwide each week.

As a Special Administrative Region, there is no National Airline that belongs to Hong Kong. Instead, there are 7 Airlines using Hong Kong as their base, with Cathay Pacific being most dominant serving both China and a global network, and Dragonair second mainly serving the China market and some regional cities in Thailand and Japan.

Hong Kong has the shortest total distance to all other urban centres in East Asia, making it an ideal location as a regional hub. Most parts of East Asia, covering a population of 2 billion, can be reached within 5 hours of flight time from Hong Kong. In particular, Hong Kong serves as the gateway to the Chinese mainland, with over 40 cities being linked to Hong Kong by scheduled and non-scheduled services.

With the opening of China market, and the robust commitment of the Chinese Government to its local Aviation Industry, Hong Kong Airlines Industry is faced with opportunity and threat at the same time. Moreover, the pressure from the US Government for liberalization such as ÐŽ®open skiesЎЇ, will leave the Hong Kong Airline Industry with potential growth and higher competition at the same time. It is critical that under such conflicting circumstances local airlines manage with a view to the future.

This paper will look into the determinant of changes in Demand and Supply, the impact of Technological change and Economies of scale, the evolution of Pricing Strategies of the Airline Industry, the interaction between firms and the nature, extent and impact of the Government Policies on the Industry.

Our objective is to understand the challenges and opportunity of Airline Industry in Hong Kong, the trend in which firms behave and the future implications as a result of it. We will give our recommendations as to how Airlines in Hong Kong will remain competitive in the circumstances.

III. The determinant of changes in Demand

Market Price:

We are going to elaborate more about market price, in particular passengersЎЇ ticket price, in Section VI and to a small extent in Section IV. In general, prices, both in terms of passenger tickets and cargo rates are trending down. This is largely due to a combination of the legislation trend whereby liberalization and competitiveness amongst firms are encouraged, the increase of capacity in the industry resulting in economies of scale, price war amongst firms and price differentiation strategies adopted by firms.

With the price trend going down, we can anticipate that quantity demanded will increase (a movement along the demand curve). For example, the cheapest travel agentЎЇs price from Hong Kong to Jakarta v.v. used to be HKD3,000 six years ago, and we can get the same ticket for HKD1,800 now. This is part of the reason, amongst other reasons, in which air travel is no longer a travel means for the privileged few and Airlines are focusing on volume of revenue generation now.

Consumers income and employment rate:

The composite household expenditure component of the Hong Kong Consumer Price Index declined from ($4,500-$65,999)