This case study introduces two types of vulnerability of firms. Consider a firm or industry of the airline industry, and analyse if you expect would have a high type 1 vulnerability.
(i)What does type 1 cost vulnerability indicate about the relationship between production and average cost in the industry?
(ii)What would the typical firm’s average cost (AC) curve look like, if it has type 1 vulnerability? Show through a graph. What would be a major cause of this cost structure? Do you think that the airline industry provides a suitable example of type 1 cost vulnerability? Justify your reason.
(iii)How did the airline industry (or an airline firm you have selected) perform during the global pandemic of year 2020? Did this match your expectations? Support your answer with evidence.
COVID-19 and the aviation industry impact
This is an abbreviated part and summarized version based on the original article.
15 October 2020
- Air transport represents a small share of GDP but is closely linked to the activities of other sectors, especially airports and aircraft manufacturing – collectively considered here as the “aviation industry”. The aviation industry is a key enabler of many other economic activities.
- The dramatic drop in demand for passenger air transport due to the COVID-19 pandemic and transmission containment measures is threatening the viability of many firms in both the air transport sector and the rest of the aviation industry, with many jobs at stake.
1 Air transport is a small but important part of the economy
The air transport sector (passenger and freight) represents only a small share of OECD countries ‘ value- added (around 0.3 % on average, see Figure 1). Yet, strong inter-industry linkages with both upstream and downstream sectors make it an important part of the economy.
First, air transport relies on several upstream sectors: support activities to air transportation (including the operation of airports); aircraft manufacturing; rental and leasing services; and refined petroleum manufacturing (including the blending of biofuels). In particular, the air transport sector and airports are inherently intertwined. Some airports depend heavily on one or a few companies that use it as a hub.
Shared ownership is common, either by private actors (e.g. Lufthansa owning a minority share in Frankfurt’s airport) or by the public sector. The OECD Indicators on Product Market Regulation show that in 2018, the public sector was a shareholder of the largest domestic airport in three out of every four OECD countries and of the largest air carrier in one out of three countries.
Moreover, aircraft manufacturers are highly dependent on demand from the air transport sector, directly or through leasing companies. Because both the activity level and the strategic decisions concerning air transport, airports and aircraft manufacturing are linked, this brief considers them jointly as the “aviation industry”.