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Week 4 Individual Assignment – Business ProposalECO/561April 14, 2014Week 4 Individual Assignment – Business ProposalThis essay details the economic analysis of the commercial airline industry. In this essay, the market structure and the elasticity of demand for the services provided by the commercial airline JENCO is detailed based on text book principles. The cause and effect of pricing and nonpricing strategies, as well as fixed and variable costs will be discussed. McConnell, Brue, & Flynn (2009) stated “In terms of volume, the most significant U.S. export of services is airline transportation provided by U.S. carriers for foreign passengers (p. 95).Market StructureJENCO commercial airlines currently has fixed costs for taxes, FAA registration, aircraft loan payments, hangar rental, utilities, insurance, and property maintenance. JENCO’s variable costs include fuel, crew salaries, crew expenses, passenger expenses, and ground handling. JENCO commercial airlines is an ogligopoly that engages in price wars with the competition. If a competitor cuts the prices of ticket fares, most of the entire commercial airline industry will follow suit. JENCO, as with most commercial airlines, has large capital expenditures and fixed costs, and high capital requirements. Once an established commercial airline, JENCO can exit or enter the market with relatively low sunk costs (Liang, 2013). Price Elasticity The airline recognizes that there is an inelastic demand for business travelers so they charge business class passengers more than leisure passengers. This is accomplished by placing restrictions on lower priced tickets such as a non-refundable policy. Business travelers are vital to JENCO airlines because these travelers will be more likely to travel many times a year and purchase upgraded services resulting in higher revenue input. Leisure or the average traveler is less likely to buy additional premium services and often price conscious. The price elasticity of supply is elastic for JENCO as the supply of ticket fares relates directly to ticket price. This elastic supply is often caused by price wars by competitors in the commercial airline industry.Pricing in Relation to Costs and RevenueRevenue can be maximized with each commercial flight by;“Using competitive price evaluation techniques to ensure JENCO is not missing pricing opportunities or giving away market share to competitors.Using more advanced forecasting techniques to better manage availability and pricing.Maintain cleaner inventory to maximize the possible revenue per flight” (Maximize Your Revenue, 2014).Meeting fixed and variable costs with the rise of the cost of jet fuel means that JENCO will have to pass the cost onto consumers. This will be done by increasing ticket fares, raising the checked bag costs, and consolidating flights. Strategically working to increase revenue and lower variable costs, JENCO can realize a profit. Nonpricing The nonpricing strategies for JENCO will be convenient of flight schedules, implementation of a frequent flyer program, superior in-flight service, and peak load pricing. Peak load pricing will give the consumer flexibility to fly during off peak hours when the airport is not as congested at a lower fare rate. It is the aim of JENCO that the successful installation of these programs will lead to a larger loyal repeat customer base. By negotiating better-than-market cost structures with the airport, crew, and frequent fly vendor JENCO will have an edge to increase the barriers to entry for the competition (Dolan, 2009). ReferencesDolan, D. 2009. Barriers to Entry. Retrieved from http://thesologuide.com/819/barriers-to-entry/Liang, J. 2013. An Econometric Analysis on Pricing and Market Structure in the U.S. Airline Industry, The Macalester Review: 3(2), Article 2. Retrieved from http://digitalcommons.macalester.edu/cgi/viewcontent.cgi?article=1047&context=macreviewMaximize Your Revenue On Each And Every Flight. 2014. Retrieved from http://www.sabreairlinesolutions.com/home/industry_challenges/revenue_growth/McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). ECO/561 course materials
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