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Transcription of this question: 4.World airlines are on alertOver the last two decades two business models have emerged in the airline industry:• budget airlines (also called “no frills” and “low cost”) that target price-conscious travellers whohave a high price elasticity of demand• full service airlines that target travellers with lower price elasticity Of demand who are willing topay a higher price for more comfort and on-board services.With the global economic downturn the airline industry is suffering. Some airlines serving onlybusiness class passengers have gone into insolvencyThe chief executive officer (CEO) Of Ryanair, a budget airline, argues that costs will increase forall airlines and that the lowest price operators are more likely to survive. Customers will try to savemoney wherever possible. Moreover, 25% Of Ryanair passengers are business people who haveadapted to the economic downturn by economizing. The period Of expensive flights is over.However, the CEO Of British Airways, a full service airline, disagrees. He said that budgetairlines can no longer Offer cheap tickets due to increasing fuel costs. The unique sellingproposition (USP) Of budget airlines will disappear. In contrast, he said, 40% Of British Åinvayscustomers are business passengers who have to keep flying. These passengers want high quality,highly differentiated and more expensive services. He believes that full service airlines are morelikely to sustain their competitive advantage.Some market analysts argue that if fuel costs cause ticket prices to go up, budget airlines will havethe advantage over full service airlines because Of their smaller size and operational flexibility.Information on elasticity:cross price elasticity of demand between airlines and Other modes Of transport (for example, car,train etc.): 0.5• income elasticity Of demand for air travel: 3price elasticity Of demand for budget airlines: 1.9• average price elasticity Of demand for first, business and economy class tickets for full serviceairlines: 0.95.(Question 4 continued)Passenger growthPassenger tramc growth by ticket type10200620072008First”business classEconomy class[Source: adapted from Suzy Jagger, World airlines on alert as soaring oil prices set a coursefor recession,The limes, 31 May 2008](a)(b)(c)(d)Define the following terms:(i) unique selling pmpos ition (USP)(ii) income ticity of demand.With reference to Porter’s generic strategies model, distinguish between thecompetitive advantages Of the two business models in the airline industry.Examine the likely effects on the airline industry Of cross price elasticity Ofdemand and income elasticity Of demand.Discuss the claim made by the British Airways CEO “that full service airlinesare more likely to sustain their competitive advantage”[2 marks][2 marks][6 marks][6 marks][9 marks]

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