Large commercial aircraft production is one of the areas in which the United Sta
ID: 1113525 • Letter: L
Question
Large commercial aircraft production is one of the areas in which the United States accuses European governments of unfair trade practices. Airbus Industry is undoubtedly heavily supported by subsidies from all participating countries. From 1970 up to today, at least $11-$12 billion (U.S.) has been paid by European governments-some American estimates of that support come to as much as $20 billion (U.S.)-and the development of the A330/340 will require several billion dollars more in the next few years. The cause for these payments was the decision of European governments in the late 1960s to support the entry of a European competitor in the market for large transport aircraft.
Despite the subsidies, the industry is very much dependent on the fuel price. Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times. The International Air Travel Association (IATA) reports that, “every $1 rise in the price of oil increases the fuel costs for the global airline industry by $1.6 billion”. More than $100 billion of aircraft orders could be cancelled or delayed. The impact of any fall-off in new orders could cause impacts on aviation-construction supply chain. There will be multiplier effects on employments.
The market is small in terms of number of aircraft sold, but each aircraft is an expensive product. Every year, 400 to 500 large transport aircraft are expected to be sold, allowing for some yearly fluctuation. Aircraft prices range from $25 to $30 million for a Boeing 737, to $30 to $32 million for an A320, to around $120 million for a Boeing 747. The relatively small number of aircraft sold goes hand in hand with a long product cycle: it takes five to six years from launch to first delivery. Then an aircraft has a product cycle of at least 20-25 years, during which it may be upgraded to new technological standards. On the other perspective, there is worldwide consensus that aircraft production exhibits a learning elasticity of 0.2.
a. Describe the characteristics of aircraft industry.
b. Using the knowledge of elasticity- explain the impacts of fuel price on the aircraft industry. What is your estimation(no exact figure needed) of elasticity- elastic or inelastic?
c. Which economics concept is more useful in producing aircraft- economies of scale or economies of scope? Give your reasons.
d. Explain the idea of learning elasticity in the aircraft industry.
Explanation / Answer
a) aircraft industry xhibits characteristics of monopoly market . In these market there are two producer . Entry to this type of market is restricted as it requires heavy initial cost . Also firms uses predatory pricing and hold excess capacity .
b) Increase in fuel prices will lead to fall in quantity demanded of airplane. Thus the demand for airplane is elastic .
c) Airlines industry has economies of scale since as production size or scale of operations increases cost will be reduced.
d) Learning elasticity in aircraft means that the incumbent will observe the learning effect and will have lower marginal cost curve .
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