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The Collapse of Monarch Airlines: The Outlook for the Airline Industry

 4 min read / 

On Monday 2nd October 2017, Monarch airlines filed for administration.

On the surface, this incident seems to be devastating, as Monarch was the UK’s fifth largest airline – approaching 50 years of trading, covering 40+ destinations, having a fleet of 30+ aircrafts and transporting millions of passengers annually. Furthermore, the UK government has been left with the task of repatriating over 100,000 passengers stranded overseas, whilst Monarch’s employees face redundancy. However, this development may not necessarily be as devastating as anticipated, depending on stakeholders’ actions and the corresponding perspective adopted.

Passengers

From the passengers’ perspective, they can look forward to dynamic efficiency. The incumbent airlines should see an increase in profits as they take over Monarch’s market share. In theory, these airlines could invest in research & development (R&D). Over time, when the innovation comes to fruition, the passengers would then experience an increase in utility.

However, there is room for exploitation as the concentration increases; the market could take the form of an oligopoly. If there is some form of implicit coordination, this will allow for the exploitation of passengers through pricing. Furthermore, given the capital-intensive nature and high fixed costs of operating airlines, there are significant barriers to entry in the market, which means exploitation could be a long-term problem unless there is government intervention.

Case Study: The U.S. Airline Industry

Over the past decade, there have been several mega-mergers which have transformed the competitive landscape of the U.S. airline industry. There has been a reduction from nine major airlines to four: American, United, Delta and Southwest. According to the data published by Diio (an airline schedule tracking service):

  • 40 of the 100 largest U.S. airports (an increase from 34 previously), is now dominated by a single airline, as measured by the number of seats for sale
  • 90+ of the 100 largest U.S. airports (an increase from 78 previously), is now dominated by two airlines, as measured by the number of seats for sale

Over this period, the increase in domestic airfares has exceeded inflation, and U.S. airlines have seen their profits rise.

Competitor Airlines

From the competitors’ perspective, they would be pleased as stakeholders – and in particular, investors – will have improved confidence. When Monarch’s closure was announced, competitors such as easyJet and Ryanair saw their share prices rally. As KPMG begins to carve up Monarch’s assets, it will provide incumbent airlines with the opportunity to acquire Monarch’s lucrative take-off and landing slots, and their fleet of aircraft and buildings.

On the other hand, this highlights the ruthlessness of capitalism. Monarch is the latest victim reflecting the fierce competition in the European short-haul market. Earlier during the year, Air Berlin (Germany’s second largest airline) and Alitalia (the flag carrier for Italy) had both filed for bankruptcy. However, given the nature of Chapter 11 Bankruptcy in Italy, Alitalia that has been described as ‘too Italian to fail’ has been able to continue their operations.

On the other hand, Monarch had not been offered any form of special treatment, which will be a reminder to rivals that they are operating in an environment where it is the ‘survival of the fittest’. Consequently, how incumbent airlines adapt their strategies to improve financial performance will be interesting and remains an open-ended question.

Furthermore, competitor airlines will be forced to look for a new benchmark for prices.  Over the last few years, Monarch faced a combination of falling revenues and increasing costs, making it difficult for them to keep up competitive pricing. Rivals could, if they wanted to, use Monarch’s pricing as a benchmark, then slightly undercut Monarch and maintain their edge. This is a scenario that can be modelled under the framework of game theory, and further tools and techniques can be applied to gain an insight into the pricing strategies adopted by firms.

Many projections can be made regarding the direction the U.K. airline industry will take over the coming years, and ultimately only time will tell.

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Companies

Amex: Troubled Credit Card Company Reports $1.2bn Net Loss

 2 min read / 

Amex annual report

On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.

Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.

For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.

In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90.  JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.

“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.

American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.

Keep reading |  2 min read

Companies

Tencent Extends Facebook Lead

Tencent Facebook

Tencent has shot past Facebook to become the world’s most valuable social network.

Editor’s Remarks: Although Tencent briefly overtook Facebook in terms of market cap in November, the recent selloff of Facebook shares prompted the Chinese tech titan to regain the lead. Facebook investors responded negatively to news that Mark Zuckerberg’s plans to highlight family and friend-based content on the newsfeed would reduce the amount of time people spent on the site. Shares in Facebook have fallen 5% since that announcement, enabling Tencent to gain a $19bn lead over the US company. Tencent’s growth has been spurred on by its diversification away from its flagship messaging app, WeChat, and into video games.

Read more on Technology:

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Companies

Apple Returns Overseas Cash

Apple overseas cash

Apple has agreed to invest $30bn in the US and pay $38bn in tax to the government. 

Editor’s Remarks: The tech giant announced that it will repatriate hundreds of billions of dollars that it currently holds in various offshore accounts. A total of $38bn in tax will be paid by the company on the sum, with a further $30bn pledged towards domestic jobs, manufacturing and data centres. The capital expenditures will be rolled out over the next five years and are estimated to create around 20,000 jobs. On the news, Apple’s share price rose 1.7% as it was widely perceived that the move would reduce the flak the company has recently been receiving for its tax avoidance schemes.

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