TPJC H2 Economics case study

TPJC / Economics / 2008 Preliminary Examination / H2 / Paper 1 1 TAMPINES JUNIOR COLLEGE Preliminary Examination 2008 ECONOMICS 9732/01 Higher 2 Paper 1 (Case Study) Monday 18 August 2008 13 30 – 15 45 (2 hours 15 min s) INSTRUCTIONS TO CANDIDATES Write your name and civics class in the spaces provided on the answer paper. Answer all questions. Write your answers on the separate answer paper provided. If you use more than one sheet of paper, fasten the sheets together. The number of marks is given in brackets [ ] at the end of each question or part question. You are reminded of the need for good English and clear presentation in your answers. This question paper consists of 11 printed pages.

TPJC / Economics / 2008 Preliminary Examination / H2 / Paper 1 2 Answer all questions. Question 1 Rising oil prices putting pressure on the airline industry Extract 1: Trouble ahead for the world's airlines High oil prices and widespread economic gloom are putting the squeeze on the airlines. Delta and Northwest have plans to merge despite objections from powerful unionised pilots. Costs are not the only problem. Just as worrying is that passenger numbers look vulnerable to a slowdown in the world’s big economies. Merging is one way that the industry will cope. Airlines are also being forced to cut costs and capacity. American Airlines said that it would slash domestic capacity by as much as 12% by the end of the year, with others promising steep cuts too. Many are introducing fuel surcharges and other costs for travellers, for example for carrying baggage in the hold or for in-flight meals and drinks. Such measures, however, will only go so far to mitigate the high costs. Worse, the more ruthless the airlines become in cutting costs, the more the impact on travellers. Weaker airlines will be knocked out of the sky and fares will rise. Some airlines may not have the financial means to replace older gas-guzzling aircraft with newer more frugal models. That sounds unpleasant for airlines and their passengers. Consolidation and lowering capacity may mean that profitability eventually improves again, but a period of widespread, dirt-cheap, air fares seems to be coming to an end. Some industry critics are sceptical of the airlines' claims about the efficiency gains that mergers of airlines will make possible. They counter that the airlines are already big enough to enjoy economies of scale and that the difficulties of knitting together complex organisations with different cultures will distract managers and divert scarce cash. Low-cost carriers, they say, will quickly move to occupy abandoned hubs and routes, replenishing capacity almost as soon as it is reduced. The success of big airline mergers is certainly not guaranteed. More than two years after their merger, US Airways and America West are still struggling with integration. That said, Air France's experience after taking over KLM, and Lufthansa's after buying Swiss, have been largely positive. Even without trying to integrate their businesses fully, the airlines have cut costs and benefited from economies of scale more quickly than investors expected, so they are now confident of being able to pull off more ambitious deals. And there are good reasons to think that the Delta-Northwest and United- Continental deals would make sense. For one thing, airline managers have become more professional during the past few years, focusing on cutting costs. One measure of their success is that the market share of low-cost carriers appears to have stabilised at around 30%, at least for the moment. Furthermore, the big network carriers know that their future depends on developing their long- haul business, where there is greater scope for savings. With Northwest's strength on the Pacific, a merged airline would be able to offer a more comprehensive set of destinations. Success of the big airline mergers would

TPJC / Economics / 2008 Preliminary Examination / H2 / Paper 1 3 mean a much bigger pay-off. The prize for passengers, investors and regulators would be a globally competitive American airline industry that no longer needed to shelter behind bankruptcy laws and outdated bilateral agreements that keep foreign investment and ownership at bay. Source: Adapted from The Economist, 14 Feb and 3 June 2008 Extract 2: British Airways traffic down 3.7% as fuel surcharge hits business flyers British Airways added to the turmoil in the airline industry by confirming that a deterioration in traffic had accelerated in June. It said a 0.7% dip in traffic in May had become a fall of 3.7% in June, with the highly profitable business-class segment falling by 3.1% which contributed significantly to the falling sales. The worsening sales outlook indicated that a significant increase in fuel surcharges in late May has turned away passengers, including the premium customers who are deemed less sensitive to prices than economy-class travelers. According to BA's own forecasts, the airline will not make a profit this year if the oil price stays at the current level of more than $140 a barrel. Even at $125 per barrel, BA's profits are wiped out. The UK flag carrier has a profit margin of 10% and is one of the world's most profitable airlines, but the relatively smaller airlines are not expected to survive if customers are put off by higher fares and a weakening global economy. "Oil is a huge cost and it's clearly having an impact," said Gert Zonnefeld, an analyst at Panmure Gordon. British Airways has plans to buy French business class airline L'Avion in a £54m deal. The takeover represents a statement of confidence by BA in the airline market and in business class sales - the customer segment that generates most of BA's profits. Willie Walsh, BA chief executive, said: "L'Avion is a successful airline that has built up a premium business in a relatively short period of time. It has a larger schedule and an established customer base in the Paris-New York market." It is also reported that the BA is close to applying for anti-cartel laws to be waived so it can form a joint venture with American Airlines and Spain's Iberia, which would allow the carriers to share profits and revenues on certain routes and collaborate on setting ticket prices. Source: Adapted from The Guardian, July 3 & 4, 2008

TPJC / Economics / 2008 Preliminary Examination / H2 / Paper 1 4 Extract 3: British Airways ups fuel fees in premium seats British Airways has increased the fuel surcharge for passengers travelling in its premium classes to compensate for rising fuel costs. Flyers in first class, Club World and World Traveller Plus will pay up to £24 more per flight than those in economy. A BA spokesperson said the move was "appropriate" as premium passengers enjoyed more space in the cabin and a higher baggage allowance. This is the first time British Airways has introduced different levels of surcharges depending on which class passengers travel in. Economy-class passengers pay a £109 fuel surcharge on one-way flights of more than nine hours. The changes mean that World Traveller Plus customers will pay £121 and travellers in Club World and First Class will pay a fuel surcharge of £133. On a typical long-haul flight in a 747 plane, there would be 14 first-class passengers, 38 in Club World, 36 World Traveller Plus passengers and 263 economy customers, BA said. Source: BBC News, 23 June 2008

TPJC / Economics / 2008 Preliminary Examination / H2 / Paper 1 5 Figure 1 Table 2 SIA Airfare from Singapore to London, 2008 Month Airfare July S$1,768 August S$2,247 September S$2,247 October S$1,899 November S$2,057 December S$1,977 Source: AsiaTravel.com Table 1 United States Airline Domes