Question

1. A. J. Munopilee is the owner of Munopilee Air, the only airline currently flying between Erewhon and El Dorado. It flies two roundtrip flights per day, with the average flight being about 85 percent full. A new entrant, UpStart Airways, has announced plans to offer an additional two flights per day in the Erewhon-El Dorado market. However, its entrance must be approved by the PAB (Polite Aeronautics Board). A. J. and his co-directors argue before the PAB that UpStart should not be allowed such entry because Munopilee asserts that UpStart’s entry will only cause both Munopilee and UpStart to fly inefficiently small numbers of passengers— each operating planes that are less than half full. Munopilee points to its current load factor or occupation rate of 85 percent as evidence that the market is not big enough for both carriers to operate efficiently. Evaluate the argument put forward by Munopilee Air. Do you think it is valid or not?

Answer 1

Currently Munopilee Air has got monopoly in the market and is operating with 85% occupancy rate. The market has been studied that at the current price, the demand would be the same. So if UpStart Airways comes at the same fare, both Munopilee and UpStart would fly inefficiently with small number of passengers.

However, if UpStart Airways come with price differentiation and charges low fare, it would attain a status of low cost airlines and can attract more number of price sensitive customers. Thus UpStart Airways would definitely be able to attract more number of passengers.