Monopolies or Competition – The Airlines Industry Essay

Monopolies or Competition

The recent merger between American Airlines and US Airways elicited varied reactions from practitioners and mainstream commentators, with several players in the airline industry registering doubts that such a merger could be perceived as enhancing a monopolistic orientation.

However, as explained by the President of American Airlines, the merger was intended to strengthen the business case for the two airlines, particularly in terms of ensuring superior scheduling options, access to more destinations around the world, and a contemporary, fuel-efficient fleet (US Airways, 2014).

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The monopolistic orientation may pay dividends for the airlines in terms of facilitating an efficient and dynamic environment, increasing the economies of scale (e.g., increased output will lead to a decrease in average operational costs, which will be passed down to customers in the form of low airfares), and reinforcing international competitiveness through the consolidation of the American market (Szczutkowski, 2010).

Additionally, unlike in a perfectly competitive orientation where individual demand curves are perfectly elastic, the monopolistically competitive orientation underscored by the merger implies that demand curves will not be perfectly elastic, hence giving the airlines the market power necessary to raise ticket prices without necessarily losing all of their customers.

Lastly, unlike in a perfectly competitive market which assumes that products are perfect substitutes for each other, the monopolistically competitive orientation underscored by the merger will facilitate the airlines to develop highly differentiated products that will enable them to win more customers and grow their revenue base (Szczutkowski, 2010). Consequently, in the airline industry, it is argued here that a monopolistic orientation is better than a purely competitive market orientation.

International Financing and Foreign Exchange Markets

As the CFO of the parent company, I would take concerted efforts to manage the foreign exchange risk associated with the depreciating Mexican peso on the foreign exchange markets.

In international money markets, the depreciation of the Mexican peso can be explained in terms of increased demand for the American dollar against a backdrop of an oversupply of the local Mexican currency (Hallgren, Ljung, & Temler, 2006). To deal with the situation, therefore, I would ensure that future loan repayments are made using American dollars due to the stability of the currency in foreign exchange markets.

It is also possible that the Mexican peso is projected to depreciate by over 30 percent over the next year due to a higher inflation rate in Mexico (Hallgren et al., 2006). In such a situation, I would initiate a suspension of repayment until the inflation rate in Mexico stabilizes or until such a time when the Mexican peso ceases to depreciate.

Hallgren et al. (2006) argue that companies are exposed to foreign exchange risk when changes in exchange rates, short-term and long-term, affect the company’s profitability, cash flow, and market value” (p. 30). Consequently, it would be important to insert foreign exchange clauses in the repayment agreement to ensure that deficits are catered for by the subsidiary and hence avoid a situation where the profitability, cash flow, and market value of the parent company may be affected.

Lastly, since the company in Mexico is a subsidiary of the American company, I would consider entering into a shared rate risk agreement to ensure potential losses arising from the depreciation of the Mexican peso are shared between the two companies.

Available literature demonstrates that “this contractual agreement means that the parties (buyer and seller) agree to share the potential profit/loss if the foreign exchange rate ends up outside an agreed interval” (p. 37). It is my considered opinion that such a move will not only provide the needed impetus for the Mexican subsidiary to survive the short-term foreign exchange depreciation effects while meeting its loan obligations but also substantially shield the parent company from potential shocks associated with foreign exchange risk.

References

Hallgren, A., Ljung, N.P., & Temler, L. (2006). – A case study of two Swedish mid-corps. Web.

Szczutkowski, A. (2010). The social value of cost information in a monopolistically competitive economy. Journal of Public Economic Theory, 12(2), 345-362.

US Airways. (2014). Building the new American. Together. Web.

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