Abstract
This paper is divided into three parts in order to explore important business and management issues. The first part of the assignment demonstrates significant details about the performance of Virgin Atlantic Airline (VAA) and its interrelations to numerous external factors such as the UK recession impact, effects of EU regulations and the business environment. Moreover, PEST analysis of VAA is presented in the first part. The issue of supply and demand as well as the way in which VAA tends to determine its pricing decisions is described. The second part of the assignment describes the differences and similarities between three economic systems: free market, command system and mixed system. A major conclusion indicated in the second part is that he mixed economic system is mostly prevailing in current economies and thus appears more effective than the others. The third part of the paper provides details of determining prices and output decisions in different market structures to include a perfect competitive market, monopoly, monopolistic competition and oligopoly.
IntroductionThis paper provides answers to questions presented in three separate tasks. The first task involves numerous aspects related to the performance of Virgin Atlantic Airline (VAA). The purpose and objectives of the airline are properly defined to indicate its strong presence in the industry by providing optimal customer service. Moreover, the first part of this assignment shows the impact of the UK recession on the activities of VAA. External factors of the environment in which the company operates are considered along with the forces of demand and supply that directly affect the pricing decisions and sales of VAA. In addition, the conduct of PEST analysis reveals significant insights into the performance of VAA affected by the business environment. Task Two provides an adequate explanation of three economic systems: free market, command and mixed. Each one has benefits and limitations, but the mixed economic system appears to allocate resources more effectively than the others. Task Three explains how prices and output decisions are determined in different market structures such as a perfect competitive market, monopoly, monopolistic competition and oligopoly.
Task One Objectives of Virgin Atlantic Airline (VAA) and the British Red CrossVirgin Atlantic Airline (VAA) indicates its main purpose to manage a profitable airline focused on people’s preference to fly and work. This shows strong emphasis on keeping both customers and employees satisfied. Therefore, the company has considered the importance of improving its customer services for business and leisure travellers (Macsai 2009). Another significant objective demonstrated by VAA refers to establishing new, solid standards for the airline industry to follow. The strategy adopted by VAA is to guarantee the delivery of an optimal business product in the air as well as run a successful global airline. Similarly, the purpose and objectives of the British Red Cross are to maintain high quality standards in the social field by helping people in crisis, building humane and resilient communities, and recognising the implications of global citizenship (British Red Cross Official Website 2014).
The responsibilities that VAA has towards key stakeholders relate to contractual, legal, ethical and social responsibilities. The company’s General Counsel indicates a substantial responsibility for maintaining compliance and legal affairs by providing detailed reports directly to the CEO of the company (Macsai 2009). Moreover, as part of its ethical and corporate social responsibility agenda, the company has demonstrated its commitment to extensive research on decreasing the use of CO2 emission fuels. In this way, the organisation provides a proper example of what is good for the business and the environment. In addition, VAA tries to achieve the recycle level by almost 50% (Virgin Atlantic Official Website 2014). The airline thus selects reusable items. VAA is also committed to the highest standards of corporate behaviour in the airline industry because it requires from its stakeholders to perform their duties efficiently. The organisation indicates its potential of being a quite reliable airline because it has fulfilled its responsibilities to the stakeholders.
The Impact of Recession on VAA ActivitiesThe recession facing the United Kingdom resulted in a challenging economic environment for VAA. However, despite the influence of negative economic trends, VAA announced substantial revenue growth as well as a considerable increase of passengers using the services of the airline. The mentioned improvement has been attributed to growth in the two sectors of business and leisure customers (Osborne 2010). Although the airline faced challenges in its trading conditions, demand has been on the rise in many of the company’s routes. Despite the negative effect of the ash cloud, the airline affirmed its expectation of increased customer compensation and operational cost. The activities of VAA have indicated a trend of acceleration out of the UK recession with a strong focus on increasing sales, expanding passenger load factor as well as increasing cargo revenue and creating new jobs in the industry (Virgin Atlantic Official Website 2014). In fact, the launch of a global marketing campaign estimated at the cost of ?10 million is indicative of the airline’s recovery from the recession. The main features of this campaign are to expand the company’s brand presence across the world and to encourage extensive demand for travel to domestic and international destinations.
Nonetheless, it should be mentioned that the overall impact of monetary and fiscal policies on the activities of VAA was negative in 2013 considering the annual operating loss of ?124.8 million (Virgin Atlantic Official Website 2014). The performance of the UK economy is a significant cause of the airline’s monetary underperformance given that many of the company’s passengers are UK-based hence directly affected by such economic developments. As a result, VAA demonstrates its plan to increase long-haul revenues by approximately ?50 million. In addition, the company aims at reducing costs in an attempt to improve its struggling financial position (Osborne 2010). Yet fears have been expressed that the airline’s improvement would not soon result in profitability.
Impact of the Enterprise Act 2002 and Article 101 and 102 of the EU Legislation on VAA ActivitiesThe Enterprise Act 2002 outlines specific guidelines on prohibiting organisations from entering into agreements that would possibly damage competition in the United Kingdom. The Act indicates conditions under which individuals suspected of price fixing can be investigated. It is fundamental to comply with the clauses identified in competition law (Office of Fair Trading 2011). This Act along with Article 101 and 102 of the EU legislation have provided a solid legal basis of competition policy in the country. There has been civil law investigation into alleged collusion with regards to pricing of passenger fuel surcharges to passenger flights identified as long-haul to and from the United Kingdom, as such legal investigation included VAA and British Airways (BA). This occurred in the period from 2004 to 2006 (Office of Fair Trading 2011). Under the Enterprise Act 2002, the status of VAA’s immunity has been extensively reviewed. The Office of Fair Trading (OFT) presented the decision that VAA’s conduct did not actually amount to non co-operation.
With regards to Article 101 and 102 of the EU legislation, it can be indicated that the EU has engaged in initiatives of enforcement of effective and reliable standards pertaining to competition rules. Such legal aspects and standards should be in the best interest of both consumers and organisations. Article 101 provides a clear formulation of cartel behaviour and modifies it in accordance with the UK context of doing business (O’Kane and Nakhwal 2013) . The respective institutions are responsible for enforcing strict rules and imposing fines in case of misconduct, such as the alleged price fixing between VAA and BA. Article 2 of the respective EU legislation is associated with the optimisation of consumer welfare in dynamic, competitive settings (Virgin Atlantic Official Website 2014). The focus is on complying with the rule of maintaining a competitive structure of business. In this way, the impact of the Enterprise Act 2002 and Article 101 and 102 of the EU legislation have affected the activities of VAA in a positive manner considering the airline’s focus on ensuring transparency and accountability in terms of prices, additional charges etc.
Impact of Demand and Supply on the Pricing Decisions and Sales of VAADemand and supply affect the pricing decisions and sales of any company. This model of price determination shows the lack of a surplus of goods placed at the equilibrium level. When demand increases/decreases and supply remains unchanged, this usually results in a higher/lower equilibrium price. In case supply increases/decreases and demand is unaltered, this reflects in a higher/lower equilibrium price (Prasch 2008). In order to illustrate examples of the law of demand, it is important to consider a situation in which a new restaurant opens up and receives positive reviews. However, there are an insufficient number of tables available in the restaurant, and the problem is that many people want to make a reservation (Burrows III 2012). This clearly shows increased demand for reservations. Another example of the specificity of demand could refer to a time when a famous artist dies, implying he would not be producing more artworks. This reflects in increased demand for his art.
An example of the law of supply in business relates to a situation in which many immigrant workers arrive to a city and demonstrate extensive willingness to be considered for employment at low wages. Yet the number of such workers is greater than the number of available jobs, resulting in the excess supply of workers and thus driving wages down (Burrows III 2012). Moreover, one may consider that wheat crops are widely available throughout the year, implying there is an excessive quantity of wheat than consumers would usually purchase (Prasch 2008). In an attempt to overcome the challenge associated with the excess supply, farmers would be forced to decrease the price of wheat, indicating that the price is reduced for everyone.
Such examples show that the forces of demand and supply are fundamental in determining the pricing decisions and sales of organisations, including the respective pricing structure of VAA. An increase in air passenger tax apparently results in high prices of air travel set by VAA. Such pricing factor indicates a negative trend in terms of discouraging passengers to use air travel services (Moon 2013). In addition, specific policies affecting fuel supply and price demonstrate a negative impact on the airline’s sustainability. Supply decisions by oil suppliers represent certain patterns that eventually lead to the rise of fuel prices (Burrow III 2012). As a result, the adoption of a relevant risk management strategy is a priority to the airline. It has been demonstrated that the risk is segregated in different sections in order to ensure that the potential occurrence of a failure would not bring the entire group down. This is done with the idea to control the effect of the fuel price risk as well as the company’s pricing decisions and sales.
PEST Analysis and Impact on the Behaviour of VAAVAA is a strong, distinct brand mostly because of corporate image and its reputation for providing adequate corporate service and persistent innovations in the airline industry. Examples of such innovations relate to first entertainment system and first in-flight beauty treatment to its passengers. As part of conducting a PEST analysis of VAA, it is important to consider the role of the environment prior to initiating marketing operations (Salai and Znidersic 2011). The political environmental aspect is associated with governmental intervention, services merit, interest rate and taxation policy. In an attempt to consider the political-legal environment in which VAA operates, individuals may refer to the opening of Heathrow Airport to the company in 1991. The basic idea was to ensure a balanced approach to managing air traffic between Heathrow Airport and Gatwick Airport. Moreover, economic issues are important for the behaviour of the airline. Such issues indicate a relevant concern with deregulation. The constant evolution of the industry has an essential role on determining and maintaining stability of low air prices (Macsai 2009). From an economical perspective, VAA is mainly concerned with increasing fuel cost and environmental restrictions such as insurance cost and higher security. VAA has always considered the trading economy in its short-term and long-term dimensions.
The third aspect of the PEST tool is the socio-cultural dimension. The airline has extensively considered the importance of differing attitudes of customers located in different regions. In this way, VAA is oriented towards ensuring a flexible socio-cultural approach in an attempt to understand the practical implications of such influence (Salai and Znidersic 2011). Therefore, the company always tends to recruit quality staff regardless of low income as a result of the recent UK recession. VAA’s employees are focused on providing passengers an ultimate entertaining experience in the air by complying with their needs and preferences (Soares et al. 2007). Considering cultural diversity in its entirety is a main socio-cultural priority of VAA.
In its behaviour, the airline has asserted its appreciation of technology as it persistently helps the company meets the expectations of its passengers. The implementation of high technologies is among the top priorities of the organisation. Innovations are integral part of the company’s aim to provide a comfortable and relaxing experience to customers (Salai and Znidersic 2011). Innovative practices based on the entertainment aspect show that the airline goes beyond the expectations of passengers. Thus, technology in VAA has a strong impact on the company’s strategic planning activities (Soares et al. 2007). Such extensive focus on technology may further reflect in significant advancements such as distribution and cost synergies facilitated through adequate technology solutions, web-page development, e-marketing and advertising activities.
As mentioned, the airline highly values cultural diversity and tries its best to confront any culturally based inequity or injustice. Therefore, VAA demonstrates open and flexible culture based on high employee morale and relevant job satisfaction (Virgin Atlantic Official Website 2014). VAA indicates the importance of a power culture by focusing on constant innovations and delivering an optimal experience to its customers and employees. This shows that VAA has the potential to move quickly in the right direction and achieve its goals (Gosling 2013). There is little bureaucracy within the organisation, which contributes to the proper assignment of roles and responsibilities among the staff thereby increasing the chance of delivering optimal customer service.
How Will VAA Benefit from International Trade?International trade represents a fundamental element of success for contemporary global organisations. International trade can significantly contribute to increased sales of VAA. The airline will benefit from international trade because of the importance the company places on commercial flights. By targeting international trade, VAA will spread its operations across different global locations (Gosling 2013). In other words, the most substantial benefit of international trade in the context of VAA refers to a significant sales market, implying flexible opportunities for market expansion. This can also help the airline build a positive image in various countries throughout the world (McLaren 2012). Thus, the company is expected to involve in extensive market research in order to explore different opportunities for international trade in specific locations. By entering the field of international trade, VAA can enjoy significant benefits of being a global airline.
Global Factors Impact on the Activities of VAAVAA is a multinational company operating in different parts of the world. This means that global factors can affect the activities of the airline in certain ways. Changes in customer preferences across different world locations are one of those factors (McLaren 2012). Demographic trends also represent an important global factor that can influence the company’s operations. Moreover, it should be indicated that the increasing fuel prices and the global recession show trends that negatively affect the sales of VAA. The airline along with other competitors in the industry faces persistent global challenges from economic, political and social nature (Salai and Znidersic 2011). The dynamic scrutiny placed on security personnel and passengers’ baggage additionally complicates the global activities of VAA. However, it is expected that the constant progression of technology would expand the global presence of the airline.
Impact of European Union Policies on the Activities of VAAOne of the policies of the European Union is based on reductions in the obstacles of cross border trade and agreement. This would reflect in expanding VAA’s capacity to provide services to passengers in different locations with fewer restrictions in place (Harvey 2012). Moreover, such policy can have a positive impact on facilitating the airline’s flexibility in terms of frequency, capacity and price of certain routes determined between two or more countries. Such flexibility would mainly relate to VAA’s freedom to operate a particular route with adequate frequency and aircraft. Another EU policy can have an impact on the activities of VAA, respectively the harmonisation or approximation of technical and safety standards on substantial number of products and services (Harvey 2012). The airline is concerned with ensuring adequate safety by conducting monitoring activities. Other EU policies, such as closer approximation of excise duties and fiscal barriers as well as the removal of legal obstacles to trade have significantly alleviated VAA’s global expansion into different locations.
Task Two Market Economic SystemsA free market economic system does not place any restrictions on setting prices and supplying goods. It indicates the lack of economic intervention and regulation, with the exception to enforce private contracts and arrange specific conditions pertaining to the ownership of property. In such system the government has a neutral influence on the maintenance and legislation of economic activity (Sirico 2012). In fact, the role of the government reflects in either regulating industries or protecting them from various market pressures. In this way, a primary characteristic of a free market system is ownership, implying that almost all of the country’s factors of production emerge as privately owned. The specificity of the legal system allows the government to uphold the property rights of private individuals. In terms of objectives, all stakeholders in a free market economy system turn out determined by pure self-interest. From the perspective of consumers, welfare is maximised; then, companies tend to maximise profits, and private individuals owning the factors of production try their best to maximise rents.
Other important characteristics of a free market economic system include free enterprise, the precise level of competition, and the conditions of the pricing system. In order to clarify the concept of free enterprise, it is essential to note that companies usually try to sell anything they wish. Therefore, they provide effective responses to consumers, who can purchase anything that is sold by producers. The level of completion is quite high within this economic system due to the common assumption that virtually any market is extensively competitive in nature. The lack of barriers to entry or exit additionally intensifies the force of competition (Sirico 2012). The pricing system works on the principle of competition and thus the price mechanism allocates the resources available in the respective economy.
Another major economic system is command, which is completely opposite to the free market economic system. A command economic system emerges with a powerful government sector and places importance on the subordinate position of employees and consumers. The government owns almost all of the country’s factors of production, as labour are the only exclusion (Castells 2011). All stakeholders in a command economic system, including employees, consumers and the government, focus on working for the common good. Unlike the free market economic system, the command economic system has no free enterprise. In addition, the level of competition is low; hence there is no price mechanism available simply because the government is responsible for setting the prices (Sirico 2012). The command economic system indicates the importance of a planning mechanism in the sense of considering the government’s fundamental role in planning the proper use of all available resources.
The third type of economy system is mixed, which includes aspects of both the free market and command economic systems. An essential feature of the mixed economic system is that certain economic decisions are made by individuals in the market (Castells 2011). Nonetheless, the government has a particular impact on the allocation and distribution of resources. The most significant question facing mixed economic systems refers to finding the right mix between the public and private sectors of the economy. In practice, the mixed economic system indicates the presence of both privately-owned and state-owned enterprises (Farrant and McPhail 2009). Therefore, there is a certain degree of private economic freedom within the respective system as well as centralised economic planning.
I believe that the mixed economic system allocates resources more effectively than the other two systems. In a mixed economy both market forces and government decisions are of equal importance, which contributes to the optimal allocation of resources. Yet market forces turn out to prevail in the mixed economic system (Farrant and McPhail 2009). The role of the government in such system is precisely determined to reflect fair and equal distribution of resources. In addition, the government is responsible for providing different forms of welfare which help the development of the economy. The fact that the mixed economic system combines features from the free market and command systems is indicative of its efficacy considering the benefits obtained from two types or approaches of resources allocation and distribution (Castells 2011). Yet it can be concluded that all economies in reality turn out mixed economies despite differences in the precise mix and balance between public and private sectors.
Task Three Market StructuresPrices and output decisions of organisations extensively depend on costs because companies always try to maximise their profits. Profit maximisation occurs at a point where marginal revenue is almost equal to marginal cost (Sutton 2007). If companies consider cost structure, then they usually mean the size and the precise ratio of capital to labour. Although these aspects present certain factors in prices and output decisions, they are identified as long term decisions rather than short-term decisions. Yet it is essential to mention that in the long run all costs emerge as variable. In a perfect competitive market, the presence of many buyers and sellers is evident, implying each one of them is a price taker and all sellers tend to supply the same products to customers (Villas-Boas 2007). However, in the long run companies are required to freely enter or exit the respective market. Furthermore, a perfect competitive market indicates that organisations are unable to control prices due to the fact that goods have perfect substitutes.
This results in a quite substantial number of sellers and buyers, which facilitates companies’ ability to enter and exit the market. Therefore, in a perfect competitive market, prices are determined in accordance with a collective principle by market supply and demand. The demand curve appears perfectly elastic (Villas-Boas 2007). Even though companies in a perfect competitive market are unable to control prices, they at least can exert control upon the level of output which is closely associated with the profit-maximising level. In turn, a perfect competitive market is identified as ensuring pure allocative efficiency (Belleflamme and Peitz 2010). The allocation of resources occurs in such a manner to allow maximum net benefit, and thus consumers would be able to obtain more goods at lower prices than other market structures.
The concept of monopoly suggests a market in which a single producer turns out to control the entire supply of goods which have no any close substitutes. Under the specific conditions of monopoly, the distinction between a single company and industry is invalid because of the sole presence of one producer (Sutton 2007). It has been indicated that the monopolistic market system imposes restrictions on the entry of new companies. As a result of such extensive control over the supply of products in the market, the monopolist tends to generate substantial profit in both the short run and in the long run. In this context, cost curves reflect only one level of output that can be produced at lowest cost. In this way, monopolists are able to determine both price and output (Belleflamme and Peitz 2010). Price is usually higher and output is lower in monopoly unlike the situation in a perfect competitive market.
In monopolistic competition, companies are also oriented in a direction to maximise profits. However, monopolistic competitive mechanisms of determining prices and output decisions indicate adequate control of organisations (Villas-Boas 2007). They are able to control prices due to product differentiation. Yet the precise amount that consumers prefer to pay is closely associated with their preference for various products in the market. In monopolistic competition, the substitution effect and the income effect appear important for determining prices and output decisions. Therefore, the demand curve in monopolistic competition is downward sloping (Belleflamme and Peitz 2010). Yet such preferences may not be that influential predictor of determining consumers’ purchasing decisions. For instance, if the prices of particular products are significantly increased, then consumers may prefer cheaper alternatives because of the influence of the substitution effect and the income effect altogether.
In such system of competition, society needs to pay much more for goods than the cost needed by companies to produce those goods. However, it is improper to claim that an imperfect competitive market lacks efficiency (Sutton 2007). Society apparently values product differentiation because of the consumers’ willingness to pay higher prices for goods identified with cheaper substitutes. In a perfect competitive market, the focus is on attaining product homogenous characteristics in terms of providing goods that are perfect substitutes (Twomey and Neuhoff 2010). This aspect indicates that companies in a perfect competitive market are more likely to earn normal profit unlike monopolists that generate substantial profit.
Moreover, oligopolies represent another type of market structure. Oligopolies usually consist of a few organisations, each with a substantial share of the market. Nevertheless, cost structures are the same as in other market systems because of the necessity for companies to maximise profits in the market (Sutton 2007). Unlike a perfect competitive market and monopolistic competition, oligopolies indicate higher market prices and lower output. Yet organisations in oligopolies present a unique feature in the sense of demonstrating the trend of not increasing or lowering prices. This is simply done because of the elasticity of demand at higher prices and inelasticity of demand at lower prices (Twomey and Neuhoff 2010). In other words, the process of increasing and lowering prices would most probably result in substantial revenue losses. Even though there are costs to society in oligopoly, the market price does not indicate the scarcity or extensive availability of input resources.
ConclusionThe paper indicated a relevant structure of three parts in order to provide sufficient details about the discussed problems. The first part of the assignment considered the performance of VAA and how different external factors affect its presence in the airline industry. The second part was associated with providing evidence on allocating and distributing resources in free market, command economic system and mixed economic system. This part not only listed the specific characteristics of the mentioned systems but also ensured insights into the greater effectiveness of the mixed economic system that the free market and command economic systems. The third task explored the way in which prices and output decisions are determined in four distinct market systems such as a perfect competitive market, monopoly, monopolistic competition and oligopoly.
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