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Airline competitive expansion dilemma

http://www.smh.com.au/business/emirates-pact-will-help-stem-qantas-losses-20120907-25iwb.html

Due to high operating costs for maintaining a small fleet of planes, Qantas Airlines is now merging with Emirates Airline to offset it’s losses. Although the merger is seen as profitable for both Qantas and Emirates shareholders, there are wide speculations that such an expansion is harmful for the aviation industry as a whole.

In general, slower expansion of available airline seats is better for the airline industry as a whole, because fewer seats means more profit per amount of fuel spent. As fuel prices are rising,  a steady growth of airline capacity will ensure a much better return of of investment than fast expansion. This forms a Prisoner’s Dilemma situation among the airline companies. On one hand, any company that expands rapidly (5% or more per year) will see a profit boost, but if all the companies started expanding rapidly, the entire industry will suffer as the high supply of airline seats deflate the prices.

– madridista

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