This document provides an overview of the aviation industry market structure and factors affecting the demand and supply of Lufthansa, the German airline. It notes that the aviation industry has an oligopolistic market structure with a few major companies competing. It then examines factors influencing demand for Lufthansa, including population size, age demographics, urbanization, GDP, education levels, and competition from low-cost carriers. Factors affecting Lufthansa's supply are also reviewed, such as fuel prices and interest rates.

1. MANAGERIAL
ECONOMICS
PROJECT REPORT
SUBMITTED BY:-
LAKSHYA GUGLANI
19DM252
FIRM NAME-LUFTHANSA
INDUSTRY-AVIATION

3. MARKETSTRUCTUREOF AVIATION
INDUSTRY
Theaviationindustryisoligopolisticinnaturewhereafew
companiescompetewithoneanotherforalimitedmarket.Alsothe
customersarevery sensitivetoprice,whichforcestheairlinesto
operateclosetothe breakevenseatfactorusingflexible
pricing.Thereforemostof theseatsare soldondiscounttofillthe
aircraftbecauseemptyseatsareperishable.
Some of the features of oligopoly are:
1.Few firms
2.Firms are interdependent in taking price and output
decisions.
3.Barriers to the entry of new firms due to Patents,large
capital or control over crucial raw material.
4.Non price competetion

4. FACTORSAFFECTINGDEMANDAND
SUPPLY OF LUFTHANSA
FACTORS AFFECTINGDEMAND:-
The diverging prevalence level of air transport across different countries can be due
to several reasons. Some of these are described as under:
Population and age Structure
Population size affects the demand for air travel since a larger demand base would
increase the demand for mobility. Hence, the population of a country has to be taken
into consideration when estimating the demand for air travel. For e.g. the six largest
countries in Europe – Germany, France, the United Kingdom, Italy, Spain and
Poland – already make up almost 70 per cent of the population in Europe. Hence, a
high share of mobility demand will be generated within these countries alone.
Another factor potentially influencing the demand for air transport is the age of a
passenger. More than 50 per cent of Europeans belong to the age groups between
25 and 44 years as well as 45 and 64 years. These two groups also reflect the
majority of the working age population. The relationship between age and demand
for travel has been investigated in different studies. One study analyses the travel
behaviour of the elderly population with particular focus on private car use versus
public transportation. It found that retired people are likely to conduct trip chains,
meaning they combine multiple purposes and destinations within one trip in order to
minimise the effort of driving. Public transportation is increasing among those 75
years old and above, in densely populated urban areas. Reasons for this might be
the availability of respective infrastructure and frequencies of public transport
services within these areas compared to the rural areas.
Urban agglomerations
The origin and destination of traffic flows are also important to understand air travel
demand. A high share of European citizens live in urban agglomerations. According

5. to World Bank (2016) data, this urban population accumulates to more than 70 per
cent of the total population across the considered European countries. These all
have an urbanisation degree of at least 50 percent. This high degree of urbanisation
gives an indication that a high share of air transport within Europe takes place
between these urban centres. In order to depict further the geographical distribution
of urban agglomerations gives a further indication. Population density is usually
highest in the areas surrounding European capitals and large cities (e.g. Paris,
London, Rome, Berlin).
Another aspect is the geographical distribution of the population, for eg Portugal’s
urban population, is mainly concentrated within two large canters. More than 60 per
cent of the urban population lives within these two large urban centres and the
remaining population is distributed across smaller urban areas with less than 300
000 inhabitants as Compared to other European countries, France, Spain and the
United Kingdom which are characterised by very large urban agglomerations with at
least more than five million inhabitants.
GDP
The income level of a country or a region is usually applied as another factor in the
determination of air travel demand. Different studies reveal that a higher GDP per
capita, which is often used as a proxy for income, is usually associated with higher
levels of air travel. For instance, an analysis by IATA (2017) indicates that increased
income has been the primary cause for the increased share of air traffic growth in the
past. However, within the considered region, GDP varies from country to country.
Eastern European countries like Romania, Poland or Bulgaria have the lowest GDP
per capita while on the other hand Lichtenstein, Luxembourg, Germany and Norway
have the highest GDP per capita in Europe.
Education status
Another Important factor affecting the demand for air travel is the education status
of the customers.A study by the Global Business Travel Association (GBTA) 2016
reveals that a high share of business travellers has a minimum college education
(71 per cent). In Luxembourg, for example, 17 per cent of all trips are business trips
as compared to only 3 per cent in Romania. Education and type of employment
activity, however, are not the only determinants of business travel. Furthermore, a
higher education level in most cases correlates with a higher income level and
hence a higher propensity to use air transport for leisure purposes as well. The
current trend towards combining business and leisure trips (= bleisure trips) might

6. also change passengers expectations towards the transport system within one trip.
Outward flights might be for business purposes and hence, passengers might be
less sensitive to an increase in airfares as time saving and travel comfort will have
a higher priority. In doing so, passengers’ preferences might change, such as price
sensitivity.
Competition from Low Cost Airlines
Minimal cost carriers are the ones which offer low prices for all the routes where
they are operating and charge for sustenance, need boarding and seat allocating.As
an outcome these kind of organizations bring down their working expense. With only
a solitary class and more seats in the plane and their staff performing multiple tasks
for instance airline stewards additionally cleaning the air ship or functioning as
entryway specialists, disentangled courses, accentuating point-to-point travel rather
than exchanges at center points. This guides the organization to limit its working
expenses and in this manner empowers it to sell tickets at a lower cost. The
significant minimal effort transporters in Europe are Ryanair, Simple stream,
Germanwing and Tulfly. In Walk 2010, The European Low Admissions Aircraft
Affiliation (ELFAA) reported that last year its individuals conveyed 162.5 million
travelers and representing over 35% of booked intra-European Air traffic, speaking to
a 8.7% expansion on the earlier year . A Minimal effort Bearer like Simple fly makes
a benefit of around 108 million at the year finished 2018 when contrasted with
English Aviation routes which is a customary aircraft transporter which made lost
£258 million at the year finished 2018. In todays day and age we can see that the
minimal effort transporters are developing quickly and have a solid hold over their
working expense. That is the reason they are the main Aircrafts which make benefits
today while the carrier business stays in emergency. Minimal effort transporters'
admissions are one reason why conventional aircrafts are confronting hindrances
today and these bearers are consequently pulling in the traveler of the customary
transporter.
Other means of transport
These days the advancement in innovation has enabled different methods for
commuting and has totally changed the current transportation modes. There are
numerous elective methods for going instead of flying, for example, transport, train,
metro, enlisted taxis, journey and numerous others. The structure of new foundation
has decreased the movement separation between areas. Today the principle
elective transportation mode that we can consider as a potential simultaneous is the
fast moving trains which are being utilized in certain nations. For e.g.- The time that it
takes to connect Vienna to Brussels in Belgium with the rapid train is just about

7. 2hours 51 minutes and it is multiple times less expensive than the flight ticket. With a
culturally diverse staff, the point is to offer incorporated rapid rail travel between real
European urban communities and to rival aircrafts on promptness, condition,
evaluating and speed. A fast rail arrange in cross seven nations of Europe rivals
aircrafts as the most helpful approach to go for example With the intercity organize
the travelers can drive from London to Frankfurt in only five hours for as meager as
£89. Travelers are additionally ready to go between Poland, Germany, the
Netherlands, Belgium, France, Switzerland and Austria through these high seed
trains. Around15 million individuals utilize these trains in Europe and they are
intending to have in excess of 60 million travelers by 2020. Accordingly, rapid trains
are a genuine contender since they are focusing on aircraft travelers as their
potential future clients.
FACTORS AFFECTINGSUPPLY:-
The Price Of Fuel:
When all is said in done, the price of fuel consistently assumes a critical job in the
world economy. That is the logic behind why changes in the fuel costs influence
profoundly on aircraft industry. It is anything but difficult to see that fuel and carrier
are correlative to one another. Aircrafts can't work without accessibility of fuel. Oil,
Gas, and different items from raw petroleum are used as essential fuel in aircraft
industry. As per the hypothesis, correlative merchandise are two products for which
an expansion in the cost of one prompts an abatement in the interest for the other.
An adjustment in cost of fuel will move the interest bend. Then again, expect that fuel
is info and aircraft transportation is yield. Ascending in information value prompts a
leftward move of the supply bend. Fuel costs can't stay a stable for a long – run
period along these lines carrier industry ought to be adaptable to respond rapidly.
The rate of intrest:
The rate of intrest is another factor which effects the market economy all in all and
flying industry specifically. The intrest expense associates the cost of merchandise
today and their cost later on. Higher financing cost builds the normal expense of pain
and this is especially pertinent to the aircraft business where influence is high and
misery expenses are considerable.

8. Conversion standard:
Conversion standard is significant as aircraft productivity is connected legitimately to
money esteems. The travel industry request is one reason which shows how
swapping scale cause changes in carrier industry. Both inbound and outbound are
affected by swapping scale levels. At the point when the conversion standard is high,
vacationer will get benefits. The outcome is they are happy to travel more, along
these lines, amount requested of aircraft tickets will be expanded. Interestingly, the
devaluation of local monetary standards cause visitors to think about whether they
should travel or not. Going in latent period is an ordinarily model. On the off chance
that the conversion scale tumbles down, client may spare their use by not voyaging
or they may hang tight for advancement tickets.Which implies that outside interest
for universal and local flights move conversely with the estimation of the home cash.
Effect of World Events
The aviation business experiences numerous progressions consistently. The more
worldwide occasions occur, the more the impact on the aviation business. In 2001,
after the fear based oppressor assault of 09/11 occurred, it influenced the carrier
business in all respects rapidly. A US aircraft posted they had a total deficit $37
billion. 20% employees and representatives were laid off by US aircrafts. The
quantity of traveler diminish ceaselessly and have foundation recuperated in 2003.
Additionally, the cost of oil have influenced the business. At the point when the cost
of oil increment, the expenses for material goes up .If the carrier don't ascend the
cost of ticket, they will diminish their net benefit. In the event that the cost of oil
tumbles off, there are more advancement tickets for travelers.
In addition, episode of specific illnesses can be influence the business .Model, when
the SARS sickness occurred, numerous nations did not enable travelers to come to
put where SARS malady prevelant.
The Policies Of Government
The nation administration approach is another factor which can influence the aircraft
business. Since the administration strategies control the cost, so the carrier business
has 2 legitimate costs: value roof and value floor .The value roof is a lawful most
extreme on the cost at which a decent can be sold . For instance, an aircraft has great
quality, so they would need to build charges. The value roof connected to expenses

9. to help individuals can be paid. At the point when the carrier needs to pull in
travelers, they make advancements about the cost to sell their tickets. So the value
floor is the value least at which ticket can be sold and the organization aircraft still
has net benefit.
Duties and tarrifs are another significant factor of the administration approach .When
the charges on the aeronautics business increment ,the cost of ticket ascends , so if
the aircraft business needs to develop, they have to viably deal with their costs. At
the point when the assessments for the carrier business increment, the cost of ticket
will increment or the business will slice off something to secure their benefit.
CHALLENGES FACED BY
LUFTHANSA
 Lufthansa has a high-cost base
Lufthansa has been making numerous efforts for cost savings which accounted
for more than EUR2.5 billion savings in the airline’s bottom line between 2015 and
2017. The airline continues to be amongst the higher cost European airlines, in
terms of cost per available seat kilometer, when accounted in terms of the average
trip length.
 Poorlabourrelations:
The Company has been infamous for numerous issues regarding its human resource
policies. There have been a number of pilot strikes which continued till 2017 and both
parties are trying their best to iron out their differences. There have also been
numerousdebates with respect to pay differences and pension schemes.
 Slow response to competitive threat

10. As more low-cost carriersentered the marketLufthansastartedlosing its face rapidly.
However, its response to the low-cost carriers has been lukewarm.
 Competition
There is a lot of competition in the aviation sector like Etihad Airlines, Emirates,
Air India, Air France, British Airways etc.
 Rising Costs:
The costs are ever increasing with rising in fuel costs, maintenance and labor
costs.
KeyLearnings:-
The above examination demonstrated that variables like market powers, money
related dangers, worldwide occasions and nation administration approaches cause
consequences for aircraft industry. So as to survive and proceed build up claim for
aircrafts, transporters should look for an appropriate way. In some of the ways like,
by effectively overseeing chance expense, and adjusting to a consistently changing
monetary conditions, aircraft ventures can have financial achievement. Be that as it
may, the prosperity of the country's economy will directly affect the degree of
accomplishment experienced in the carrier business. During monetary shortages in
the country's economy, voyagers will have less assets accessible to go for delight.
Adding to the negative monetary impacts in the carrier business, future and existing
strategies focusing on the aircraft business will keep on frustrating the business'
capacity to recoup misfortunes in times of financial hardships.
References:
Books
Introductory microeconomics and macroeconomics by Kunal Dua.
Economics by Lipsey and Chrystal,Oxford university press.

11. Online resources
https://www.lufthansagroup.com/en/home.html
https://en.wikipedia.org/wiki/Lufthansa
https://studymoose.com/swot-analysis-of-lufthansa-essay