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Explain the impact of the change in the value of the pound against the dollar, comparing the 2007 value to the 2015 value, on British Airways who buy oil which is priced in US dollars. What is the impact of this change in the exchange rate on the UK economy as a whole?

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Read the text below and answer ALL the questions that follow.

Air Wars

The European airline market looks radically different today to that of the early 1990s when most routes in Europe were a monopoly or a duopoly. Following the relaxation of rules governing airlines by the European Union in 1997, which resulted in weakening of barriers to entry, many new entrants, which were no-frills carriers such as Ryanair and easyJet, have proven to be very successful businesses, combining a number of factors to take advantage of new opportunities and exploiting them very effectively. As a result, they have taken a large share of passenger traffic from their competitors, mainly older established airlines such as British Airways (BA) and Air France. Some large no-frills carriers, such as Ryanair and easyJet, managed to continue to sell seats and make profits during the recession that followed the 2008 financial crash.

The no-frills carriers’ rigorous focus on reducing costs and simplifying operations has resulted in a changed approach to issues such as fleet operation and renewal, airport operations, and sales techniques. However, although the monopoly/duopoly competition of the 1990s has been replaced the industry is still dominated by a small number of large firms and the large existing firms like BA have been joined by a few big no-frills airlines, such as Ryanair and easyJet, making the industry oligopolistic. The continued existence of big, powerful, airlines has meant that there are still some cases of anti-competitive behaviour, which has resulted in some airlines being taken to the UK Competition Commission (now the Competition and Markets Authority).

One example of competition policy in action is that BA and Virgin were investigated for fixing high fares, resulting in a large fine for BA. In 2007 BA was fined £270m in a dual action by the UK and US competition authorities, after admitting price fixing on fuel surcharges on its long-haul flights. The US Department of Justice imposed a penalty of $300m (£148m) on BA, just hours after a £121.5m fine was levied on the airline by the Office of Fair Trading. The OFT fine is the biggest-ever penalty it has imposed on a company for infringements of competition law and, said the OFT, demonstrates its determination to “deal vigorously” with anti-competitive behaviour.

BA had admitted that, between August 2004 and January 2006, it colluded with Virgin Atlantic over the surcharges added to ticket prices in response to rising oil prices. During that period, the extra charges soared from £5 to £60 a ticket on long-haul return flights. Virgin, which ‘blew the whistle’ on BA, escaped any fine after being granted immunity under the OFT’s leniency policy. BA’s chief executive Willie Walsh said that while fuel surcharges are “a legitimate way” of recovering costs, “this does not in any way excuse the anti-competitive conduct by a very limited number of individuals within British Airways”. “Anti-competitive behaviour is entirely unacceptable and we condemn it unreservedly,” he added.

The UK airline industry suffered from a 25% depreciation of the pound sterling against the US dollar after the financial crisis began in 2008.


Source: Adapted from ‘No-frills Carriers: Revolution or Evolution?

A Study by the Civil Aviation Authority’. CAA November 2006, and The Guardian, 2007.


(The mark awarded indicates how much work you must do for a specific question. Diagrams can be drawn by hand or using software)


a) Referring to the article above: What is meant by competition policy and why is it necessary in a market economy? [10 marks]

b) Referring to the article above: What were British Airways and Virgin Airlines doing? Why was Virgin not fined? [10 marks]

c) Using relevant economic theory (an economic diagram) illustrate how a large airline, like British Airways, can set its price and output. What type of profits is likely to result? How is anti-competitive behaviour by BA relevant to this diagram? [20 marks]

2. In December 2007 the British pound (sterling) was £1 = $2 against the United States dollar.

a) Find the current (June 2015) value of the pound against the US dollar and explain, using relevant economic theory, why the exchange rate has changed since December 2007, particularly immediately after the financial crash in 2008-09. [20 marks]

b) Explain the impact of the change in the value of the pound against the dollar, comparing the 2007 value to the 2015 value, on British Airways who buy oil which is priced in US dollars. What is the impact of this change in the exchange rate on the UK economy as a whole? [10 marks]


a) Explain what is meant by a recession. What were the causes

of the 2008-09 recession? (Use relevant economic theory to explain your answer) [20 marks]

b) Use economic analysis (diagrams) to explain how the UK government could take action to help the UK economy recover from slow economic growth. [10 marks]




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