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ECONOMIC ANALYSIS OF MANAGERS

ECON 701 001

MANAGERIAL ECONOMICS

WRITTEN ASSIGNMENT

Professor: Geoffrey Prince

Submitted by:
Anila Margret, 300
Jaskeerat Singh, 300873946
Stein Sunny, 300

Overview:
Established by a royal decree in July 2003, Etihad Airways is United Arab Emirates national air
carrier. In November, Etihad started its commercial operations. Today, Etihad is known as the
fastest growing airlines in the world, with 44 countries, 66 destinations and operating at least
1000 flights in a week. Being the national air carrier of the UAE, Etihad displays the Arabian
Culture in its hospitality. Etihad also operates Etihad Crystal Cargo, offering cargo services
globally, along with international transportations as its main business. Etihad is continuously
focusing on providing remarkable experience to its customers by upgrading its air fleet in
Business, Economy and First class cabin. With less than 8 years in operation Etihad Airways
received many global awards such as Worlds Leading Airlines at the world Travel Awards
from 2009 to 2015 (World Travel Awards, 2016).
The three major areas on which the managers of any organization focus on are profit
maximization, optimal markup pricing and price discrimination.
Profit maximization:
Profit maximization is an important aim of every organization because it takes into account all
the relevant costs and revenues. Sometime both of these goals merge or are equivalent. This
happens when an organization goes through a situation called pure selling. This happens when
the organization makes and supplies a good or service while incurring no variable cost. It should
be clear that, without any variable costs, the firm maximizes its ultimate profit by setting price
and output to gain as much revenue as possible. The monopolist's profit maximizing level of
output is found by equating its marginal revenue with its marginal cost, which is the same profit
maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of
output. Indeed, the condition that marginal revenue equal marginal cost is used to determine the
profit maximizing level of output of every firm, regardless of the market structure in which the
firm is operating.
Optimal Markup Pricing:

The connection between the organizations pricing policy and its product is close. Once the firm
determined its optimal output by weighing marginal revenue and marginal cost, it was a simple
matter to set rice in order to sell exactly that much output. The size of the firms markup (above
marginal cost and expressed as a percentage of price) depends inversely on the price elasticity of
demand for a good or service. The markup is always positive. In case the demand is inelastic
then the firms current price cannot be revenue maximization. The markup rule depends on both
cost and demand. In certain cases managers often adopt pricing policies and the most commonly
used policy is full-cost pricing. There are two major criticism about full-cost pricing. Firstly,
average cost is used for full-cost pricing as its base. Secondly, the percentage markup is
dependent on the elasticity of demand.

Price discrimination allows a company to earn higher profits than standard pricing because it
allows firms to capture every last dollar of revenue available from each of its customers. While
perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect
price discrimination exists. For example, movie theaters usually charge three different prices for
a show. The prices target various age groups, including youth, adults and seniors. The prices
fluctuate with the expected income of each age bracket, with the highest charge going to the
adult population.
Issue 1: Whether the elasticity of demand play a role in profit maximization.
Price elasticity of demand plays a major role in profit maximization. Etihad,
as worlds esteemed airline, took up marketing strategies and codeshare
partnership agreement to enhance its profitability. This airway carrier
operates in a total of 86 destinations globally. These destinations are located
in a total of 42 countries distributed across Africa, Americas, Europe, North
America, Asia and Oceania. Etihad provides quality in-flight entertainment
services to its clients meeting their comfort (Alex Cole, 2010). To be on top
of market competition, both short-term and long-term goals were set to
achieve. In regards to this context, flight costs and service cost were reduced
so as to increase its sales and value of customers as a short-term objective.
Techniques of price elasticity were applied for the purpose of maximizing its
profit and customer preference.
The organizations long term objectives focused on enhancing its market
strategies. This included increasing the amount of their profits annually by
5-10% facilitating its competitiveness. Furthermore, increasing their
customers value by a rate of 8-10% by the year 2015 was stated as the
organizations long term objective. Etihad had a long term objective of
opening up Abu Dhabi to the outside world and increase the UAE staff by the
year 2013 by 15% (Etihad Airways, 2010). A key issue for Etihad is that the
economy-only service should avoid polluting the mainstream carrier's quality
branding, at a time when the carrier is working extremely hard to build and
maintain its reputation as a world-leading premium airlines (CAPA, 2010)
Etihad also signed a strategic commercial partnership agreement with Kenya
airways in order to expand its reach across Africa and this in turn leads to
greater collaboration between airlines and customer satisfaction. It benefits
both the airlines to save costs through cooperation and scale of operations.
As part of the reciprocal codeshare agreement, Kenya Airways will place its
KQ code on Etihad Airways daily service from Nairobi to Abu Dhabi and,
subject to government approval, onwards to up to 32 key destinations across
Etihads global network (Kenya Airways, 2013). To overcome heavy

competition, it took up product strategy, which includes different product


components. It also adopted pricing strategy, which resulted in effective and
successful outcome, by providing somewhat similar services as same as its
close competitors in a reasonable price. To meet global competitiveness,
Etihad adopted people strategy to simplify and comfort the journey of its
customers from across the world. Thus changes in price and its service
quality play major role in profit maximization. It also came up with the
strategy of best price promise, for its customer on its reliability on prices.
Customers can look on the different Etihad websites if there is any price
difference for the journey. Price comparison can be only accepted if the date,
number of passengers and origin or departure are the same. Customers can
then claim for a refund that is calculated on the basis of price difference.
Place strategy was applied to its catalog, that helped the customers to
access online tickets and 24/7 customer cares services from anywhere across
the globe. Etihad is now focusing on spreading its airline across Asian
countries. India is the main target as it is a developing country with
increasing number of middle class community. It carefully studies about all
the market structure of different countries to approach its target accordingly.
Etihad plans to establish its existing economic fleet which will attract middle
class population and gradually increases the demand for economic class.
Etihad was able to survive in all economic condition by adjusting itself to
adapt to the changes.
Although Etihad had to spend billions to get a platform of acceptance, Etihad
strives to be the best through acquiring and implementing key strategies.
Its really more than just an airline; its more of a service industry that helps
brand Abu Dhabi (Mohammed Ali Yasin, 2011). Its majority of funding is
done through financial resources and funding organization. Economic
recession has not put down the status of Etihad as it focuses mainly on
expanding routes and increasing sales. The total revenue of the organization
grew by 14.7% over 2012.Etihad airways established new offices to
accommodate its expansion in different countries. Therefore, the optimal
pricing methods chosen by Etihad are marketing strategy (both long term
and short term), product strategy, place strategy, people strategy and
physical evidence strategy to overcome the issues such as cutthroat
competition, fluctuating market condition, meeting customers core
preference.

Issue 2: Whether the practice of behavior Pricing is reflected in the principles.

During a year, Etihad airways charges high prices to certain group of customers due to many
factors. Some of these factors are related to the Behavioral pricing. It is a form of Price
discrimination with a goal to adjust the price paid by different customers and enhance the profits
of a company. Etihad is a growing airlines, but this growth is only possible with generation of
high revenue. Increase in demand by the customers led to an increase in the fares of the tickets.
The revenue generated by Etihad Airways was by increasing the fares of their tickets by tracking
the online activities of the customers. Etihad Airways attained an average seat factor of 75 per
cent across 45 destinations during the first quarter of 2008. Year-on year, the airlines seat factor
has increased by seven percentage points as Etihad continues to expand its global flight schedule
and add aircraft to a fleet which will grow to 40 by the end of 2008. The growth in passengers
also increased consistently every year. The airline carried 1,421,223 million passengers during
the first three months of 2008, compared to 1,023,582 million for the same period in 2007, an
increase of 40 per cent (Etihad Airways Facts and Figures , 2008).

Conclusion:
Today, Price Discrimination strategy is used by most of the airlines to generate high revenue.
Etihad Airways achieved double digit growth in certain key areas. Highlighting the years
financial report, Etihad generated US$62 million of net profit. Etihads partnership with other
airlines also helped in generating revenue by 21 per cent. In past 10 years, Etihad Airways
established partnership with 70 plus financial institutions and raised US$9 billion plus
cumulative funding through Business Behavior Pricing strategy from time to time. This
Contributes to the GDP growth of Abu Dhabi as well (Etihad Airways Annual Report, 2013).

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