Reflection on Open Skies Policy: Where are the benefits?

The Open Skies agreement that came into force in 1997 promised us (consumers) an increase in competition which would drive prices down and challenge the established carriers on routes. Foolishly, we expected a surge of new airlines that would operate on the US-UK routes. We were promised a better quality product at a substantially lower price. 15 years later, I must confess: I see little change. When the agreement came into the effect, we indeed had the emergence of new low-cost long haul carries such as EOS or SkyJet that offered an all premium service for not-so premium prices. The UKs international hubs such as Gatwick and Heathrow saw the arrival of new US and European carriers. Following simple economic theory, an increase in market supply was supposed to reduce prices for tickets. It did! However, the major carriers adopted aggressive techniques to retain their market share. It's not surprising that ZOOM airliners along with EOS and SkyJet went into bankruptcy soon after commencing their services. The orthodox carriers charged prices below that of the marginal cost as their significant scale allowed them to recoup their costs. They purchased take-off/landing slots to create a capacity barrier. A sudden surge in demand for these slots drove their prices up to levels that could only be afforded by large airlines.

Let me us an example to illustrate the result of such tactics. I was hoping to book a flight to New York this Christmas at an affordable price. Prior to making a booking, I searched what carriers operate the London-New York route. To my surprise, there were only 5 airlines. Looking up prices, I was shocked. The minimum price for a return Economy Class ticket was £1200. It appears to me that all benefits from an OpenSkies agreement had insofar been limited. We now have a market whereby unconventional competition has been removed and it resembles highly a structure that is costly to the consumer. I am in favour of OpenSkies agreement but I think the government must monitor the actions of major players in the industry with more vigilance and foster start-ups such as ZOOM UK. 

"The Armchair Economist" By Steven Landsburg

In ‘The Armchair Economist’ Steven Landsburg applies a variety of basic economic principles and reasoning to human behavior. 

A chapter that particularly intrigued me was chapter 16, as Landsburg investigates into why popcorn costs so much at the cinema.  With my basic knowledge of economics, I assumed that if cinemas charged less for popcorn demand would increase.  However, I thought that the reason cinemas do not decrease the price of popcorn is because once you have entered the cinema; the cinema owner has a monopoly.   

In comparison, Landsburg illustrates that the owners’ monopoly is not the reason why popcorn prices are so high.  He states “Once you enter the theatre, the owner has a monopoly on a lot of things. He is the only supplier of rest rooms, for example. Why doesn't he charge you a monopoly price to use the rest room?[…] The answer, of course, is that a rest room fee would make the theater less attractive to moviegoers. To maintain his clientele, the owner would be forced to sell tickets at a lower price. What he collected at the rest room door would be lost at the box office”. 

Instead, Landsburg explains that popcorn is a secondary product, whereas the ticket is a primary product.  ‘Popcorn lovers’ are likely to be relatively price insensitive as they associate popcorn as being a necessity when visiting the cinema.  They are therefore likely to purchase popcorn regardless of the price.  Charging high prices for popcorn enables the cinema owner to keep his ticket prices below customers’ “reservation price”.  Allowing price sensitive customers to go to the cinema.  Contrary to my original opinion I have now realized that it is unlikely that cinema owners will reduce popcorn prices.

Overall, I really enjoyed reading ‘The Armchair Economist’ and would recommend it to anyone else interested in behavioral economics or anyone intrigued by the way economists see the world, as Landsburg covers many other interesting topics such as ‘Why do seatbelts cause accidents’ and ‘Why do they charge $35 for rock concerts when they know it could sell out at $50’.

COO of Citi, Asia-Pacific Mr Michael Borch gives his view on 'Macroeconomics trends in Asia'

On Monday 25th November, the Epsom College Economics and Enterprise Society welcomed Mr Michael Borch, COO of Citi, Asia-Pacific who gave pupils an insight into the economic development model of the Asian region; in particular China. The talk encompassed the role of trade in stimulating economic growth which subsequently has forced urbanisation in China to progress at colossal rates. Most importantly, he destroyed the perception that China's economic structure has little resemblance to that of the West. In reality, China is an active participant in globalisation that has originally been orchestrated by the forces of western capitalism. Following the Communist Party Plenum three weeks ago, China has emphasised its desire to pursue market-orientated reforms which only strengthens Mr Borch's view on China. Personally, I feel that the Chinese version of capitalism will dominate the near future. The financial crash of 2008 has shown us that market fundamentalism cannot be trusted to govern our economic senses. The post crisis era has seen an increased government intervention in all aspects of the economy, ranging from QE to bailouts. With the move towards more principle based regulation (MPBR) in the financial industry, we are bound to see ever increasing government supervision. Arguably, the Chinese version of capitalism is all the factors mentioned above; However, I feel the western economies will follow suit but without the strong ideological base present in China. So what will the future hold? My answer is: A version of capitalism that one has never witnessed before.

JPMorgan Agrees $4.5bn Mortgage Payout Deal

JPMorgan, one of the biggest investment banks in the world, has agreed to pay $4.5bn back to 21 major institutional investors who lost money on mortgage-related securities during the financial crisis. The deal is separate from the preliminary $13 billion settlement which resolved a raft of actions over mortgage-backed securities. The securities in question were supposed to be sophisticated ‘risk-free home loans’, however JP Morgan is alleged to have sold the mortgage-backed assets knowing full well of the risks involved. Recent legal costs have meant that JPMorgan have made a rare loss in this years third quarter, however the estimated share price of $60 has remained intact due to the large amount of cash they have set aside to cover these settlements ($23bn). Despite this massive reserve, the bank is still under investigation and if continued legal action is to be taken, JPMorgan could see its earnings further plummet, as well as its share price. As a result of its recent multibillion-dollar trading losses, JPMorgan’s $6bn share repurchasing program (which initially sent share prices to close at their lowest level since last year) was suspended after just 2 months. However, shareholders need not worry as dividend payouts of 30 cents a quarter are set to remain unchanged, unless losses rise to $5bn (instead of the current $2bn). JPMorgan seem to have escaped a potential disaster, however future legal investigations could increase losses further, and as a result send share prices plummeting. In my opinion, the stock buyback scheme should continue as it will enable the bank to improve shareholder value, which would offset potential future depletion of their share price due to further possible legal action.

Twitter's IPO: the Wider Picture

Last week, Twitter underwent its IPO procedures and began trading on the New York Stock Exchange. Initially valued at $26 a share, the price skyrocketed to reach $50 and later stabilising at about $45+-. Why is that Twitter, reporting a loss for the last three quarters, has been able to have such a successful listing? Recently, we have been experiencing a growth trend in the public listing of technological giants whose products are somewhat intangible. Facebook's IPO last year, Google's share passing the benchmark of $1000 per share and Twitter's listing, in my opinion, are signs of a new 'Tech bubble' that could pose potential hazards. On the other hand, we are living in societies that see technological advancement as the only way forward in future economic prosperity. Technology has seen a growth in private investment but more so from the government. The governments of the emerging economies have made technological progress a pillar of their economic development. Recently, Russia has adopted a strategy entitled 'Russia 2020' in which, the government has pledged to increase its funding in the technology and establish 20 Silicon Valley-type developments around the country to foster new ideas. Arguably, the value we place on technology is reflected in the ever growing share prices of tech companies but we need to ensure that we don't overvalue companies which provide futile services such as social networking which have little effect on the development of our economies.

Mr Peter Mather, Vice President of BP Europe, and former Head of Country UK 'Energy in the 21st Century: The Challenges'

On Monday 23rd September, the Epsom College Economics and Enterprise Society organised and attended a lecture by Peter Mather on energy in the future and how it will affect us, not only politically and socially but also economically. He spoke of how the government is going to have to organise its budget in the future to address the issues of energy, not only with investment in renewable sources but also dealing with the problems of climate change, and the potential disgruntlement it will cause. It appeared to us that although global warming isn't yet a proven science, the economic effects of it are already showing on a macro level. Private individuals and firms are suffering increased costs from petrol as the price continues to increase, but due to the demand for petrol remaining constant, the repercussions of its consumption remain. He claimed that although there was still no definitive solution, long-term investment in research and development is crucial in combating global warming. Therefore, increased R&D into sustainability of energy must be a national policy in the long term, for both developed and developing governments. Furthermore, Mr Mather was certain that demand would dry up before supply, as he believed a good enough substitute would arise in good time. The talk was informative, interesting and accessible and we would like to thank Mr Peter Mather on behalf of the Epsom College Economics and Enterprise Society for giving up his precious time. 

Jake Seabold and Luke Butcher 

Nikita, Rahim and Cameron Voyage North to London to see what’s up with the West

On Wednesday the 19^th of June, 3 renegade Epsom Economists ditched the bucolic surroundings of the college in favour of the roaring urban environment of the London School of Economic's Old Theatre. The eventual spectacle was a coalesce of  an interesting , though rather sobering , analysis of the sad future for economic growth under current practices in the west and an indictment of present policy makers infatuation with Quantitative easing, which is the monetary policy in which governments increase bank liquidity and also private company liquidity by purchasing bonds.   The lecture far surpassed the minimum expectation of an eloquent plug of King’s latest book and was fully accessible even to myself as a young dilettante economist. 

Kings book and lecture succinctly detailed the changes in economic growth of Britain sectioning this into time periods across Kings own (half century long) life. The figures substantiating King’s worry for western affluence as he states between 1963-73 average growth per capita was 37%, this figure dwindling to just 4% between 2003-2014 , in spite of much technological  progress, notably the dot com boom. King did not forecast any imminent resurgence, citing fundamental flaws and misinterpretations of behavioral economics as well as an increasing reliance upon mathematical practice as the reasons behind government’s adoration of Q.E and inability to truly crack the problem of this dwindling growth in western countries, the US also sharing a low average of 2.5% growth between 2003 and 2004.  A notably damning highlight of present western policy was Kings humorous comparison between  policy maker’s infatuation with Q.E and Sigmund Freud’s description of the desperate man’s religious 'delusional' faith , something implausible  and sought out and substituted when there is no other viable hopeful solution. With monetarism tending central banks towards 0% base rates, leaving next to no room for central banks to manipulate the money supply to encourage lending and satisfy demands for growth, King alleges that policy makers have found a willful and misplaced hope in Quantitative easing, which he implies is throwing money at the problem and not tackling the heart of the issue which is far greater than that of a recent financial crisis  and what he preempts as the true heart of why western affluence and why the promises of future recovery many of us are inspired by are mendacious attempts to avert attention from the true economic quandary he believes we are in.

In the lecture was a few shots at Krugman and other economists regarding different takes on matters, just  to spice up the lecture. After all an economist rarely stands and speaks without taking a swipe at another economist.

Both the lecture and Book share the title

When the Money Runs Out: The End of Western Affluence

I’m sure that many of you reading this were unable to fit into the cramped and sweaty Old Theatre so for those of you that missed it, here is a link to the podcast and also a link to the book if you so please.

The book: http://www.amazon.co.uk/When-Money-Runs-Out-Affluence/dp/0300190522/ref=sr_1_1?s=books&ie=UTF8&qid=1363792647&sr=1-1

The lecture (on podcast): http://www.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player.aspx?id=1936

picture from yalebooks.co.uk

EU places tarrif on imports of Chinese solar panels: Good or Bad?

An interesting article which highlights some of the arguments around trade and protectionism was released today. 

Tariffs placed by EU on imports of Chinese solar panels

The EU recently announced that it was placing import tariff's on Chinese Solar Panels, which it accused China of 'dumping' onto European markets.

 

Q: What is meant by 'dumping'?

 

Unsurprisingly perhaps, China has retaliated by placing tariffs on French wines. This case highlights the benefits and drawbacks of protectionism, and the arguments in favour of free trade. In this scenario both the UK and Germany voted against the introduction of solar panel tariffs, however were out voted in the European Parliament which meant that the tariff went ahead.

 

What do you think?

 

Q: Was the EU right to put these tariffs in place?

Q: Who benefits and who loses from this action?

Q: Can you think of a better solution which would resolve this problem for all parties concerned?

 

Post your thoughts and answers in the comments section below:

 

Read more at:  http://www.bbc.co.uk/news/business-22778022

An Inspiring Talk by Christopher Hyman

On the 26th of February (Tuesday) 2013, Epsom College invited the Chief Executive of Serco, Mr. Christopher Hyman to talk to us about the company he works in as well as his views and opinions towards having a vision, a strategy and a clear set of values in a business. 

It all started in 1994 where Mr. Hyman was headhunted by Serco to become the European finance director, and in 1999 he was made group finance director. In 2002, his hard work has paid off, allowing him to become the chief executive of Serco. Serco improves the quality and efficiency of essential services that matter to millions of people around the world. The work they do for national and local governments involves  the most important areas of public service, including health, education, transport, science and defence.

In his speech, Mr.Hyman started off with the importance of having a vision and a strategy. He mentioned that the difference between the two is that a vision is a focus, or an aim; whilst a strategy is how you're going to achieve that aim. He mentioned that in every business it is very important to have a vision and a strategy, and somewhere along the lines he seems to be hinting that having a vision and a strategy in life is also as important. In my opinion, the talk given by Chris Hyman was very inspiring in a sense that he was very passionate for the company that it came through his speech. He was willing and able to stick to his values and principles and at the same time encouraging social responsibility and leadership. He also picked up on teamwork and how the people around him helped and supported him to where he is today, and he mentioned: "If you want to go quickly, go alone; if you want to go far, take someone with you."

To me, he was very intellectual, opinionated and ambitious man with a right mindset in which he made me reflect on how I carry out the things I do in my life. For example, he talked to us about knowing how to choose between the wrong and the right, and having the integrity in yourself to make the right decision. He told us the difference between honestly and integrity in which honestly is telling the truth to others, whilst integrity is about telling the truth to yourself.  By doing so, we are able to look at negative situations with a positive outlook. In business, it is very important to have the right intentions as well as making the right and honest decision in which it may affect the people around you including our own self.

Overall, it was a fantastic night with an inspiring speaker, Mr. Christopher Hyman, who left me motivated to learn to look at situations in a different perspective as well as understanding that there is no substitution for hard work. I believe that Mr.Hyman has taught us all to be more responsible, self-motivated and passionate in the things we do. By doing so, we are able to channel that passion and motivation towards our careers in the future.

Sir Mervyn King at Eton College

On a crisp Thursday in January the Epsom College Economics and Enterprise Society were incredibly privileged to hear the former governor of the Bank of England, Sir Mervyn King speak at Eton College regarding the trials and tribulations of a post credit-crunch British economy.

A bustling lecture hall listened attentively as Mr King picked apart the causes of the 2008 crisis, its effects on today's economic activity, and what the future holds for Great Britain. The former governor spoke of how the crisis was not merely the fault of one party or another, but a fault of the whole economic system we rely on. Reckless and irresponsible spending and speculation leading to worsening budget deficits, coupled with a crisis of confidence has seen the effects of the credit crunch continue even today, stagnation, and macroeconomic imbalance. With regards to crisis response, Mr King demonstrated that the UK was experiencing a paradox of policy, where short term actions differ from long term goals, the government wishes for increased wealth in the long run, but this is not possible when government spending is cut in a contractionary fiscal fashion. When queried about the future of the British economy, Sir Mervyn King concluded that “the future is uncertain”, and thus he is joined by many, who believe we are still not out of the woods yet.

  

Gucci owner PPR's shares hit 12 year high 

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Shares in the French luxury goods firm, PPR, have risen more than 7% in Paris to their highest level in 12 years.

That follows a better-than-expected jump in earnings at the company, which owns brands such as Gucci and Yves Saint Laurent.

Net income rose 6.3% to 1.4 bn euros while sales jumped 20% to 9.7bn euros, driven in part by sales of its Bottega Veneta handbags.

PPR boss Francois-Henri Pinault seems confident of improving there operating and financial performances in 2013.

The results are a clear positive, showing PPR to hold one of the most balanced brand portfolio in luxury, which is currently outperforming peers like LVMH, one Paris-based trader told Reuters.

The company pointed out that about 40% of its global sales now came from emerging markets.

The company is made up of two main types of business - luxury goods and sports and lifestyle brands. 

Regarding the recent decrease in demand for luxury goods in China, experts say it is too early to tell whether last year's slowdown was over, but that initial signs were positive and that Sales had picked up in the fourth quarter of 2012. 

Last year, it bought the Chinese luxury jeweller Qeelin.

The source: http://www.bbc.co.uk/news/business-21471664

Euro PMs back large-scale fishing reform to save stocks

The European Parliament has voted for sweeping reforms of the controversial EU Common Fisheries Policy.

http://www.bbc.co.uk/news/world-europe-21358774

Impact of Multi National Companies (MNCs) on globalisation

This week 13EC4B have been creating a video on the impact of Multi-National Companies on globalisation.

Their videos are both creative and informative, covering many of the important point of the costs and benefits to economies created by Multi-National Companies.

Take a look and see what you think. Are there any other economic implications you can think of?

Vlad, Ralph and Connor

Bo, Ceclilia and Eric