A contestable market has freedom of entry and exit, low sunk costs and competitive equilibrium.
There are high fixed costs in setting up an airline firm. Buying planes, training staff e.t.c. Therefore there are significant economies of scale in this industry. Therefore it makes it difficult for a new firm to enter. This is because a small firm would have higher average costs than established firms and be unable to compete.
However new firms have entered the market in recent years. E.g. Ryanair, Easy Jet. It may be possible to buy or rent planes cheaply, therefore, there is some contestability.
There is strong brand loyalty for many airlines e.g. British Airways. They spend a lot of money on advertising. Therefore new firms would have to spend a lot of money on advertising as well. This is a sunk cost because it is non-recoverable and therefore would deter entry because firms could lose money. This makes the market less contestable.
However, for many customers, brand loyalty is not important as they are more concerned about getting cheap prices. Therefore new firms who offer no-frills, low prices have been able to enter the market capturing market share from the large, existing firms. This means there is a significant element of contestability.
Another barrier to entry is vertical integration. For example, it is difficult for new firms to getting landing slots at major airports. E.g. Heathrow this is a big factor to reduce contestability. However new firms can get landing slots at smaller airports e.g. Luton, Stanstead.
The big airlines used to make high levels of profit suggesting there are barriers to entry and no scope for hit and run competition. However, in recent years profitability has fallen due to the entry of new firms. Therefore the UK airline industry has become reasonably contestable in recent years.
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