JAL Case Study – Lessons to be Learned

From studying the JAL case, we can break down why JAL went bankrupt into four major concepts: PED, YED, XED and PES. Using these four concepts of price elasticity, we can take a deeper look into how JAL went from being the top airline in Japan to bankruptcy in a short period of time. In studying the JAL bankruptcy however, it is important to first understand the context of the study. JAL first noticed major drops in sales in 2009, around the same time the economic recession that started in 2007 was said to have ended. However, it’s effects are still felt today, especially in the cautious airline industry. As with any economic study, a recession plays a big part in contributing to the causes and effects in a case study. Also, the JAL bankruptcy took place in Japan, a country said to be in an economic recession for the last 20 years. Further background information on the JAL case study is provided, with articles here and here.

PED – Price Elasticity of Demand (PED) is an elasticity used to show the responsiveness of the quantity demanded of a good or service to a change in its price. Using our knowledge of elasticities, we can see that JAL’s mistake was in thinking the demand for their airline was very inelastic; or that a change in price would only result in a small change in demand. In assuming this, when prices for the airline tickets did increase due to economic changes and rising prices for oil, JAL suffered a drop in demand much greater than they had accounted for, leaving them with expensive flights bringing in very little money from very few customers.

YED – Income Elasticity of Demand (YED) is a measurement of the responsiveness of the demand of a good or service to a change in consumer income. Here we can understand that JAL thought the YED of their airline tickets was also inelastic; or that a large drop in consumer income would only result in a small drop in demand. JAL assumed that people would always travel, and that they would give up other things before giving up flying. Contrary to this however, when people’s income was cut during the recession and certain currencies such as the USD lost their value, many people gave up travel in order to buy more necessities. This too resulted in the lose of many customers for JAL, and crippled their revenue.

XED – Cross Elasticity of Demand (XED) is a measurement of the responsiveness of the demand of a good or service to a change in the price of another good. In JAL’s case, they assumed the XED of their airline tickets would be inelastic, and that when other airlines offered the same flights at cheaper prices customers would continue to purchase the more expensive JAL tickets.However, when other airlines in Japan, such as ANA starting offering competitive flights at much lower costs, many customers migrated to the budget flights in order to save money during the recession. The result of this was JAL left with only a few of the loyal customers they expected to have should competition over flights in Japan pick up.

PES – Price Elasticity of Supply (PES) is an elasticity defined as a numerical measure of the responsiveness of the supply of a given good to a change in the price of that good. JAL predicted that the PES of their airline tickets would be inelastic, or that despite changes in the economy, JAL would still be able to buy the necessary resources to fuel their fleet at a reasonably low price in order to keep airline price tickets down as well. Contrary to this though, the price of oil shot up during the recession, and JAL was forced to continue buying the fuel in order to keep it’s airline operational. However, as the prices rose, JAL found the need to raise ticke prices in order to compensate, which, as covered by my analysis of JAL’s PED, led to a huge drop in demand for the airline.

At this point JAL was faced with paying increasingly high prices for jet fuel and other supplies while receiving a decreased revenue from a lack of sales due to an increase in ticket prices. Coupling this with cheaper alternative flights and a total decrease in consumer spending due to a drop in revenue during the recession, JAL went from being one of the most successful and illustrious airlines in all of East Asia to completely bankrupt in only a matter of months.

Summative Data Response Reflection

Upon taking another summative data response, I feel I have made a great headway towards beginning to understand how to convey the ideas gathered from studying specific economic situations. Knowing this, I feel I am now starting to better understand both the basic ideas we’ve studied for months now, and the corresponding diagrams and greater effects that they correspond with. While I may not be scoring perfect 20’s now, I am very content with a 17. I find I am understanding and describing diagrams and definitions precisely and effectively, but in observing the greater effects of the economic shift and generating an argument around a decision I still have room to improve. Doing this is as simple as using using CRAMPSS more effectively in evaluating a decision, and supporting it with solid thinking.

Portfolio Selection – Semester 1

Here I’ll be covering the basis of my portfolio on my blog, including direct links to other articles and blog posts within my blog that I find effective in expressing some of the ideas I have learned so far in Semester 1 of IB HL Economics with Dr. Anthony.

PPC Diagrams – While we only briefly talked about PPC Diagrams in the beginning of the Semester to explain opportunity cost, I did happen to explain it in both a blog post and VoiceThread update. PPC diagrams are essential in understanding opportunity cost and how there are limited supplies for unlimited wants and needs. Link here.

Demand and Supply Curves – We have looked existentially at these are they are the basis for most ideas in economics. Being able to understand how supply and demand interact is important in understanding why market prices are established, and how raising or lowering prices can affect these values. Link here.

Price Ceilings and Floors – A common concept associated with the construction of supply and demand curves is the use of price ceilings and floors in an economy to regulate prices. Both can be used to either keep prices low for the consumer’s benefit or high for the producer’s benefit. However, many people don’t understand how these restrictions on price can upset the regulation created by free markets which establish their own prices at the point which is most beneficial for producers and consumers. Link here.

Feel free to browse through the rest of my blog posts in addition to the ones linked here. Find anything you like? Drop me a comment and let me know. I’ll be sure to be keeping the blog more updated now as I continue to learn more about the basics of microeconomics here at Canadian Academy.