Flight capacity

South African Airways (SAA) and Quantas Airlines hold a duopoly- a ‘code-share’ – on direct flights from Australia to South Africa. The International Air Services Commission has indicated to the airlines that the tie-up may be cancelled at the end of 2015. The Commission warned the airlines to stop decreasing their flight capacity in order to cut costs and drive up load factors and fares. Quantas wants the commision to approve the tie-up for another five years otherwise it has indicated it would withdraw itself entirely from the route. Many would argue that the breaking up of the duopoly by the commission is a Pareto-efficient change. This interpretation cannot be so because breaking up a duopoly makes its owners (or shareholders) worse off. Do you agree or disagree? Explain your answer.

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