Archive for November, 2009

Dubai under scrutiny after debt payment delay

BBC News: Click Here

Yahoo News: Click Here

“Dubai’s financial health has come under scrutiny after a major, government-owned investmnet company asker for a six-month dely on repaying its debts.”

According to BBC News, Dubai World, the government-owned investment company, has a debt of $59 billion to the banks in Europe. The request for a postpone had considerable effect on the European stock market. Especially the Royal Bank of Scotland’s stock market was badly affected.

Dubai World was suffering from a credit-crunch as global economic recession has started from last year. Also the massive construction of skyscrappers, hotels, and fancy facilities has put a lot of financial burden on the company.

This is a credit default swap chart for countries that have been affected by Dubai’s delay in debt payment. This lists countries from left to right that are most vulnerable to this event. Those countries that are in deep danger of bankruptcy are Ukraine, Venezuela, Vietnam, and countries in Middle East. Countries that have low CDS points but have rapid increase are Japan, Chile and UK. These countries do not have high risk, however, they are potential danger.

Overall, this event certainly abashed Dubai’s credibility on its reliability and of its investment.

Resource:

CDS data Chart: Asian Economy News (In Korean Language)

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US dollar falls to 14-year low against the yen

BBC News: Click Here

“The US dollar has hit a 14-year low against the Japanese yen with low interest rates in the US making the greenback less attractive to investors.”

According to BBC News, the US dollar has slipped to 86.5 yen. It seemed to have lost its name as ‘world currency.’ With low interest rates and unstable economy within the US, the investors are ditching the US dollars and finidng an alternative (such as Euro, Yen, or gold). This has significantly affected the US dollar to fall. Investors wanted safe, high-profit currency; not low-profit, unstable US Dollar.

While the US Dollar slipped to 86.5 yen, other currencies such as Euro, Yen, or gold have increased dramatically. The price of gold was especially surprising. The price of gold was steadly rising for last 5 years! This significantly increased especially during the last 2 years when there was a global economic recession. Investors wanted more safe investments. So they chose gold.

Yet, I do not think the fall in US dollar is a bad news for US automobile companies or export companies. As the value of US dollar compared to other major currencies has fallen, the exporting companies have gained price advantage over other companies in the country with high currency. Also this will allow companies in the US to gain more control of the domestic market as other companies based on the country with high currency compared to the US dollar will lose a price advantage.

<A terrified Japanese man reluctantly trading US dollars for Japanese Yen>

Japanese exporting companies would be seriously concerned about this situation. As 40% of its economy is based on exporting, it is a serious matter related to the recovery of economic downfall in Japan.

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Tummy Tuck Jeans

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Watch Video: Click Here

In this video, it researched about the company, “Not Your Daughter’s Jeans”, how it was successful despite the economic recession. They targetted women over 40 years-old who still want to be fashionable.  But, there aren’t any jean-companies making jeans for these women. This company knew this and started to make jeans for these 40 years-old women. These women were not in economic difficulties like 20~30’s. So the jeans this company was selling was income-inelastic. This means that these women will not buy less jeans when their income decreases. It could be said that this company has created a ‘niche market,’ which satisfies specific people with specific products.

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Elasticity: Hovis Case Study

bread

News Article: Click Here

Premier Food’s Hovis has experienced some significant decline in its bread sales. This is mainly because of

  1. Increase in price of bread.
  2. Rival companies keeping the low price.

Hovis’ increase in price of bread was said to be inevitable. They simply could not maintain the price as the production cost were exceeded the selling price. Consumers have turned their back on Hovis for following reasons.

  1. Whenever there is an increase on price of a product, the demand decrease. It’s the law of demand. (The degree of its decrease is determined by its elasticity). So the consumers started to buy less of their bread.
  2. Usually, bread are told to be inelastic. However, in the article it reported that there are 2 other rival companies selling bread. This has made a substitution effect for Hovis’ bread. Therefore, it has made the bread elastic.

It’s simple. There are other companies selling low-price bread, but Hovis rose its price. No consumer would leave a cheap bread to the side and buy Hovis’ expensive bread.

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Scrappage sees UK car sales surge

BBC News Article: Click Here

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In UK, there has been a tremendous increase in their car sales. “The Society of Motor Manufacturers and Traders (SMMT) said 168,942 new cars were registered last month, an increase of 31.6% compared with October 2008.”

There are several reasons to how the UK car sale surged:

  1. There was a government policy in increase VAT for old cars starting from next year 2010. Many costumers wanted to avoid this, so there has been an increase in car sales.
  2. There was another government policy in supporting old car owners to buy a new car. The government has supported these owners up to a £2,000 discount for replacing 10 year or more cars. This cost was said to be shared between the government and automobile producers.
  3. Consumer’s purchasing power has increased sharply, which led to more spending such as buying a car. This was due to reduced mortgage interest payment, lower utility bills and a moderation in inflation.

Looking at these 4 reasons, it is clear that government role in increase of car sales was pivotal. Many people criticize about government supporting for companies with deficit. However, government support is sometimes effective. Also, government policies in reducing mortgage interest payment, increasing VAT, and etc. was a good approach in lifting up the crumbled car industry.

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Advice for JAL

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Just like British Airline, Japan Airline is in a big mess of deficit. Due to global economic recession, the demand for high service, high price seats went down as well as Japan Airline’s profit went down. Here are some of my advice for JAL:

  1. They should cut off high price seats such as business class and 1st class seats. Due to global economic recession, the demand for those seats have went down. Conversely, the demand for lower price seats such as economic seats went up.
  2. They should lower the price as much as possible. As the demand for high price seats went down, Japan Airline must make the seats available for a low price in order to ‘survive.’
  3. They should lower the labor cost. This might lower the quality of airline service, however, it is inevitable during the recession.
  4. They should get rid of unprofitable air-routes. By getting of those unprofitable, money-eating routes, it will significantly help Japan Airline financially. Instead, they should look for cheaper, but effective routes.

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Data Response: “Cheap Flights – Europe”

ryanair-Irish-budget-airline

a) In the article, it suggested that European air travel’s price are getting elastic due to the global economic recession. It has introduced British Airway, which aimed for high price and inelastic part of the service to gain profit. However, as the demand for high price seats went down, they tried switching their plans to aim for low price and elastic part of the service. So this suggests that European air travel price are getting elastic.

b) Ryanair used to aim for low price seats in order to gain a lot of travelers in their aircraft. The low price seats are usually very elastic. Therefore, if Ryanair lowers the price by just a little, there are tremendous increase in amount of demand. As the global economy went through recession, lots of travelers wanted low price seats for airlines. So the Ryanair has become the most profitable airline by the tremendous increase in demand for low price seats.

c) Ryanair was able to offer seats on some flights for under 10 pounds because of their unique plan. Ryanair had an unique plan in minimizing costs included in a flight service. The airline provider has only one kind of aircraft, the Boeing 737, that minimizes the service costs. It only landed on minor cities, where it cost less than in major cities. Also, they can fly two times than the ordinary airline because their airline gets their aircrafts back into the sky only 20-25 minutes after it has landed. Also, as they covered the cost for the flight, they lower the price for an empty seat right before take off. This has really helped lower the price for seats.

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