Define economies of scale. Are economies of scale evident in the airline industr

Question

Define economies of scale. Are economies of scale evident in the airline industry? What is the implication for market entry?

Airline passengers are broadly segmented by purpose of travel. Characterize the two major segments by price elasticity of demand. What is the implication for the price each segment will pay for air travel?

Explain how higher utilization of assets such as aircraft, gates, and pilots lowers the cost per available seat mile (CASM) or cost per available seat kilometer (CASK).

The airline industry, despite continued rapid growth, has been only marginally profitable over the last 50 years. What characteristics of the industry result in the lack of satisfactory profits?

Characterize the demand for air travel over time; that is, by time of day, day of the week, season, and business cycle.

Explanation / Answer

1.) Economic of scale arises due to the inverse relationship between the quantity produced and the per unit cost FC (fixed cost) ; it means greater the quantity of goods produced the lower the per unit cost.It is basically the cost advantage due to increase output of products.Airlines have put in place several strategies to increase the number of flights; here they are increasing the supply to reduce per unit FC. Among them are in-flight meal reduction/suppression and ticket-selling process. Airlines industry try to increase the demand by following the startegies mentioned above according to the economics of scale.Implications of market entry are- spreading the risk (diversifying the business help in reducing the risk of failure) and maintaining the oligopolistic competition .

2.) Airlines Passangers are characterised by travelling in "Economic class or the Business class". Price elasticity of demand basically means that as the demand rises then the price also rises at a constant supply situation. If the demand for flight will rise then price will rise but people travelling in Business class wont get affected by it as they have enough money to pay; they will pay the price airline charge them .Hence, Price elasticity of demand is not applied in their class. For people travelling in economic class it will definately get affected.

3.)Higher utilization of assets lowers CASM as we know :-CASM = Operating Expenses /total number of available seat miles producedSo, by proper utilization of assets we are reducing our operating costs. For example, we have only 1 pilot to fly 5 aero planes. In this case, if we consider a 24 hours day => one pilot can fly up to 24/8 = 3 aero planes in a day by working for 8 hours per flight. Total number of hours in a day = 24 hrs.Still, 5-3= 2 flights are left alone. Hence, no proper utilization of resource i.e. in this case flight. But, if we efficiently include 5 pilots for 5 plane the utilization of resource is bettered. Hence, the operating cost goes down and hence CASM lowers.

4.) The airline industry have very few rivalries. Their is very less competition. The major junk of airline is by the Airindia or Boing which has kind of monopoly. They cannot just increase the price. They follow the cutthroat policy.Due to increase in price of fuel on which the airline affects it makes less profit.The Varaible cost and Fixed Cost in the airline industry is really huge to overcome during a short while. There are terrorist attack as well and incident like 9/11 which shakes every sector.

5.) In the airline Industry the different time if we see like day, week , month or considering the business cycle; i feel the maximum rush would be at the time of some occassions. For any person some day or week wont matter much. The demand for airline will be maximum during odd times preferably like morning at around 4 or night because the tickets are of lower cost plus corporate plans may be applied during odd times.The demand will b high just because the price would be low. It is the other way. Due to lower price demand is high as these are odd timings. Now a days we can see main focus is on creating the market share rather than creating more profit. Firstly ; they will give huge offers to the customers.

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