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Air Industry, Case Study Example

Pages: 3

Words: 885

Case Study

Air industry costs have been a hot topic as of late because since the prices of fuel are continuously increasing, the air industry is forced to raise its ticket prices as a consequence. However, it is important to note that this industry has other costs that may contribute to the increasing ticket prices. According to the Aviation and Airspace Almanac, the airline industry’s costs include station expenses, passenger services, promotion and sales, administration, flight crew, fuel, maintenance, depreciation and amortization, airport charges, and enroute facility charges. Although we would expect that the price of fuel tops this list as the most extreme expense that the air industry will make, this is not the case; 12.2% of the money spent by the airline industry is used to ensure that the administration is running smoothly, followed by12.0% of the money spent to pay and train its flight crew, and 16.4% is spent on promotions and sales (Aviation and Airspace Almanac, n.d.).

Other airline industry expenses that the Aviation and Airspace Almanac reports includes the fact that 75% of their non-fixed costs are spend on staffing needs. In addition, it reports that the airlines typically overbook flights because as a result of two thirds of the operating costs being fixed, the marginal costs of taking an extra passenger are extremely small. Furthermore, the almanac mentioned that a flight must have 65% of its seats sold to cover all of the overhead costs associated with the flight; therefore, if very few people travel to a certain location, the airline industry will have an extremely low marginal income. This contributes to their practice of selling seats for very low prices at last minute through vacation deal websites like Priceline. The advent of the internet however has ensured that the airline industry is able to sell more seats than it did previously; people are flying more frequently in the 2000’s compared to the 1990’s, and even with the last minute seat deals that the airlines are offering, they are seeing progressively more and more profit as a consequence.

Other ways that airlines have managed to cover increasing operating expenses is a change in their luggage policy. Before the fuel prices increased to their current state, airlines used to offer customers a free checked bag in addition to their carryon item. Since the increase however, many airlines have required that passengers pay to check a bag and they will typically be charged additional money for each pound of the bag that the individual airline considers to be overweight.

When considering all of the combined overhead costs for a flight, mathematicians have statistically determined that the cost of one seat on a plane per mile is about 12 cents for longer flights. As a consequence, large planes require a total of more than $55,000 to be able to travel to its destination. It is therefore apparent that it is essential for the airlines to find ways to fill the plane, which justifies their advertising costs and the many extras that they offer to customers as incentive to fill the flight.

It is interesting that despite the fact that many airports are government run and funded that airlines have such a high amount of station expenses and passenger service expenses. However, it is important to note that these fees are not completely covered by the tax money that the airports receive. The main reason that the airlines must offer passenger services is due to the competitive nature of the industry itself. Consumers typically have many different companies they can choose to fly with, but many have their individual preferences. These preferences come as a consequence of amenities available on the flight itself, such as extra leg room, inflight movies, and meal options while aboard. Typically these amenities require the customers to pay a slightly higher amount of money for the service, but many don’t mind because this makes the long duration of their flights more comfortable. Furthermore, people may choose certain airlines because of their reputation for being on time, safe, etc. Although these are not amenities, airlines who usually charge more are able to reach destinations in a timelier manner and have a staff trained in more advanced safety features. As such the price that customers pay for airline tickets is also a direct result of the type of service they expect. The airlines themselves must weigh the balance between service and ticket price when thinking about who their target market is (Investopedia, n.d.).

Despite the fact that airlines themselves compete, these is no real travel option that is able to compete with this industry. Although there are other modes of transportation available such as cars, buses, planes, and ships, airplanes are the only way to ensure that a destination is reached in the quickest manner. Since this is the case, airlines don’t necessarily need to strive for perfection. Planes typically do not board at the announced times and there is usually plane traffic as the plane is leaving and entering an airport. However, perfecting these aspects of the flying experience would likely lead to a further increase in ticket prices, which may deter customers into looking into some of the transportation alternatives.

References

Aviation and Airspace Almanac. (n.d.).  Operating Expenses of the Airline Industry. Retrieved from http://people.hofstra.edu/geotrans/eng/ch3en/conc3en/airlinecosts.html

Investopedia. (n.d.). The Industry Handbook: The Airline Industry. Retrieved from             http://www.investopedia.com/features/industryhandbook/airline.asp

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