Conversely, any reduction of in the number of passengers from the breakeven point will result in a loss for the firm. This is assuming that every passenger has the same contribution margin. In some cases, an addition of a first class passenger and the removal of 2 coach passengers may actually increase the profit. 2. You are a management analyst for XYZ aircraft manufacturing company.
It is well known that the airline industry has practiced price discrimination for many years. We all know that on each flight the passengers have paid different prices, and that in some cases we can observe that the highest price is as much as five times the lowest price. Is price discrimination a good or bad thing for the airline passengers and the society? To answer such a question, we must focus on the
Economic scale: European airline industry has achieved economic scale in which it creates a barrier of entry that the new entrants have to compete on a large scale (eNote, 2012). In order to compete to the existing competitors, easyJet offered low fares by minimizing cost as much as they can. easyJet’s low fare strategy focuses on offering airfare without meal service and business class seating. Moreover, easyJet also encouraged Internet sales to reduce the business operation cost generated by hiring reservation agents (Kumar, N & Rogers, B 2000). b.
Essentially, Airbus and Boeing, the two major players provide almost the entirety of the market. The other players (Bombardier, Embraer and Cessna) have a very limited presence in the market. This industry structure makes airlines very dependent on the two major aircraft manufacturers. - Airlines are as well very dependent on oil price that represent one of their major variable cost. - Airport gates and time slots are very scarce as every airlines are competing for the exact same product.
Such technological advancement placed a lot of financial burden on the operations of Jet Blue. The airline industry continues to feel the effect from the U.S economic slowdown and rise of crude oil/jet fuel prices, which have risen to record numbers with no predictable end in sight. The slow economic growth has compelled both business and individual travelers to cut back on travel expenditure thereby compelling airlines such as Jet Blue to initiate energy conservation measures, targeting specific markets and exploring the possibility of partnership with other airlines. Linked to the volatility of jet fuel prices is the increased in competition posed by new entrants to the airline industry. New entrants such as Virgin America are bracing the competition by offering lower fares to customers.
However, many of those years have been financially turbulent with a large number airlines filing for bankruptcy protection and merging with other airlines for sustainability. Although during several periods the airline industry experienced “sharp upturn in profitability” (Grant, 2010, p.30). Giovanni Bisignani, Director General of IATA, stated in 2004: “The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago”. (Done, 2009) There are two main phases of the U.S. airline industry: regulation phase until 1978 and deregulation after October 1978.
For the airline industry, this means that the average cost of operating are being met. The airlines are able to operate, but do not make any extra money above covering costs. An article in Wall Street Journal suggested that United Airlines “was not covering its costs from San Francisco to Washington D.C.” (Brickley, Smith & Zimmerman, 2009). It is being assumed that the revenue collected on the typical flight between these two hubs did not cover the costs. This does not necessarily mean that the airline should discontinue flights between these two hubs.
The summer of 1971 found the once formidable company on the brink of disaster. Despite the nearly a $1 billion in sunk costs, Lockheed was in need of $250 million more to bring the plane to market, but its bankers would not commit without federal loan guarantees. Spokespersons for Lockheed claimed before Congress that the Tri-Star program was economically sound and that their problem was mere liquidity crisis. However, opposition to the guarantee focused on estimated break-even sales – the number of jets that would need to be sold for total revenue to cover all accumulated costs. This case illustrates the importance of NPV analysis in capital budgeting.
As a result, management took into account that changing both supply and demand according to market activity could improve its business performance. In attempt to capture the above factors, American Airlines management developed a yield management system which considered capacity, historical bookings, pricing, cancellations and no-show rates, and costs of oversales and spoilage. If passenger-requested booking price was equal to or greater than the bid price, management must accept all passengers requested at that price. In terms of the-no-show rate, for local passengers had been 15 per cent whereas for flow passengers had been 20 per cent. Two additional costs include spoilage and oversale.
The salaries of pilots and cabin crew were substantially increased – where they benefited from a hefty 30% rise in pay and could respectively earn up to £140 000 and £55 000 per annum. As for ground crew and other support and frontline staff, their terms and conditions were unrivalled across the industry as they were paid 25% more than their counterparts in other airlines alongside a reduction in working hours. An Alarming Financial Situation However, this rosy picture was marred by the recent global financial crisis, which inevitably had adverse effects on all airline operators, with a sharp fall in demand for first and business class travel. Last financial year, the airline reported a £30 million loss. The loss for the last three months of the current year was over £10 million and the figures for the rest of the year look like being just as bad, with losses running at over £50 000 a day.