Airline Industry Cost Analysis

Paper Summary:

This paper analyzes the cost dynamics within the airline industry. The writer of this paper discusses the fixed costs within the industry which are significantly higher for established airlines, as compared to those of the newer, low-cost carriers. This paper also delves into the variable costs associated primarily with increased capacity and the number of passengers served. The writer of this paper contends and explains why the only way for any airline to survive and grow is to offer lower prices to gain new customers, thereby grabbing the market share from its competitors. This paper also examines why established airlines can no longer continue business as usual and must employ new methods and strategies to successfully compete. To lower prices the established airlines are spreading their flights out instead of concentrating them in banks thus lengthening layovers, resulting in less satisfied customers and less services offered, albeit at a lower cost.

From the Paper:

"Today, the only way for any airline to grow is to use low prices to attract new passengers and to take market share from competitors. Profit is dependent on revenue growth exceeding price decline and profit margin growth is dependent on the ability of airlines to increase the percentage of seats they fill on each flight and to continually cut costs. But, it's difficult to increase the percentage of seats given excess supply and price pressures, so operational efficiency will hold the key to success. As a result, a shakeout of airlines is occurring in the U.S. and elsewhere (Airline). United and USAirways have declared Chapter 11 bankruptcy, and Delta and American have barely avoided it in 2003 and 2004. International airlines such as Alitalia, Scandinavian Airlines System, British Airways, SABENA, Japan Air System, Air Canada, Ansett Australian , and others have flirted with or declared bankruptcy since 2000, as low-cost entrants expand overseas."

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