Essay --

Economies of scale The concept of economies of scale refers to the advantages gained when long-run average cost decrease with an increase in the quantity being produced. Economies of scale are common in highly capital intense industries with very high FC such as the airline industry. In general the average total cost curve at least in the short run is U-shaped, which indicates that the average total costs decline over a certain range of increasing output and then increase again until they reached their minimum. () The differentiation between short-run and long-run is not linked to a certain time period but related to the existence of fixed input factors. In the short-run there is some kind of input that is fixed and therefore cannot easily be changed without excessive investment. In the long-run every input is variable and no fixed factors exist. () Because of economies of scale, network airlines have an inherent cost advantage over smaller ones. This is a major reason why there are very few small airlines in the industry and why there is continual consolidation. Hub airports also contribute significantly to economies of scale. Hubs are extremely costly operations, and the costs that they generate, such as multiple labor shifts, terminal leases, and ground equipment, are fixed in the short term. Therefore, in order to spread the costs over more units of output (air seat miles (ASM)), airlines have a strong incentive to use these assets as intensively as possible. While most airlines operate banked hubs to provide shorter connection times for their passengers, airlines such as American and Delta have experimented with rolling hubs in order to better utilize hub assets. With banked hubs, assets sometimes remain unused for extended... ... paid and unpaid seats, to determine the average amount of revenue received for a paid seat we calculate revenue per revenue passenger mile (RRPM). Break-even analysis is an important measurement for a company. It is the number of revenue (or unit) required in order for the company’s costs to be recovered. In the airline industry, break-even called break-even load factor and is usually expressed as a percentage of total ASMs. With break-even load factor, any actual load factor greater than break-even is a positive contribution and any load factor less than break-even is a loss. Break-even load factor is an important factor when assessing routes and flights on individual basis because it is possible for an airline to report a operating profit, it may not necessarily represent a net profit since fixed overhead cost and interest income/expenses still need to be paid.