Challenges Associated with High Fixed Costs - Airlines
What are the challenges associated with managing in a business with high fixed costs like airlines?
To understand the challenges firms face with regard to high fixed costs we must first have a basic understanding. A fixed cost is a routine cost the company incurs despite production, and changes in volume. It is a cost that must be paid routinely, but the amount of the expense may vary.
Firms with high fixed costs must have complete understanding of what fixed costs exist that will be incurred, and how much revenue they need to generate in order to cover those costs and remain profitable. Companies operating in the airline industry face several opportunities in managing and developing strategies that take into account the following challenges: rivalry, high-fixed costs, low capacity, and price competition. The high fixed costs faced by airline companies are the costs of planes, fuel, pilots, flight attendants, and additional staff for baggage and customer service. The airline industry is fiercely competitive and the ability to manage these costs and deliver revenue is what makes a firm successful. In a growing market the amount of entries and competitive offers can hinder the ability to remain viably profitable. “In short, companies that operate with a high fixed cost business model, particularly companies that operate in cyclical end markets, get hit the hardest when there is a cyclical downturn or a push out of an expected spending pattern.” (“Alcatel-Lucent: Turnaround or takeover?” (2012). When the industry struggles, competition to meet revenue goals increase, and airline firms tend to either encounter significant unexpected expenses to keep up or get caught in a price war situation. As far as competition in the airline industry, labor is a fixed-cost that can significantly impact a firm. With the level of competition in the aviation industry, and the amount of firms competing, it can be challenging to retain the skilled pilots, staff, and customer
To understand the challenges firms face with regard to high fixed costs we must first have a basic understanding. A fixed cost is a routine cost the company incurs despite production, and changes in volume. It is a cost that must be paid routinely, but the amount of the expense may vary.
Firms with high fixed costs must have complete understanding of what fixed costs exist that will be incurred, and how much revenue they need to generate in order to cover those costs and remain profitable. Companies operating in the airline industry face several opportunities in managing and developing strategies that take into account the following challenges: rivalry, high-fixed costs, low capacity, and price competition. The high fixed costs faced by airline companies are the costs of planes, fuel, pilots, flight attendants, and additional staff for baggage and customer service. The airline industry is fiercely competitive and the ability to manage these costs and deliver revenue is what makes a firm successful. In a growing market the amount of entries and competitive offers can hinder the ability to remain viably profitable. “In short, companies that operate with a high fixed cost business model, particularly companies that operate in cyclical end markets, get hit the hardest when there is a cyclical downturn or a push out of an expected spending pattern.” (“Alcatel-Lucent: Turnaround or takeover?” (2012). When the industry struggles, competition to meet revenue goals increase, and airline firms tend to either encounter significant unexpected expenses to keep up or get caught in a price war situation. As far as competition in the airline industry, labor is a fixed-cost that can significantly impact a firm. With the level of competition in the aviation industry, and the amount of firms competing, it can be challenging to retain the skilled pilots, staff, and customer
Cited: McWilliams, Paul. (2012). “Alcatel-Lucent: Turnaround or takeover?” Retrieved from http://money.msn.com/top-stocks/post.aspx?post=4bab7644-01a6-4b4e-b636-443995abad2b Joyner, James. Publisher, “Airlines Make Profit!” Outside the Beltway Retrieved from http://www.outsidethebeltway.com/airlines-make-profit/