We’ve all experienced (or heard about) the challenges that the airlines have been facing. Identify three factors that are affecting airline company’s ability to break even. For each of your factors, discuss how these have an impact on the breakeven (contribution margin, fixed costs, variable costs, a combination, etc.), and what happens if these factors increase or decrease.
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There are, as you say, a number of issues that affect the ability of airlines to break even. Airlines have, however, been rather profitable in the past few years. Let us look at some factors that affect this.
The cost of fuel is a very important factor that affects airlines’ ability to break even. The cost of fuel can be seen partly as a variable cost and partly as a fixed cost. Of course, if an airline changes the number of miles it flies, it changes the amount of fuel that it needs. This means that fuel is a variable cost. However, fuel can also be somewhat of a fixed cost for a given route. In other words, just flying an empty airplane on a given route would take up a given amount of fuel. This is a fixed cost of flying that route. The marginal amount of fuel needed to move each passenger is relatively low. In these ways, fuel is a combination of a fixed and a marginal cost.
The price of airplanes is also an important factor. This is largely a fixed cost. Once an airline has bought or leased an airplane, those costs are locked in, regardless of how much the airplane is flown or how many people are on the airplane when it flies. The number of airplanes bought or leased can vary, but once the airplane is bought or leased, its cost is a fixed cost.
The wages paid to employees are also an important factor. These can be fixed costs or variable costs, depending on the contracts that the airlines have with their unions. When pilots, for example, are paid a given amount per month regardless of miles flown, they are a fixed cost. If, however, people like baggage handlers are paid on an hourly basis, they can be a variable cost.
We must note that this question asks only about costs. The major factors that affect airlines’ profitability come from the revenue side. Airlines’ profitability generally depends on how many passengers they get on each flight and how much money they are able to charge those passengers in fares and fees.
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