every airplane as intensively as possible. Although this strategy makes sense for each individual carrier, it results in a tendency toward perpetual overcapacity. (e)Excess Capacity and Low Marginal Costs The airline industry historically has tended both to produce excess capacity and to price its product below fully allocated costs. The demand of consumers for schedule frequency produces tremendous excess capacity with no shelf life, pushing costs up. The demand of consumers for low prices and the perception that air transportation is virtually an undifferentiated commodity drive prices down to levels that, too oft?en, fail to cover fully allocated costs. Moreover, that capacity has no shelf life. Once a scheduled flight pulls away from the gate, any empty seats are lost forever. This leads to marginal cost pricing. (f)Sensitivity to Economic Fluctuations The susceptibility of air transportation demand to the business cycle was underlined by the recession of the early 1990s. Revenue passenger miles and cargo ton-miles declined, and losses soared to record levels. Although the impact of a recession is not unique to the airline industry, what is different is the fact that as a service industry, it is much slower to recover because spending on air travel is discretionary. In a recession, people tend to postpone long-distance travel to save not only on airfares but also on the expenses associated with the trip. Travel is one of the expenses a business can cut immediately during tough economic times. (g) Close Government Regulation Unlike other oligopolistic industries, but like other transportation modes, the airlines have a long history of both support and regulation by government. The FAA regulates most aspects of airline operations that relate to safety and navigation, as well as to environmental conditions. Reference4
BSAB 415 – Airline ManagementWensveen, J. G., & Wells, A. T. (2011). Air transportation: A management perspective(7th ed.). Farnham, England: Ashgate.5
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- Summer '19
- Economics, Economics of production, Airline Management