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Chapter 11: Problem 9

(Related to the Apply the Concept on page 376) An article in the New York Times on the airline industry described airlines as being "burdened by high fixed costs." What are likely to be the most important fixed costs for an airline? Are airlines likely to have particularly high fixed costs relative to their variable costs when compared with, say, an Old Navy clothing store or a Panera Bread restaurant? Briefly explain.

Short Answer

Expert verified
Some of the important fixed costs for an airline are the costs of acquiring, maintaining, and storing aircraft, and costs of staffing and operating airports and offices. These are significantly higher compared to businesses like Old Navy or Panera Bread restaurant that have lower infrastructure and equipment costs. Thus, airlines do have particularly high fixed costs relative to their variable costs.

Step by step solution

01

Identify Airline Fixed Costs

The key fixed costs for airlines include costs associated with acquiring aircraft, costs of maintaining and storing aircraft, and costs of staffing and operating airports and offices. These costs must be paid regardless of the number of passengers flown on any given day.
02

Compare with Variable Costs

Variable costs for airlines include mainly fuel and to a lesser extent, in-flight provisions and crew costs. Now, these costs increase as more flights are made. Comparing these, it can be seen that fixed costs are high relative to variable costs due to significant investments required for aircraft purchases, infrastructure, and staffing.
03

Comparison with Other Businesses

When compared to Old Navy clothing store or a Panera Bread restaurant, airlines do have particularly high fixed costs. This is because the nature of the costs in these other businesses (rent, wages, cost of goods sold) are quite different. While they do have fixed costs, these costs are lower relative to their variable costs compared to airlines, which have significant infrastructure and equipment costs.

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