An airline transportation consultant offers the CEO of BlueStar, a struggling new commercial airline company, the following advice conscerning the airline's high operation costs in the current quarter: "You don't have enough aircraft to operate efficiently. However, at some point in the long run, you will have the opportunity to add aircraft to your fleet in order to reduce you total costs and still carry the saome passenger load." Does this advice make any sense? In the long run, how can BlueStar's total costs fall by adding more aircraft to its fleet? Must BlueStar experience economies of scale for the consultant's advice to be correct?
The advice provided by the airline transportation consultant does make sense, and it is related to the concept of economies of scale. In the long run, adding more aircraft to BlueStar's fleet can potentially reduce total costs while maintaining the same passenger load. To understand why, let's explore the concept of economies of scale.
Economies of scale refer to the cost advantages that a company can achieve as its scale of operation increases. This means that as a company grows and expands, it can benefit from certain efficiencies and cost savings that come from producing or operating on a larger scale.
In the case of BlueStar, the consultant believes that the company does not have enough aircraft to operate efficiently. This can indicate that BlueStar's current fleet size is not sufficient to fully leverage economies of scale. By adding more aircraft to its fleet, BlueStar can potentially benefit from the following factors:
1. Spreading fixed costs: Fixed costs are expenses that do not vary with the level of production or service. Examples include hangar rental, administrative salaries, and some maintenance expenses. When the number of aircraft in the fleet is increased, these fixed costs can be spread over more units, leading to a lower average cost per aircraft.
2. Increasing operational efficiency: With a larger fleet, BlueStar can potentially operate more flights, which can lead to improved utilization of its resources. This increased efficiency can help reduce costs associated with fuel consumption, crew scheduling, and maintenance.
3. Negotiating better pricing: As BlueStar grows its fleet, it may gain more bargaining power when negotiating purchases and maintenance contracts with aircraft manufacturers and service providers. Volume discounts and favorable contractual terms can contribute to cost savings.
It is important to note that achieving economies of scale is not automatic, and it depends on various factors such as industry conditions, market demand, and management capabilities. BlueStar would need to carefully plan its fleet expansion, analyze market trends, assess profitability, and ensure effective fleet management to realize the benefits of economies of scale.
In summary, the consultant's advice suggests that by adding more aircraft to its fleet, BlueStar can potentially reduce its total costs in the long run. However, achieving these cost reductions would depend on BlueStar's ability to leverage economies of scale efficiently and effectively.