An airline transportation consultant offers the CEO of BlueStar, a struggling new commercial airline company, the following advice concerning the airline's high operating 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 your total costs and still carry the same 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 consultant's advice does make sense. In the long run, BlueStar's total costs can fall by adding more aircraft to its fleet due to economies of scale.
Economies of scale refer to the cost advantages that a company can achieve as it increases its production or scale of operations. In the case of an airline, adding more aircraft to the fleet allows for increased capacity and greater efficiency in operations.
Here's how BlueStar can experience cost reductions by adding more aircraft:
1. Increased capacity: Adding more aircraft will enable BlueStar to carry a larger number of passengers and increase its overall capacity. This can help spread fixed costs (such as pilot salaries, ground crew, and maintenance) over a larger number of passengers, reducing the cost per passenger.
2. Improved scheduling and utilization: With a larger fleet, BlueStar can schedule flights more efficiently, reducing waiting times and maximizing aircraft utilization. This can lead to lower costs per flight and higher revenue generation.
3. Negotiating better deals: As BlueStar expands its fleet, it gains more bargaining power when negotiating with suppliers. It can secure better deals on aircraft purchases, maintenance contracts, fuel, and other operational expenses. These savings can contribute to the overall reduction in costs.
4. Economies in maintenance and training: By operating a larger fleet, BlueStar can achieve economies of scale in maintenance and training. It can consolidate maintenance facilities, streamline training programs, and reduce per-aircraft costs associated with these activities.
However, it is important to note that experiencing economies of scale is not the only way to reduce costs. Other factors such as operational efficiency, effective management, and streamlining processes can also contribute to cost reduction. The consultant's advice is based on the assumption that adding more aircraft will allow BlueStar to achieve economies of scale and ultimately reduce its total costs.
The advice provided by the airline transportation consultant does make sense. In the long run, increasing the number of aircraft in BlueStar's fleet can help the company reduce its total costs while still carrying the same passenger load. This is because adding more aircraft allows the airline to spread its fixed costs (such as maintenance, leasing, and overhead expenses) over a larger number of flights and passengers.
By operating more flights and carrying a larger number of passengers, BlueStar can increase its revenue without a proportionate increase in fixed costs. This leads to a lower cost per flight or per passenger, ultimately reducing the company's total costs.
However, it is important to note that BlueStar would need to experience economies of scale for this advice to hold true. Economies of scale refer to the cost advantages gained when a company increases its scale of production. If BlueStar can achieve economies of scale by increasing its fleet size (e.g., through bulk purchasing, better bargaining power with suppliers, or improved operational efficiency), it would help drive down its total costs and make the consultant's advice accurate.