What are the challenges associated with managing in a business with high fixed costs like airlines? To understand the challenges firms face with regard to high fixed costs we must first have a basic understanding. A fixed cost is a routine cost the company incurs despite production, and changes in volume. It is a cost that must be paid routinely, but the amount of the expense may vary. Firms with high fixed costs must have complete understanding of what fixed costs exist that will be incurred, and how much revenue they need to generate in order to cover those costs and remain profitable. Companies operating in the airline industry face several opportunities in managing and developing strategies that take into account the following challenges: rivalry, high-fixed costs, low capacity, and price competition. The high fixed costs faced by airline companies are the costs of planes, fuel, pilots, flight attendants, and additional staff for baggage and customer service.
The airline industry is fiercely competitive and the ability to manage these costs and deliver revenue is what makes a firm successful. In a growing market the amount of entries and competitive offers can hinder the ability to remain viably profitable. “In short, companies that operate with a high fixed cost business model, particularly companies that operate in cyclical end markets, get hit the hardest when there is a cyclical downturn or a push out of an expected spending pattern.” (“Alcatel-Lucent: Turnaround or takeover?” (2012). When the industry struggles, competition to meet revenue goals increase, and airline firms tend to either encounter significant unexpected expenses to keep up or get caught in a price war situation.
As far as competition in the airline industry, labor is a fixed-cost that can significantly impact a firm. With the level of competition in the aviation industry, and the amount of firms competing, it can be challenging to retain the skilled pilots, staff, and customer service employees. Pricing strategy is a challenge as well, in that, in order to be the most productive firm and minimize the effect of these high fixed-costs, airlines must maintain just enough equipment and enough route offerings to meet demand, and therefore remain profitable.
The difficulties experienced by high-fixed costs according to Paul McWilliams, “…companies with high fixed costs models have inherently low cost flexibility and are, therefore, very sensitive to fluctuations in revenue.” (“Alcatel-Lucent: Turnaround or takeover?”) High-fixed costs allow the ability to produce high profit if the company runs at a high productivity and is in a growing market. If a company cannot produce revenue, it will detrimentally impact the firm’s ability to remain profitable. To sum up the challenges in terms operating in the airline industry, James Joyner says, “We’ve had commercial aviation for nearly a century now and nobody has managed to make a sustained go of it yet.
As the business starts to look profitable, we’ll inevitably see more entrants into the competition, driving down price, and demands from labor for their fair share, driving up costs.” Therefore, the ability to minimize the challenges faced in operating with high-fixed costs comes down to awareness of the fixed costs, the ability to remain competitive while operating in volatile industry, and a firms ability to generate revenue.
McWilliams, Paul. (2012). “Alcatel-Lucent: Turnaround or takeover?” Retrieved from http://money.msn.com/top-stocks/post.aspx?post=4bab7644-01a6-4b4e-b636-443995abad2b
Joyner, James. Publisher, “Airlines Make Profit!” Outside the Beltway Retrieved from http://www.outsidethebeltway.com/airlines-make-profit/