What are the challenges connected with managing in an organisation with high fixed expenses like airlines? To understand the obstacles firms face with regard to high fixed costs we need to first have a fundamental understanding. A set expense is a regular cost the company sustains regardless of production, and modifications in volume. It is an expense that needs to be paid regularly, however the quantity of the expense may differ. Companies with high fixed expenses need to have total understanding of what repaired costs exist that will be sustained, and just how much revenue they need to generate in order to cover those expenses and stay lucrative.
Business running in the airline market face numerous opportunities in managing and establishing techniques that take into consideration the following challenges: competition, high-fixed expenses, low capability, and cost competitors. The high set expenses dealt with by airline company companies are the expenses of aircrafts, fuel, pilots, flight attendants, and additional personnel for baggage and customer care.
The airline market is increasingly competitive and the capability to handle these costs and provide profits is what makes a company successful. In a growing market the amount of entries and competitive deals can prevent the capability to remain viably successful. “In other words, business that operate with a high set expense service design, particularly business that operate in cyclical end markets, get strike the hardest when there is a cyclical slump or a push out of a predicted costs pattern.” (“Alcatel-Lucent: Turnaround or takeover?” (2012 ). When the market struggles, competition to fulfill income objectives increase, and airline company companies tend to either come across considerable unanticipated expenses to maintain or get captured in a cost war circumstance.
As far as competitors in the airline company market, labor is a fixed-cost that can considerably affect a firm. With the level of competition in the aviation industry, and the amount of firms completing, it can be challenging to keep the experienced pilots, personnel, and consumer service workers. Pricing strategy is an obstacle as well, because, in order to be the most efficient company and reduce the impact of these high fixed-costs, airlines must preserve simply sufficient equipment and adequate route offerings to fulfill need, and for that reason remain successful.
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.