Business Economics the Airline Industry  Term Paper

  • Length: 10 pages
  • Subject: Transportation
  • Type: Term Paper
  • Paper: #66288313

Excerpt from Term Paper :

A lower price enables an airline to remain well above the competition.

Economies of scale and scope are vital to the performance of an organization no matter the industry the organization is involved in. An organization can only remain competitive if driven to achieve economies of scale (Bronson & Morgan, 1998). Tactics an organization may adopt to achieve economies of scale and scope will include optimal market coverage, increasing sizes, superior "internal growth" and raised capital (Bronson & Morgan, 1998). Another important consideration for organizations include efficiency. One might define efficiency as "the ratio of inputs to outputs" (Bronson & Morgan, 1998).

Efficiency of an organization may be measured in various ways including by observation through accounting (Bronson & Morgan, 1998). An organization particularly a franchised business location will continually measure efficiency to ensure they are minimizing costs and saving time to help facilitate economies of scale and scope.

Tactics Businesses Use to Compete to Win in Business Or Survive

Economies of scale and scope are vital to the airline industry. Without economies of scale and scope an airline cannot remain competitive nor generate profits. It is vital that airlines pay specific attention to organizational tactics and methods to ensure economies of scale are maintained. There are several tactics that successful airlines adopt to achieve economies of scale and scope.

Airlines that expand total operations will often realize increasing economies of scale, however much controversy exists as to whether getting larger is an adequate measure for realizing economies of scale and scope in the airline industry (O'Connor, 2001). Many have suggested that airlines that expand in size often increase economies of scope more so than economies of scale. Increasing size is one way that airlines can realize better advertising, marketing and distribution, so this assumption makes sense. However increasing size may also decrease the costs associated with providing additional products or services. Hence the confusion. The matter is at best considered controversial. Airlines adding route branching from existing networks may improve economies of scope or savings because airport personnel and facilities may be in place at the point of origin; this enables costs "to be spread over more units of output" (O' Connor, 2001: 22).

Other methods and tactics airlines may use to realize economies of scale often involve merging with other airlines (O'Connor, 2001). By doing so an airline may ensure it takes on a more profitable route for example, or improve peak business by merging with a carrier that has peak business during the primary carriers off season (O'Connor, 2001).

British Airway has adopted a variety of tactics to improve its economies of scale and scope. One method they have employed is increasing aircraft fuel efficiency by 30$% in recent years and reducing energy consumption in buildings by 2% every year (British Airways, 2005). The company is committed to expanding its economy's of scale by providing new airline destinations and cost cutting. British Airways has spent much time increasing their presence in major airports and hubs, securing new slots particularly at U.S. And other major airports (Acumen, 2005).

The company has also worked to open new franchises abroad including ones in South Africa, Denmark and is currently working on securing new franchises with Canadian Airlines (Acumen, 2005). This will help economies of scope by improving British Airway's brand name while at the same time reducing costs via economies of scale (Acumen, 2005).

British Airways has also begun serving roughly a dozen U.S.. Cities, increasing its international presence and scope of service (O' Connor, 2001). British Airways has in fact grown to the point where many consider themselves a "mega carrier" growing in size and strength to realize economies of scale (O' Connor, 2001).

BA has also extended services to distant regions including the East Indies and Asia (O' Connor, 2001). British Airways also improved its efficiency and economies of scope in 1987 when it became privatized (O' Connor, 2001). This allowed increasing revenues to be generated, a reduction in deficits, enhanced commercial viability and efficiency and less political interference in the management of the airline (O' Connor, 2001).

Unfortunately there are often many barriers to economies of scale and scope within the airline industry. As airline companies for example attempt to increase their size through internationalization they also increase their "complexity of operations" and costs associated with managing those operations, which may result in diseconomies of scale (Katrishen & Scordis, 1998; Porter, 1985). British Airways for example launched a new inexpensive airline labeled "Go" in 1998 improving economies of scale while competing for many business oriented clientele (Acumen, 2005). Unfortunately this airline eventually failed which disrupted their economies of scale and scope in the short-term (Acumen, 2005). The expenses associated with increased operating costs and international exposure ultimately resulted in diseconomies of scale.

Conclusions

International businesses are constantly striving to realize economies of scale and scope to remain competitive within their industry. There are a variety of tactics that industries adopt to achieve economies of scale and scope, including increasing their sizes and service offerings. Economies of scale are particularly vital to the health and well being of firms in the airline industry. Often to achieve economies of scale and scope airlines have to cut costs by reducing fares, offering services in international locations, increasing their size and services through mergers and engaging in other brand building tactics.

British airways has adopted a number of these tactics to improve their economies of scale and scope. Many of their strategies have succeed, propelling the airline to mega airline status in the industry. British Airways is often considered a frontline global carrier in part due to its economic success. Of course not all of the tactics the firm has adopted have succeeded in creating economies of scale and scope (for example establishing "Go" as a part of the carriers service). However such mistakes are common and often enable an organization to ultimately grow with time regardless of the industry.

Ultimately the future of the airline industry will depend on its ability to maintain economies of scale and scope over time. In recent years airline agencies have struggled to maintain their stronghold due to a number of factors including economic concerns. Fortunately many including British Airways have pulled through despite minor setbacks such as that incurred with the introduction of "Go." Often establishing or realizing economies of scale is nothing more than a matter of trial and error in the airline industry.

As time has shown most airlines find ways to face demands and challenges presented with changing times. Some researchers believe in the future airlines might adopt a number of techniques to maintain economies, including raising their capacity per flight (UA, 1996). This may be achieved by utilizing larger aircrafts or by building larger airports and runways (UA, 1996). Technology may also help improve economies of scale by offering more efficient air traffic control (UA, 1996).

As long as airlines like British Airways continue to adapt and conform to changing consumer demands and trends, it is likely they will continue to realize significant success well into the future.

References

Acumen Professional Intelligence Ltd. (2005). "Business Environment - British Airways." Acumen Enterprise, 31, October 2005:

http://www.acumenenterprise.com/Business/Business_Environment_British_Airways_L18237/

British Airways, (2005). "Global Warming and Aviation." 31, Oct 2005:

http://www.britishairways.com/travel/crglobalwarm/public/en_gb

Bronson, J.W. & Morgan, C.P. "The role of scale in franchise success: Evidence from the travel industry." Journal of Small Business Management, 36(4): 1998.

Katrishen, F.A. & Scordis, N. (1998). "Economies of scale in services: A study of multinational insurers." Journal of International Business Studies, 29(2): 305.

O'Connor, W.E. (2001). "An Introduction to Airline Economics." Westport; Praeger.

Porter, Michael E. 1985. Competitive Advantage. New York, NY: The Free Press.

University of Arizona. (1996). "The Airline Industry." 31, October 2005:

http://www.mega.nu:8080/ampp/PEGB/chap11.htm

Van Bergen, J. (2004…

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