The variable cost per passenger is relativity low. The airlines will seek to minimize their variable costs as the same time as using the capital investments in a wise manner to maximize revenues. One example of this is Southwest Airlines, the founder of the low cost carrier model, where the variable costs are minimized with a no frills service.
The challenge faced by airlines is the sell sufficient seats on each aircraft to ensure that they break even or make a profit; this is due to the high fixed cost. One approach that been the used is dynamic pricing in order to manage the demand for the flights. If a particular flight is selling well and appears to be in demand, the price of the seats will remain high as the airline will increase revenue and will be confident that the seats will sell (Nellis and Parker, 2006) if seats for a flight do not appear to be selling well, the airline may reduce the price in order to stimulate demand to increase the number of passengers paying that will use that flight (Nellis and Parker, 2006).
As technology has developed, the advantages of the automated processes have been leveraged to lower costs. The use of the internet to sell tickets has been a significant strategy...
The labor costs associated with flights has also been reduced with the self check on online or using check in booths in airports. The firm has assessed the cost f the technology and the value it may created, assessing it against the previous, more labor intensive methods, to determine which is likely to provide the greatest level of profit. The assessment is not simply one of costs and revenue; the way that the technology may impact on the demand that generates the revenue will also need to be considered. In the case of Southwest Airlines, moving most ticket sales to the online environment has also allowed the firm to assess a very broad market in an efficient manner which may have been more difficult with traditional sales though call centers and travel agents. The technology is used for advantage by selecting where it can add value in a manner that is acceptable to the customers.
References
Baye Michael, (2007), Managerial Economics and Business Strategy, McGraw-Hill/Irwin
Chadwick L (2007), Essential Management Accounting, London, Routledge
Nellis JG, Parker D, (2006), Principles of the Business Economics, London, Prentice Hall
