Topics: Southwest Airlines, Economics, Airline Pages: 2 (448 words) Published: August 31, 2013
Ryan Sommer
Applied paper topic #1

There are two types of costs associated with production. They are Fixed Cost and Variable Cost. In the short-run, at least one factor of production is fixed, so Airline firms will face both fixed and variable cost. The shape of the cost curves in the short run reflect the law of diminishing returns. During air craft production, If average costs are falling then marginal costs must be less than average while if average costs are rising then marginal must be more than average. Because of all of the equipment and facilities involved in air transportation, it is easy to lose sight of the fact that this is a service industry. Airlines perform a service for their customers by transporting them from one point to another for an agreed price. In that sense, the airline business is similar to other service businesses like banks, insurance companies or even barbershops. There is no physical product given in return for the money paid by the customer, nor inventory created and stored for sale at some later date. Unlike many service businesses, airlines need more than storefronts and telephones to get started. They need an enormous range of expensive equipment and facilities, from airplanes to flight simulators to maintenance hangars. As a result, the airline industry is a capital-intensive business, requiring large sums of money to operate effectively. Whatever arrangements an airline chooses to pursue, its capital needs require consistent profitability. Because airlines own large fleets of expensive aircraft which depreciate in value over time, they typically generate a substantial positive cash flow. Most airlines use their cash flow to repay debt or acquire new aircraft. When profits and cash flow decline, an airline's ability to repay debt and acquire new aircraft is jeopardized. Airlines also are labor intensive. Each major airline employs an army of pilots, flight attendants, mechanics, baggage handlers, reservation agents,...
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