Economies Of Scale In Airlines Management Essay


The undermentioned study is aimed at analyzing the economic systems of graduated table construct and schemes in the air hose industry. This papers is divided into several pieces which discuss the impact of the economic systems of graduated table on the chief facets of the air hose industry. The last subdivision of the papers concludes.


The fiscal purpose of houses is to increase the stockholder ‘s capital ( Atril, P. , Mc Laney E. , 2008 ) . Business ‘ direction, so, have to either optimize plus use or cut down house ‘s costs. Current economic state of affairs have managed industries to accomplish historic degrees of plus optimisation. Therefore, particular accent had been put in cost decrease schemes during the last decennary ( Akan, M. , Ata, B. , Lariviere, M. A. , 2011 ) . Airline companies were one of the industries which suffered, about instantly, the consequence of these new market conditions. To get by with this scenario, the industry implemented several cost salvaging schemes ; among them the ‘economies of graduated table ‘ ( EoS ) .

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The undermentioned papers is aimed at analyzing the term EoS and analyzing how applicable the construct is to major carriers/airlines. The papers is divided into eight pieces. The first discusses how the EoS applies to the air hose industry. The remained subdivisions remark on how the EoS affects: the air hoses ‘ buying procedure, managerial processs, selling, engineering use, consolidation, and the “ unfastened skies ” scheme. The last subdivision concludes.

Economies of graduated table in air hoses

Eoss can be defined as any cost decreases, reacting to increased demand for end product, traveling along a given, declivitous long tally cost curve ( Grieve, R. H. , 2010 ) . In other words, the demand allows houses, in this instance airlines, to administer costs over a greater figure of products/services. Airlines have put in topographic point several schemes to increase the figure of flights. Among them: ticket-selling procedure optimisation, in-flight repast reduction/suppression, confederations, and consolidations ( Harvey, G. , 2009 ) .

EoS construct assumes that increasing returns emerge at the degree of the house. However, some writers claim that EoS does lend to be decreases, but turnover growing does non by and large manifest itself in this mode. Empirical grounds has shown that EoS merely helped those air hoses which do non lose their ‘identity ‘ when demand increases. That is, Airlines which do non lose the control of the service bringing even they rely in a complex supplier construction. Following this train of idea, EoS are of small importance in accounting for increasing returns, since these return rates are attributable to other factors such as external economic systems or industrial distinction ( Grieve, R. H. , 2010 ) .

A successful illustration of EoS execution is Leading Alliance. Star Alliance is a web of 24 member air hoses. Lufthansa and United air hoses have registered an of import growing in its rider air hose group during 2010 ( DATAMONITOR, 2010 ) . Whereas, a failed execution, MexicanaClick, a low cost air hose which was belongings of the 2nd largest Mexican bearer ( Mexicana ) , did non produced the expected consequences ( BBC, 2010 ) .

The EoS effects in buying procedures

The execution of EoS has forced air hoses to alter their concern theoretical account. Traditionally, ticket merchandising was made in two chief signifiers: over the air hose counter or via an agent. Information Technologies ( IT ) have modified this procedure. Customer can straight do reserves and purchase tickets without by themselves. Therefore, ticket agents have evolved to electronic system which provided the map of seeking, reserving, and selling tickets doing the buying procedure more accurate, fast, and dependable ( Singh, A.Kr. , Das, D. , 2010 ) .

In the same mode, EoS has managed air hoses to set up stronger relationships with their providers. For case, the supply IT systems have allow air hoses to avoid mediators in the requisition of resources since mid 80s, hence, their logistic costs have decreased ( Caves, D. W. , et Al, 1984 ) .

Investings in these affairs have allowed Lufthansa to be the 3rd largest air hoses of Europe, and the universe ‘s 5th largest air hose in footings of overall riders ( Singh, A.Kr. , Das, D. , 2010 ) .

EoS and managerial processs

Outsourcing is the most perennial scheme of the EoS. By outsourcing activities, the air hose allows market forces to cut down the costs of subcontractors who offer for the concern ( Harvey, G. , 2009 ) . However, some writer claim that high specialisation, in suppliers, jeopardize concern continuity of the outsourced house ( Grieve, R. H. , 2010 ) .

Presents, air hose employees are based in different parts of the universe, sometimes in topographic points where wages and benefits are lower than their airline-home based co-workers. In this mode, air hoses have besides relocated concern maps to take advantage of lower rewards and societal charges incurred in some states. For case, British Airways relocated its ticket processing map to New Delhi ( Harvey, G. , 2009 ) .

Eos and selling

Marketing map has besides been affected by EoS. Alliances have switched this map to major air hoses. Major air hoses are responsible for the selling trips for paths which are composed of international and local classs. In this mode, major companies deliver the international legs of the trip and regional air hoses the local 1s. When the complete journey is made by two major companies, the function of major and regional houses are switched. That is, the air hose which delivers the international leg is responsible for the selling responsibilities of that trip and frailty versa. Additionally, these maps are, most of the times, outsourced. The flight Atlanta-Barcelona is a good illustration. British Airways is responsible for the selling of that path, but it merely delivers the path from Atlanta to London. The 2nd leg, London-Barcelona is delivered by Iberia ; whereas in the path Barcelona-Atlanta, these maps are switched ( Wright, C. P. , et Al, 2010 ) . In the instance of regional or little companies, selling map is wholly absorbed by the major company, since regional/small houses do non hold the needed substructure to execute this undertaking ( Forbes, S. J. , Lederman, M. , 2010 ) .

Technology in air hoses

IT systems are the most popular EoS scheme. They have non merely changed the air hoses ‘ buying procedure, but besides have optimized the business and improved the communicating with suppliers ( Pilarski, A. , 2005 ) . However, that is non plenty. Energy represents one of the biggest costs of the air hoses. Air France-KLM and Air China reported that fuel costs accounted for about 39 % of its planetary costs in the financial twelvemonth 2009 ( DATAMONITOR, 2010 ) . Therefore, better engine engineering, logistic, and route planning system will assist the air hoses to cut down these costs.

Airlines have non been able to use EoS to aircraft engineering since they have a higher dependence in two chief suppliers: Airbus and Boeing ( DATAMONITOR, 2010 ) . By and large talking, the whole industry efficiency depends upon technological progresss and cost betterment that these two companies may accomplish. Therefore, it can be said that all engineering which does non straight depend upon air hoses is already optimized.

Air France-KLM and Delta are a good illustration of technological optimisation since some of their procedure like baggage registering and check-in can be done by the client himself avoiding long waiting lines.

Consolidation of the air hose industry

Consolidation is besides a good known EoS scheme. Consolidation is chiefly aimed at cut downing costs by uniting mature and efficient procedures into one alone entity ( Oum, T. H. , et Al, 1995 ) . Some writers claim that consolidations make air hoses to increase their market portion. However, Empirical grounds has shown that market portion remains stable. For case, in the 70s five US air hoses controlled 87 % of the planetary market. In 2003, none of these five air hoses exist, although the portion of the top-10 air hoses in all traffic was 86 % ( Pilarski, A. , 2005 ) . On the other manus, consolidations are long and complex procedures due to revenue enhancement and aeronautical ordinances.

Alliances have been a optional scheme for consolidations. Alliances is formed by any two air hoses that exchange interline riders and that have a proration understanding for the gross collected from the sale of interline paths. In this mode, an air hose can spread out its finishs and, hence, increase its grosss. In 2006, 59 % of all worldwide available place stat mis were flown by air hoses belonging to one of the three largest international confederations: Star, SkyTeam, or oneworld. Alliance activity is expected to go on turning ( Wright, et Al, 2010 ) . Therefore, confederations seem to be the right scheme for the industry.

“ Open skies ” scheme

The “ unfastened skies ” scheme consists on leting air hoses to wing within one state, that is, no limitation in local services. In this manner, an air hose may plan paths to cover local paths and straight vie with regional houses. The understanding between US and the EU allows air hoses to cut down costs of portion codifications and to better their costing scheme. European air hoses which are already consolidated with American 1s can run as one entity, because they do non hold limitations to run in both parts and frailty versa. However, European Court of Justice has found that this understanding is interrupting the jurisprudence, therefore, some amendments have to be done to this understanding ( Yu-Chun, C. , et Al, 2009 ) .

Open skies scheme is non a direct consequence of the EoS, but a mean to accomplish it. This scheme was created to impulse air hose industry in the fortiess. Therefore, understandings like that in other parts will let air hoses to cut down their costing scheme and to increase their market engagement.


Airline industry is the foundation rock of the current planetary commercialism. Its high efficiency has allowed houses to sell their merchandises in other parts with competitory monetary values. On the other manus, this industry is a facilitator for some others. Its relevancy has been exposed during natural catastrophes when airdromes are blocked and merchandises can non be transported. Current economic system can non be understood without air transit. The challenge of air hoses, now, is to happen originative ways to go on their optimisation and profitable continuity. Airline industry allows us non merely to make any portion of the universe, but besides to hold a competitory and trustable economic system.

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