Question

Using real world example, list and explain what you believe to be the main sources of economies of scale in the airline industry.

Answer 1

ANSWER:

In my opinion the main sources of "economies of scale" is by keeping lower cost structure which comes from being the largest in an industry. It is any reductions in cost, responding to increased output demand, moving along a given, downward-sloping long run cost curve.

Southwest Airlines is the most well-managed and largest airline in the United States. The company has 40 years of history and is known for its high-quality and low-fare air service. It is the only profitable airline for 29 years by maintaining low costs, differentiating itself, and targeting a different market niche. The company's mission is centered on offering cheaper flights than rivals, without shirking on service. By keeping low costs, Southwest Airlines has been able to thrive in an environment that forces competitors to take huge losses or declare bankruptcy. The company has been able to dramatically hike its profits and, subsequently, its stock price. The company's main target include winning more customers, taking good care of its employees, keeping prices low, increasing operating revenues, and having a strong balance sheet.

Furthermore, few more examples of how Southwest Airlines can achieve the economies of scale are that the company split up management jobs and hire specialists to focus on specific departments. It employs teams that research typical targets, like the most profitable markets. The company can move them to a new city after each task completion. It also gains from the use of central corporate offices that handle all of their accounting. Due to its huge size, the company can borrow money from institutions at a much reduced rate than a smaller firm. It also advertises in national newspapers and on television across a huge population that is familiar with their product. It also holds the ability to buy replacement parts in bulk and gain larger discounts