Question

ANALYZING MANAGERIAL DECISIONS: United Airlines The WSJ recently presented data suggesting that United Airlines was not covering its costs on flights the hubs at the two airports, such as ticket agents, from San Francisco to Washington D.C. The article building charges, baggage handlers, gate charges, quoted analysts saying that United should discon- etc. Suppose that the revenue collected on the typi- tinue this service. The costs per flight (presented in cal United flight from San Francisco to Washington the article) included the costs of fuel, pilots, flight does not cover these costs. Does this fact imply that attendants, food, etc. used on the flight. They also United should discontinue these flights? Explain. included a share of the costs associated with running nt innut markets are perfectly competitive, generally no firm in the in lt ir imnortant for

Answer 1

United Airlines should analyse the different types of cost being incurred in the operations. These costs should be classified as fixed cost and variable cost. If the revenue per flight earned by the United Airlines is more than the variable cost per flight, even if the fixed cost is not covered, then United Airlines should continue the operations in the short run and try to bring in capital so that revenue earned is more than total cost in the long run. If the airlines continue to earn revenue that is more than variable cost, but unable to cover fixed cost in the long run, then United Airlines should stop the operations in the long run.

If revenue per flight earned is less than the variable cost per flight in the short run, then United Airlines should stop the operation in the short run as well as it is below the shutdown point.