Question

Identify and discuss briefly three (3) Cost Drivers that may impact the costs incurredin the airline industry in the Caribbean.

Example of cost drivers will be Economies of Scale, Learning and experience curve effects and Link with other activities in the company or industry value chain.

Answer 1

Economies Of Scale

In Caribbean, Airline Industry is an important sector for the economic development of the state.It generates employement in the region and enhances business productivity. To be a profitable business, economies of the scale (EoS) has to be improved. To improve the financial position, a firm always try to increase the output with minimum input. In case of Airline Industry, firms has been constantly optimizing the tickets selling system, customer services, easy payments & cancellations, minimal error in baggage handlig, punctuality etc. If the company fails to entertain customer requirement, then there is high chance of loosing the customer base in the near future. But to maintain all this, company has to spend lot of money attracting customers. The globalization has increased the level of competition to threshhold level which has indirectly added costs to industry. The employees nowadays can easily change the company when offered higher packages. To retain the employees , company has to offer the increaments which incurres the costs .

Learning and experience curve effects

It means a firm learns from what it has been practising in the past or still doing.It says that there is an inverse relationship between the volume of production and direct cost per unit . The cost incurred is lower when the volume of production is high. In case of Caribbran Airline Industry , production here would be number of flighs scheduled and costs would be operational costs. Higher the number of flights scheduled with 80 to 100 % of tickets sold, lower would be the operational costs. This will bring out the profits to the Airline. If more than 35 to 40 % tickets remains unsold then there will be loss to the industry.

Link with other activities in the company or industry value chain.

There is always a high maintainance cost in this industry. The technical expertise , tools, machines, advanced equipments , etc are required to ensure the best working of the aeroplane. EoS has forced to outsource this kind of work as employing full time workers costs the comapany much higher than outsoursing. Suppliers are very important in this industry . Sometimes, intermediaries increases the cost of supply, but with the IT development, the role of intermediaries has lessen over a period of time by creating strong relationship with the suppliers directly. This was possilble due to advancement of logistics with IT development.