Answer to Question #152745 in Economics for medo

Question

An airline transportation consultant offers the CEO of BlueStar, a struggling new commercial airline company, the following advice concerning the airline’s high operating costs
in the current quarter: “You don’t have enough aircraft to operate efficiently. However, at
some point in the long run, you will have the opportunity to add aircraft to your fleet in
order to reduce your total costs and still carry the same passenger load.” Does this advice
make any sense? In the long run, how can BlueStar’s total costs fall by adding more aircraft to its fleet? Must BlueStar experience economies of scale for the consultant’s advice
to be correct?

Answer 1

Since the cost of expenses of airlines includes compensation payments as a result of non-performance of flights for technical reasons, that is, payment of forfeit under contracts or tickets, an increase in the aircraft fleet will make it possible at any time to compensate for an aircraft that has been out of service at the current moment. In addition, the presence of an additional aircraft will reduce the burden on routine maintenance of equipment, since it will not perform

be in rush mode at inflated prices. In this case, economies of scale really work.