In today’s air industry, several challenges can clearly be seen to be affecting airlines operations. Among them are the expenses and costs that are incurred in the daily running of the corporations. The above challenges are as a result of the continued competition in the growing airline industry and the advancement of technology among the corporations. The major expenses that have been noted to affect the air industry are labor costs and those costs related to fuel. Labor costs though can be entirely fixed in a short-term by the industry since they are easily predictable at the same time easy to manipulate, but for the case of fuel costs, they are hard to be controlled and manipulated since they vary every time depending on the fluctuation of the prices of fuel. Of the two costs, fuel costs are the ones that can easily bring a company to the ground from huge profits to losses depending on trends of the people that want to fly.
The whole airline expenses and costs associated with its operations account to a percentage of approximately over 30 while the operating expenses in general take the remaining share of 70% of costs that are not fixed. Labor costs involve those that are occurred in payment of wages, bonuses and other rewards to the industry’s employees. Some costs are also incurred in the hiring of experts or even pilots just in case a company does not have sufficient ones or has those that lack the knowledge, qualifications, and expertise in certain fields of the airline.
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When the cost of labor supersedes the general output of manpower, the companies in the industry go ahead to implement mechanisms that will cut down the costs to match the requirements of the company in the fulfilment of the shareholders’ interests. Such mechanisms include retrenchment or laying off of workers that are either non-productive, not qualified in certain fields of operation, or by reducing the retirement age ("What are the major expenses that affect companies in the airline industry", 2018). Workers are also obligated to take on work done by others at the same pay or work overtime without overtime pay. The other mechanism is the reduction of their salaries and benefits together with the bonuses that were initially extended to them.
Consequences related to labor cost usually attacks, those companies that do not embrace technology or gradually adapt to it in the competitive industry of airlines. Low customer brand loyalty is also a great influencer of the increased labor costs of a company. As such, companies are forced to cut down on such costs in order to be more profitable in the competitive industry that considers price instead of quality in service delivery in the current world.
The cost of fuel on the other hand, is estimated to account for at most 15 % of the whole operating expenses. Fuel costs have been known to cause a devastating impact on the air industry besides being the largest single expense for most airlines through time. The cost is special in the sense that they do affect every company in the industry not like the other costs. Therefore this implies that companies need to make appropriate plans and come up with measures related to fuel usage by each individual corporation in order to take care of the fuel uncertainties in future times.
The majority of the companies in the industry have devised programs in a bid to cater for the fuel costs that fluctuate every time. They go ahead to purchase cost hedging contracts from airline fuel manufacturing firms and lock them in their individual costs to prevent exposure to fuel cost risks that can come by for a particular period of time. They are to consider it as a cost that is fixed for the entire period. When the prices of fuels go down they do not incur costs, but rather fail to optimize on the profits that would have been realized (Woythaler & Jacobi, 2018). When the prices go up, they are still on the safe side as they do not cater for the increased price but still incur the same expenses.
Take an example of a year when the prices of fuel rose. This met the airline industry unaware as no corporation was expecting the rise. Most of the companies responded negatively by going down almost to collapsing before they opted to adopt a serious reconstruction of themselves to withstand the survival (Bryan, 2018). At that particular moment the airline index had dropped significantly in comparison to its initial position. The year that followed saw the prices of fuels decrease to accommodative prices that led to a general improvement of the economy of countries as the corporations realized outstanding profits in compensation of the previous years.
When the costs of fuels rise airline corporations are forced to reflect the same effect in the tickets by simply increasing the fare rates between destinations. The opposite happens when the costs are low. The patron’s flying occurrences are also regulated in the sense that the amounts of flights are reduced to minimize the fuel costs due to high prices at that particular time.
References
Bryan, V. (2018). ANALYSIS-Higher wages, fuel prices turn up cost pressure on airlines. CNBC. Retrieved 27 April 2018, from https://www.cnbc.com/2018/02/14/reuters-america-analysis-higher-wages-fuel-prices-turn-up-cost-pressure-on-airlines.html
What are the major expenses that affect companies in the airline industry?. (2018). Investopedia. Retrieved 27 April 2018, from https://www.investopedia.com/ask/answers/040715/what-are-major-expenses-affect-companies-airline-industry.asp
Woythaler, G., & Jacobi, C. (2018). How Fuel Prices Impact US Airlines | Accenture. Accenture.com. Retrieved 27 April 2018, from https://www.accenture.com/us-en/insight-how-fuel-prices-have-impact-us-airlines
