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Lan Airlines in 2008

Lan Airline was established by the Chilean government as the country’s first airline in 1929. In 1980s, the government sold 51% of the airline to a group of local investors, and became fully privatized five years later in 1994. The majority Lan Airline stocks were owned by the Cueto Group and the Pinera Group. In 2007, Lan owned 62 passenger destinations and an additional 16 cargo destinations. Lan had five statutory companies which were Lan Ecuador, Lan Argentina, Lan Airlines, Lab Express for Chilean domestic routes, and Lan Peru (Masanell, Tarzijan & Mitchell, 2009).

Problem

The main problem of Lan was the low-cost model. As the Lan CEO questioned, if they were in low-cost or they were in between. There are two reasons why Lan was trying to take the low-cost model. One is the high fuel cost: the cost per gallon had increased 231% from 2003 to 2007. Also, since the low-cost movement of European Airlines had attracted global attention, and those airlines that took the low-cost model generated 30% of EBITDAR compared to Lan’s 15% current profit (Masanell, Tarzijan & Mitchell, 2009).

Size differences and economies of scale

Since Lan is taking the low-cost model, it has cost advantages. According to the economies of scale, the larger volume of production the company is making, the lower cost of production it can reach. Lan reaches the low-cost by reducing the flight time and turn around time, and increasing flexibility and seat numbers. By doing that, Lan is increasing its volume of production: carry more passenger and cargo within a short time compared with other airline companies. With higher production volume, Lan can take some advantages. First of all, Lan can purchase some specialized machines. Lan can invest its saved money from the low-cost model to some specialized machines. It can buy much more valued planes from Boeing and Airbus and contributes them to international markets, and increase capacity. For instance, Lan is...