Airline

Airlines need a certain passenger load factor to breakeven on its flights. The moment a decision is made to fly a plane, the costs of the fuel and landing charges are almost fixed. If insufficient paying passengers are onboard the plane, the contribution margin will be less than the fixed costs and a loss would be made on each flight.

Some airlines choose to reduce its pricing, in the hope that the resulting increase in volume would generate positive contribution margin to defray its fixed costs. This is very similar to the strategy used by hotels we discussed earlier. Another strategy is to cut the flight allowance of its pilots and crew, which would reduce the variable costs of each flight. An outright cut in pay and headcount would reduce fixed costs of the airline as a whole. Yet another strategy is to ground some of its aircraft, so that there will be less partially filled flights which cannot recover its full costs per flight.

Conclusion

If your business has high fixed costs and you experience a drop in demand like many businesses now, you could consider the following:

• Generate more volume by reducing selling price (packaging product bundles instead of simply reducing the price of your standard product or service so that you retain the flexibility to revert to your normal pricing once market conditions improve)

• Generate more volume by reaching out to new market segments (e.g. no frills market segment or different demographic range)

• Convert permanent personnel resources to part-time resources or explore outsourcing

• Convert idle space and capacity into new income sources

• Review your processes and streamline them to eliminate waste. It may be possible to remove a whole layer of fixed costs (paperwork, personnel and premises), which would result in cost savings, or revenue enhancements if resources are redeployed to more value-adding activities that customers would pay for