United Airlines
The Wall Street Journal (WSJ) made a presentation of data that suggested that the United Airlines was not in a position to cover the cost of flights between Washington D.C and San Francisco. It also stated that the services provided by the airline should be discontinued. The expenses incurred per flight included paying for food, attendants, fuel, and pilots. The expenses also covered shared costs of running hubs at San Francisco and Washington D.C. Running the hubs include expenses such as building charges, ticket agents, gate fees, and baggage handlers among others. To determine whether the airline should be closed, some factors should be taken into consideration. The expenses per flight should be keenly examined (Brickley, Smith, and Zimmerman, 2009). An airline is supposed to consider both ancillary and direct revenue that are tied to each flight.
According to Brickley, et al. (2009), expenses incurred per flight should be allocated to each single flight to include indirect costs, variable costs, and direct costs. Variable costs include food and fuel prices. Such costs should not be fixed because the costs of fuel and food keep fluctuating now and then. Fixed costs include overhead and building charges. An individual on each flight helps cover for compensation paid for lost luggage and bumped passengers. The amount paid by one person also includes crash insurance. In each flight, one individual partly pays to maintain and buy defibrillators and oxygen. Other costs incurred that are compensated by one passenger include repairing baggage carts.
Gordon Bethune, a former chief executive officer of United Airlines, said that all the components of each flight are equally important. If one element is missing or is inadequate, there are high chances that a loss will be made. As for the United Airlines case, the production costs (between Washington and San Francisco are greater than marginal revenue. Due to such a situation and varying conditions, the airline makes a loss.
McCartney (2012), posits that to determine whether the airline should continue operating or not, it is important to make a significant number of considerations. All expenditures should be analyzed; an analysis of potential cost burden should also be made. For instance, the biggest concern of United Airlines is the hub costs of interconnecting flights between San Francisco and Washington D.C. To state that the data from WSJ is false, it is important to investigate variable costs of the flights. Marginal analysis of total costs should also be done. Evaluation of changes in costs from each hub should support increases in costs. However, the idea is not supposed to justify an entire loss in profitability. If the market is perfectly competitive and the costs of the flight are warranted, United Airlines should terminate production in the hubs because it cannot thrive by passing rates to clients. If the prices are continuously passed to clients, they will eventually feel overburdened and will opt for other means of transport or airline companies.
During the bankruptcy that came to an end in 2006, the United Airlines had reduced the salaries of workers. The company also defaulted on corporate-pension plan thus worsening the working conditions of its workers. The airlines also terminated replacing planes and upgrading facilities. It, therefore, left old fleets in operation and embittered workforce (Brickley, 2009). Even in the present day, labor issues are a major problem for the company. The fact that replacement of planes was not done in time, it means that the corporation still has to cater for such expenses which will be high in the long-run (McCartney, 2012). There will reach a time when all flights will need to be replaced.
According to McCartney (2012), the planes may need to be repaired at the same time or replaced at a later date when funds are unavailable. Accidents may also occur if planes are not well serviced or replaced early enough. The airline also has labor issues where employees do not get sufficient salaries to cater for their expenses. As a result, they may offer substandard services which may be unattractive to most clients. The company may, at last, have an undesirable reputation which may affect its operations in future. Today, labor issues are a major challenge to the company. The former United and Continental flight attendants work together without possessing a joint contract. As a result, the employees are not decided to which rules they should eventually adopt. It is a major challenge because employees are not motivated to work together to achieve one goal. Employees from different airlines may result in conflicts because they pursue different goals.
During merging, it was important for the executive officers to ensure that operations of the company were done promptly. Such operations included landing and leaving on time to avoid complaints from clients and delayed flights. The extensive technical challenges of the merger could be easily avoided. Rather than combining websites, carrier reservation systems, and flier programs, United Airlines combined all the above thus maximizing confusion and disruption. By adopting the system used for carrying passengers by the Continental, United trained a large number of customers on how different software were used. At the end of the sessions, training was still inadequate (Brickley, 2009). Both scheduling programs used were merged leading to frequent flight cancellations and pilots losing track. In other incidences dead or retired officers were also assigned duties leading to delayed or inadequate services.
Bennett (2016) asserts that building planes while allowing space for mechanical failure and storms could help improve the services offered. Competitors such as delta formed a merger to avoid cancellation of flights due to storms and other unfavorable weather conditions. The company succeeded in its plan. Due to such competitive advantages by competitors, United Airlines cannot succeed if it still has challenges in operations because customers will look for an alternative. The technical problems of United Airlines should first be solved if the company wants to compete favorably.
An assessment of fare prices needs to be done by the firm to ensure that it maximizes profits. United Airlines does not maximize profits because the prices charged do not cater for all expenses. If the airlines continue operating under such conditions, no profits will be made. Massive debts may result if the conditions persist for an extended period. The company can use pricing discrimination to improve profitability. Travelers should be grouped according to price sensitivity so as to satisfy their desires and for the company to make enough profits (Bennett, 2016). A pricing plan should also be formulated to separate the group of clients. United Airlines provides actual prices which are not necessary. The plan should only indicate pricing levels for various groups. The system it currently uses makes it difficult for them to charge high prices that can cater for expenses and ensure profitability (Brickley, 2009). From the above arguments, the operations of the United Airlines between Washington D.C and San Francisco should be discontinued until the company arrives at a sustainable solution that will ensure adequate profitability.
References
Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial Economics & Organizational Architecture. (5th ed., p. 38). New York: McGraw-Hill Irwin.
Bennet, D. (2016, January 14). United’s Quest to Be Less Awful. Bloomberg.com. Retrieved from http://www.bloomberg.com/features/2016-united-airlines-struggles/
McCartney, S. (2012, June 6). How airlines spend your airfare. Retrieved from http://online.wsj.com/article/SB10001424052702303296604577450581396602106.html
