The Capacity Utilization Of An Airline And Its Impact On Cost | Danish A. Hashim

In the present business environment, many airlines in the world are facing financial problems due to their poor capacity utilization resulting from the lack of demand. In view of uncertainty about future demand, it is not easy for airlines to adjust their capacity accordingly. The present paper makes an attempt to address this problem by making a case study of the state-owned Indian Airlines, which is suffering financially since long mainly due to poor capacity utilization. By considering a time period between 1964-65 and 1999-00 and by applying a translog variable cost function, the capacity utilization and its impact on unit cost has been estimated with respect to two alternative measures of potential output: (i) where short-run average cost is minimum, and (ii) where short-run and long-run average cost curves are tangent. From the findings of the study it is concluded that an airline may benefit financially by ensuring utilization of capacity in accordance with short-run requirement even if capacity adjustment from long-run perspective is difficult.