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    An airline transportation consultant offers the CEO of BlueS

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    An airline transportation consultant offers the CEO of BlueStar, a struggling commercial airline company, the following advice concerning the airline's high operating costs in the current quarter: You don't have enough aircraft to operate efficiently. However, at some point in the long run, you will have the opportunity to add aircraft to your fleet in order to reduce your total costs and still carry the same passenger load. Does this advice make any sense? In the long run, how can BlueStar's total costs fall by adding more aircraft to its fleet? Must BlueStar experience economies of scale for the consultant's advice to be correct?

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    Solution Preview

    No, the advice given by the consultant does not make sense, although BlueStar could use the advice, and add a few initiatives to it, and then it would make sense. The consultant's advice is that the CEO should buy more planes to reduce total costs, and still carry the same passenger load. If the company is carrying 2,000 passengers each day on their current fleet of aircraft, which consists of ten planes, and they add an eleventh plane, the company is still carrying 2,000 passengers on ten planes, because the passenger load has not increased. In the meantime, the company went to the expense of buying the plane, carrying the note payable, and ...

    Solution Summary

    An airline transportation consultant offers the CEO of BlueStar, a struggling commercial airline company, the following advice concerning the airline's high operating costs in the current quarter: You don't have enough aircraft to operate efficiently. However, at some point in the long run, you will have the opportunity to add aircraft to your fleet in order to reduce your total costs and still carry the same passenger load. Does this advice make any sense? In the long run, how can BlueStar's total costs fall by adding more aircraft to its fleet? Must BlueStar experience economies of scale for the consultant's advice to be correct?

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