Grounding flights - the shut-down point

Thursday, July 17, 2008

I normally teach about there being a shut-down price - a price so low that a business cannot hope to cover even the variable costs of production and one that implies that it might be better to close down production in the short term. Perhaps I should be tweaking this to talk about the ‘shut-down point’ - focusing less on the price facing consumers, but more on businesses making calculated decisions about which shops to keep running, which factories to close and which products to continue selling.

The airlines provide an example of this. Faced with surging aviation fuel prices, slowing consumer demand and expensive take-off and landing fees, Ryanair has become the latest airline to ground some of its flights and cut back on operating capacity in a bid to stem losses. In his typically colourful language, Ryanair CEO Michael O’Leary has blamed the “twats” at the British Airports Authority” for his decision. In today’s Guardian he claims that “the airline would lose less money by grounding its aircraft and not hiring personnel to fly them rather than operating them at a loss from Stansted.”

Grounding planes is his response rather than abandoning route - the airline will be making a 14% reduction in the number of weekly flights at Stansted this winter, from more than 1,850 a week to to just under 1,600 this winter. The number of planes based at Stansted will fall from 36 to 28. The number of weekly flights to Dublin will fall from 58 to 50, to Glasgow from 29 to 20 and to Rome CIA from 35 to 28.

Ryanair Press Release

EasyJet (24th July) has also announced reductions in their winter capacity as a cost cutting measure - The Telegraph reports that “Oil price inflation had increased the company’s fuel bill by £185m for the full year”

Posted to A2 Micro • Business Economics • Transport Economics
Tags: prices, production, costs, losses, ryanair, aviation, shut down price
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