Analyzing Managerial Decisions At United Airlines

Analyzing Managerial Decisionsunited Airlinesthewsjrecently Presented

Analyzing Managerial Decisionsunited Airlinesthewsjrecently Presented

ANALYZING MANAGERIAL DECISIONS: United Airlines The WSJ recently presented data suggesting that United Airlines was not covering its costs on flights from San Francisco to Washington D.C. The article quoted analysts saying that United should discontinue this service. The costs per flight (presented in the article) included the costs of fuel, pilots, flight attendants, food, etc. used on the flight. They also included a share of the costs associated with running the hubs at the two airports, such as ticket agents, building charges, baggage handlers, gate charges, etc. Suppose that the revenue collected on the typical United flight from San Francisco to Washington does not cover these costs.

Does this fact imply that United should discontinue these flights? Explain. After looking for the original source document that was referred to in the case to no avail, I am going to provide you with my introduction to this case. The case is really asking you to consider if United Airlines should shut down one of its flights because it is not meeting its cost on that flight (i.e., marginal analysis). You could consider this from both a short and long-run perspective.

Over the short-run, the easy answer might be yes, when we are just looking at the one flight and not considering that there could be connections occurring outside of this flight that could be profitable. In addition, you may want to consider the sunk costs that are embedded in this case. So, on one hand, you have to discuss the point-to-point flight and, on the other, you have to consider any additional profits that this firm might make as a result of keeping the flight. All assignments must be completed as Word documents. If you do not have Word, you can use Microsoft WordPad and use the rich text format (.rtf extension). All assignments must be prepared in the APA format, including references.

Use a single cover page that contains the title of the assignment and your name. All page margins should be the default margins for your word processing program. Use only the LEFT margin justification setting. All papers should be single spaced (this includes spacing between paragraphs) and in 12-point font. Direct quotes and paraphrasing MUST be referenced and cited using APA guidelines. Although there is no limit on how many citations are in the paper, there is a limit of 15% for quotations and 25% for unoriginal wording for this course.

When more than one quarter of a paper seems to be unoriginal, it usually indicates a problem. Even if sources are properly cited and some of the words are changed, it raises the question of how much original thinking went into the paper. There is a big difference between starting with a blank page and writing your own thoughts and building the paper around quotes, paraphrased sources, and the altered wording of another author. You are encouraged to use textbook concepts as you attempt to explain in your own words the answers to the assignments rather than relying heavily on quoted material. Try to think about how you would explain your answer to someone who has not taken a managerial economics class.

High scores on the originality report in Turnitin.com are not just a result of plagiarism; they can also result from an incorrect quotation/citation methodology or from using words that have been rearranged from your sources. If you use someone else’s work, you must cite and reference it appropriately. You must include a separate References page in APA format with each paper. Any source that is used to develop your paper must be included in this section.

Sample Paper For Above instruction

Introduction

Decisions in managerial economics often revolve around analyzing costs and revenues associated with specific business operations, such as airline routes. For United Airlines, a critical question arises when a particular flight route, such as San Francisco to Washington D.C., does not cover its operational costs. This scenario exemplifies the application of marginal analysis—an essential concept in managerial decision-making—assessing whether to continue or discontinue a service based on short-term and long-term implications.

Short-Run Analysis

In the short run, the primary focus is on the specific flight in question. If the revenue generated from the flight fails to cover its incremental costs—including fuel, crew wages, food, and the proportionate share of hub operation costs—it may seem rational to cease operations on that route. This aligns with the principle that a company should cease producing a good or service when the price (or revenue) falls below marginal cost, thus avoiding operating at a loss. However, this decision is nuanced by considerations of fixed and sunk costs, which, in the short term, are costs that have already been incurred and cannot be recovered regardless of future actions.

Sunk costs, such as aircraft acquisition costs or previous investments in infrastructure, should not influence ongoing operational decisions. From this perspective, the airline's decision to keep the route open should hinge solely on whether the flight's marginal revenue exceeds its marginal cost. If it does not, then discontinuing the route is justified to prevent further losses. Conversely, if there are potential connections and downstream revenues that this flight facilitates—such as connecting passengers who will generate additional revenue—keeping the route open could be beneficial in the broader network context, even if it is not profitable on a per-flight basis.

Long-Run Perspective and Strategic Considerations

When evaluating the decision from a long-term standpoint, strategic considerations come into play. Airlines often operate on a hub-and-spoke model, where individual routes, although unprofitable on their own in the short term, contribute to the overall network and serve strategic purposes—such as maintaining market presence, deterring competition, or facilitating future profitable connections. In this light, sustaining the route might be justifiable if it supports these broader strategic objectives.

Moreover, maintaining certain routes can enhance brand loyalty and customer convenience, potentially leading to increased demand elsewhere. Such network effects may justify continuing a route despite short-term losses, especially if fixed costs on the route are largely sunk and unlikely to change if the route is discontinued. The airline's capacity to adapt its service offerings and pricing strategies can transform a seemingly unprofitable route into a long-term strategic asset.

Implications of Sunk and Fixed Costs

A vital aspect in managerial decision-making involves understanding the distinction between fixed, variable, and sunk costs. Fixed costs, such as aircraft leasing or salaries of permanent staff, are costs that do not change with the level of output in the short run. Sunk costs are a subset of fixed costs that cannot be recovered once incurred, such as previous investments in aircraft or infrastructure.

Decisions should ideally be based only on marginal costs and marginal revenues, excluding sunk costs. Disregarding sunk costs aligns with economic rationality and prevents firms from engaging in the "sunk cost fallacy," where past investments disproportionately influence current decisions. Practically, for United Airlines, if a flight's revenue does not cover its marginal cost, ceasing operations on that route aligns with maximizing short-term profits and efficiency.

Conclusion

In conclusion, whether United Airlines should shut down a route that does not cover its costs depends on the time horizon and strategic objectives. Short-term analysis suggests discontinuing the route if it operates at a loss on the margins, while a long-term perspective considers network effects, strategic positioning, and potential future profitability. Managers must weigh these factors carefully, recognizing the importance of separating sunk costs from relevant costs to make economically rational decisions. Ultimately, such decisions should aim to optimize the airline's overall network profitability and strategic positioning.

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