Analyzing Managerial Decisions: United Airlines WSJ Review

Analyzing Managerial Decisions: United Airlines The WSJ recently presented data

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 a point-to-point flight, and on the other, you need 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 save as rich text format (.rtf). All assignments must be prepared in APA format, including references.

Use a cover page containing the title of the assignment and your name. All page margins should be the default margins for your word processing program. Use only left justification. The document should be single-spaced, with 12-point font. Direct quotes and paraphrased material must be cited according to APA guidelines. Quoting more than 15% of the paper or having more than 25% unoriginal wording raises questions of originality; ensure your work reflects your own analysis, supplemented by proper citations. Focus on explaining concepts in your own words rather than relying heavily on quotes. All sources used must be listed in a separate APA-format References page.

Paper For Above instruction

The decision of whether United Airlines should continue operating flights that do not cover their direct and allocated costs involves a nuanced analysis rooted in managerial economics principles, particularly short-term marginal analysis and long-term strategic considerations. While at first glance, the fact that a flight does not cover its assigned costs might suggest discontinuation, a comprehensive evaluation reveals that such a decision cannot be based solely on immediate cost-revenue comparisons without considering broader implications.

Short-Run Analysis: The Marginal Perspective

In the short term, managerial decision-making often hinges on marginal analysis—that is, whether the additional revenue from operating a flight exceeds the incremental or variable costs associated with that flight. When a particular route fails to cover its attributable costs, the immediate financial disadvantage might indicate that discontinuation is optimal. However, this perspective omits important factors such as the presence of fixed or sunk costs and the potential benefits of network connectivity.

For instance, the costs of fuel, crew, food, and airport fees are semi-variable, but many costs associated with hub operations (ticket agents, baggage handling, gate charges) are largely fixed or sunk in the short term. Discontinuing a flight could lead to a loss of passenger feed-in to connecting flights, thus diminishing revenue from other parts of the network—an effect known as the network externality. Therefore, even if the direct flight appears unprofitable in isolation, the overall profitability of the hub or the airline’s network might improve by maintaining the service.

Long-Run Perspective: Strategic and Market Considerations

Long-term decision-making involves considering the strategic implications of maintaining or discontinuing a route. If the route is essential for competitive positioning, market presence, or future growth, discontinuing the flight could be detrimental. For example, maintaining a presence on a high-demand route might prevent competitors from capturing market share. Additionally, discontinuing service might lead to increased customer dissatisfaction or loss of corporate contracts, affecting future revenue streams.

Economists often consider the concept of sunk costs—expenses that have already been incurred and cannot be recovered. While these costs should not influence the decision to stop or continue a route, the fixed costs associated with operating the flight might be viewed as sunk in some strategic assessments, making the focus mainly on incremental revenue and costs.

Moreover, maintaining a flight route can sometimes be justified if it serves as a feeder or connection point, increasing the overall utilization of the airline’s broader network. This ancillary benefit might make a seemingly unprofitable route valuable in the context of the airline's overall network profitability.

Implications of Discontinuation

If United Airlines were to stop operating the San Francisco to Washington flight, it might reduce its costs marginally, but the loss in connectivity might deter travelers who prefer direct service, shifting demand to competitors or leading to a decrease in total revenue across the network. Conversely, continuing such a route despite individual unprofitability could be justified if it sustains broader strategic advantages, such as market share and network robustness.

Furthermore, the airline operators must consider the possibility of future increases in revenue due to market growth, shifts in demand, or operational efficiencies gained over time. Discontinuing a route purely based on current costs versus revenue might overlook potential future gains or market dynamics.

Conclusion

In conclusion, the decision to maintain or discontinue a route that does not cover its costs requires a comprehensive analysis that extends beyond short-term marginal calculations. While immediate cost coverage is a critical factor, strategic considerations—network effects, market positioning, and future growth prospects—play a vital role. Therefore, United Airlines should carefully evaluate both short-term operational data and long-term strategic implications before making such decisions. Discontinuing a route solely because it is unprofitable in a narrow sense might lead to unintended consequences that could outweigh immediate cost savings, ultimately harming the airline’s long-term competitiveness.

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