How can better utilization of assets improve a company’s profits?

In recent years, the airline industry has dominated headlines. Consumers are shopping Priceline.com and other Internet sites for the lowest rates. The airlines have also lured customers with frequent-flyer programs, which award free flights to passengers who accumulate specified miles of travel. Unredeemed frequent-flyer mileage represents a liability that airlines must report on their balance sheets, usually as Air traffic liability. Southwest Airlines, a profitable, no-frills carrier based in Dallas, has been rated near the top of the industry. Southwest controls costs by flying to smaller, less-expensive airports; using only one model of aircraft; serving no meals; increasing staff efficiency; and having a shorter turnaround time on the ground between flights. The fact that most of the cities served by Southwest have predictable weather maximizes its on-time arrival record.

Requirements

With a partner or group, lead your class in a discussion of the following questions, or write a report as directed by your instructor.

1. Frequent-flyer programs have grown into significant obligations for airlines. Why should a liability be recorded for those programs? Discuss how you might calculate the amount of this liability. Can you think of other industries that offer incentives that create a similar liability?

2. One of Southwest Airlines’ strategies for success is shortening stops at airport gates between flights. The company’s chairman has stated, “What [you] produce is lower fares for the customers because you generate more revenue from the same fixed cost in that airplane.” Look up fixed cost in the Glindex of this book. What are some of the “fixed costs” of an airline? How can better utilization of assets improve a company’s profits?

 

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