I am a Law and Business Studies student from England (I am British). In my recent Business Studies lecturers, I have been working on the affects of the recent terrorist attacks in America on Virgin Atlantic. The following can apply to any airline in a similar situation. It doesn’t cover everything, but it does give you an indication of what is happening from a Business Studies student. This is all in note form in my folder, so I had to (quickly) make it into a presentable essay. The following isn’t a particularly coherent essay – it only took me 45 minutes or so to make head and tail of it and to type it up.
It is evident that Richard Branson’s airline, Virgin Atlantic Airways, is suffering dreadfully because of the recent terrorist attacks in America. Once a prosperous and expanding airline, Virgin Atlantic is having to resort to a number of cost-cutting measures which will hopefully result in the carrier not making a loss (thus not loosing more money), but helping the airline to reach the breakeven point and ideally, although unlikely, to make a profit.
It is apparent that Virgin Atlantic has reduced the number of flights it operates. This therefore suggests that there is a decrease in demand (a downfall in consumer confidence) and, in keeping with this, reducing the number of flights decreases the total variable costs, for instance fuel, food stuffs, and airport costs. It is also visible that the airline is to reduce its workforce; it is intending to make 1,200 members of staff redundant. By cutting the size of its workforce, Virgin Atlantic will decrease the cost of labour (labour is a fixed cost, which means that the cost remains the same, unlike variable costs, regardless of demand and supply). Both of these two reductions suggests that the airline is reducing supply in order to meet falling demand (this is the basic law of demand and supply; as demand increases, so does supply (price is likely to fall). As demand decreases, so does supply (price is likely to increase)
I would, at this point in time, normally illustrate the above by drawing a demand and supply diagram. But as I am unable to do so on this, I have left it out. For those of you who understand what I am talking about, I will explain. For those who don’t, skip onto the next paragraph. Letter A, which is positioned at the equilibrium (the market equilibrium) of the original supply and demand cross, is before September 11. Letter B, which is at the new market equilibrium (a shift to the left has occurred), is after September 11. Letter A shows the quantity of flights before September 11, with letter B showing the quantity of flights after September 11. At Q2, there is a fall in revenue, which means a fall in profits. P2 is the new price.
As stated above, Virgin Atlantic’s fixed costs, for example rent, labour and loans, have to be met; they don’t vary. Variable costs, for example fuel, airport costs and food stuffs, will fall naturally. Reducing the number of flights will reduce the variable costs. Will the saving of variable costs cancel out the fixed costs? The airline is to reduce the number of its workforce, thus a chunk of the fixed costs will disappear. So, then, will its remaining fixed costs be met? It could be argued that yes, there is a possibility of this happening, because of the reduction in flights and the grounding of aircraft.
Virgin Atlantic’s actions suggests that it fears the situation will roll on for sometime. Even though reducing the number of flights is a short-term reaction, decreasing the number of the workforce may indicate a long-term plan to reduce the likely damage. Loosing staff has its consequences; there is a cost involved. Firstly, training costs. Pilots and the attendants, for example, already have had their training. The airline will also loose invaluable experience. When in a position to do so, Virgin Atlantic will have to recruit once again and subsequently train them, which costs. Secondly, compensation. This may be in the form of redundancy payments to senior management. Contract terms may also apply.
In the long-term, Virgin Atlantic may loose its reputation and its market share.
To help to entice consumers back, Virgin Atlantic may lower its fares so as to appeal to them.
The future’s black, the future’s somewhat uncertain.
A few additional points you may wish to consider:
In incidents involving the Middle East, fuel prices generally increase. Thus, if this continues, and if the Middle East becomes increasingly involved, Virgin Atlantic may have to pay higher fuel prices.
Because of the new security requirements, Virgin Atlantic has had to invest heavily into this, which is another fixed cost (remember the airline is trying to reduce its fixed costs by reducing its variable costs. To help to achieve this, Virgin Atlantic has reduced the number of flights and ground some of its aircraft).
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