Last updated: May 24, 2019
Topic: BusinessEnergy
Sample donated:

Any change in the price of oil in the world market directly affects the cost of fuel which in turn affects the airline industry.  This effect however is not simply because the cost of fuel is much higher but there are other factors that must be examined as well.

A perfect illustration of this is an analysis of the decisions that airlines have to make when the cost of fuel rises.  In order to maintain costs at an acceptable level, airlines need to decide whether or not they should cancel certain flights which are not as profitable.  The airline must compute how much revenue is lost from the cancellation in relation to the decrease in costs that this contributes.  Simply put, if the cost that is averted is higher than the potential revenue from the flight then the flight must be cancelled and if the revenue is higher than the savings then the flight must be continued.

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In macro economic principles, this is called the profit maximization method in setting marginal revenue equal to marginal cost.  If Y is the number of passenger-miles the company provides, PY the price customers pay per mile and ? denote change, then the lost revenue from cancelled flights might be represented as PY?Y. If E denotes the quantity of energy consumed and PE the price per unit of energy, then the cost reduction would be given by PE?E. Equality of marginal revenue and marginal cost in this case would require


It is important to remember that under this assumption, the other external factors have not been considered.  The factors of production such as firing of employees due to changes in fuel price and cutting of flights influence bigger things such as the growth of a particular economy and per capita earnings.

In sum, the effect of distortions in the fuel price have a tendency not only to affect the revenue measures of an airline company but also affect the employment rates and even business schedules as caused by cancellation and revision of flight schedules.