IRWIN LIOW LI MING (MBS141010)

The financial pain of higher fuel prices is particularly acute for airlines because it is their single biggest
expense. Airlines pump about 7,000 gallons into a Boeing 737 and about 60,000 gallons into the bigger
747 jet. Each generation of aircraft is more efficient: An Airbus A330 long-range jet uses 38 percent less
fuel than the DC-10 it replaced, while the Airbus A319 medium-range jet is 27 percent more efficient than
DC-9 it replaced.
a)

Is the price of fuel a fixed cost or a variable cost for an airline? Explain.

[4 marks]

It is a variable cost as the cost varies with fuel prices and the type of aircraft model being used. As fuel
prices increases, the cost of jet fuel also increases and vice versa. The more fuel efficient an aircraft
model, the less fuel it uses therefore minimizing jet fuel costs. Other considerations which can affect fuel
consumption are the number of trips made, the weather in which the planes operates in, speed and altitude
it travels at and load factor.
b) Explain how an increase in the price of fuel changes an airlines total costs, average costs, and
marginal cost.
[6 marks]
Since fuel cost is a variable cost any increase in the price of fuel will cause the airlines total costs,
average costs, and marginal cost to also increase. However, the airline average fixed cost and total fixed
cost remains the same (no element of variable cost to consider).
c) Draw a graph to show the effects of an increase in the price of fuel on an airlines TFC, TVC, AFC,
AVC, and MC curves.
[14 marks]
i) There is no change to the TFC, however TVC increases along with fuel prices and this is indicated by
a shift upwards from TVC0 to TVC1.

ii) Again there is no change to AFC, but as fuel prices increases, MC 0 and AVC0 shifts upwards to MC1
and AVC1.

d) Explain how a technological advance that makes an airplane engine more fuel efficient changes an
airlines total product, marginal product, and average product.
[6 marks]
With more efficient engines, the airplane will consume less fuel to travel the routes it normally does. In
short, the airline uses less resources (fuel) to produce more output (sales of seats). Therefore the airlines
total product, marginal product, and average product all increase indicated by an upward shift of the TP,
MP and AP curves.