American Airlines vs. Southwest Term Paper Example | Topics and Well Written Essays - 1500 words

American Airlines vs. Southwest - Term Paper Example As the report declares Southwest is found to be continually winning over American Airlines in terms of economies of scale. American Airlines is fast losing upon its consumer base which has compelled it to operate over a lower scale compared to its low cost rival. Economies of scale imply the accrual of profit over the long run on account of an expansion in the scale of operation. This paper stresses that LRAC is a combination of a large number of short run average cost curves which too assume a similar U-shape. However, their minimum point continues to shift lower and the LRAC is the locus of the minimum points of all these short run average cost curves. Normally, a company does not continue its production operations after having reached the point of minimum long run average cost. This is the reason why the long run average cost curve is often held similar to the supply curve of the concerned producer. He will generally produce at the point where his short run average cost is lowest and thus, when the loci of all those points are obtained, it yields the long run supply curve of the organization concerned. In the present case, the situation could be interpreted as follows. Southwest Airlines has been growing in size on account of an expansion in its customer base and its average cost of operation over the long run is being reduced simultaneously as well. Howev er, the situation is found to be quite different for American Airlines, which although has a prospect of operating over the large scale, cannot do so on account of a reduction in its customer base. ... The fall in the cost of production has been interpreted as long run average cost (LRAC). Actually, LRAC is a combination of a large number of short run average cost curves which too assume a similar U-shape. However, their minimum point continues to shift lower and the LRAC is the locus of the minimum points of all these short run average cost curves. Normally, a company does not continue its production operations after having reached the point of minimum long run average cost. This is the reason why the long run average cost curve is often held similar to the supply curve of the concerned producer. He will generally produce at the point where his short run average cost is lowest and thus, when the loci of all those points are obtained, it yields the long run supply curve of the organization concerned (McEachern, 2011). In the present case, the situation could be interpreted as follows. Southwest Airlines has been growing in size on account of an expansion in its customer base and it s average cost of operation over the long run is being reduced simultaneously as well. However, the situation is found to be quite different for American Airlines, which although has a prospect of operating over the large scale, cannot do so on account of a reduction in its customer base. A reduction in average cost accompanied by a hike in production implies the incurrence of higher profit margins as well. This could be well evinced through the fact that during the first quarter of 2009, Southwest Airlines reaped a profit of nearly USD 5 million while its passenger base increased by approximately 12 percent. Over the same period, American Airlines incurred a huge loss and its passenger traffic expanded by a nominal 1.6 percent (CBS News, ‘Airline