A case study of Qatar airways
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Published: Tue, 25 Apr 2017
The unit cost of a product is greatly affected by the capacity utilization of a firm. Hence the profitability is also influenced by the capacity utilization. A firm is considered to be operating in full capacity when the installed capacity as well as available resources is being utilized to the maximum. But as the utilization of capacity decreases, the cost also gets affected. This is applicable for Qatar Airways also. Hence with decrease in capacity utilization, the unit cost is also affected but in two different ways. There exists two kinds of unit cost- unit variable cost and unit fixed cost. Unit variable cost involves the cost incurred for labor and materials for producing a single unit of product whereas the unit fixed cost is the cost of fixed assets like machinery that is used for the manufacture of a single unit. Thus capacity utilization affects these two costs differently.
For unit variable cost, a decrease in capacity utilization would cause a decrease in it. This means there exist a positive relationship between capacity utilization and unit variable cost. But this decrease may not be in a proportionate manner. The following diagram illustrates the relationship between unit variable cost:
Unit Variable cost
Cost per unit
The above graph has capacity utilization in the Y-axis and Unit cost in the X-axis. It can be seen that as capacity utilization decreases the cost per unit also decreases.
In the case of unit fixed cost, there exists a negative relationship. This means as capacity utilization increases, the unit fixed cost decreases. In the following graph, the unit cost is in the X-axis and capacity utilization is in the Y-axis:
Capacity Utilization Unit Fixed cost
Cost per unit
Hence capacity utilization has an impact over the unit cost of a product. The following formula is used for calculating capacity utilization:
Capacity Utilization (%) = Actual output per month (or per annum) x 100%
Maximum possible output per month (or per annum)
In the case of Qatar Airways the capacity utilization must be done properly so that the maximum usage of the resources can be done in the most effective manner. Reports reveal that the company is not much affected by the economic downturn and there is still large number of British tourists flying through QA. Hence the profitability of the company is not much affected. The company can alter the seating configuration as per the requirements of the customers as well as based upon the unit cost. Both unit variable and unit fixed cost must be considered while fixing the cost for ticket.
The fuel consumption is a very important factor in airline industry. There are certain factors that affect the fuel consumption of an aircraft. This includes the aircraft type, seat occupancy, cargo weight etc. Seating and seat occupancy are major determinants of fuel consumption. There is an emission calculator is now used which takes the average of seating and seat occupancy of a particular airline and compares it with the standard configuration of aircraft manufacturers with regard to seating. The average seat occupancy for scheduled and chartered market segments is different. Also the flight region also alters the seat occupancy of scheduled flights.
There exist certain specifications for airline industry with regard to seating. The seats are fitted out by the companies with respect to these specifications. The number of seats is a crucial factor in fuel consumption. The seats are different for different classes. For example, the seats in business class are larger and heavier than those in economy class. But economy seats are usually more in number when compared with the business class seats. Also the seats that fit in a row vary according to the airline type. The aim of every company is to arrange the seating in such a way that the customer requirements are met in the best manner.
Extend of capacity utilization is the critical factor that decides the fixed cost that must be allocated per unit of product. Hence the fixed cost and capacity utilization are inversely proportional to each other.
Full capacity is an ideal situation that every organization dreams of. But operating in near full capacity is possible if proper planning is done. Increasing the total capacity can be done in many ways. The following are the most acceptable methods:
• Employing more workers- This way more output can be generated in a less amount of time. But at the same time the unit variable cost is increased to a little bit as employee wages are considered as overheads.
• Building larger buildings for manufacture or providing service- This way there will be more space for production or service. Hence the firm could easily make use of the available resources.
• Purchasing more raw materials/stock- If there is more raw materials, then the firm could use them for production and hence increase the production capacity.
A firm is considered to be running in full capacity whenever the capacity utilization turns 100%. This means the firm is able to make use of the installed capacity and the available resources to the maximum. Thus operating in full capacity brings many benefits to the firm. But it doesn’t mean there are only advantages to this method of operation. There are also certain disadvantages to it.
The major advantages of full capacity operation are:
Decrease in unit fixed cost: Since the capacity utilization and fixed cost per unit is inversely proportional, an increase in the former would reduce the unit fixed costs. Thus the total unit cost would also be less. Hence the total unit cost, i.e., the cost per ticket for Qatar Airways can be reduced by operating in full or near full capacity.
Maximum utilization of resources: When working in full capacity the company utilizes the current resources in the most effective manner. Hence the wastage of resources will be minimized as well as the revenue increases.
Better chance of survival in worst times: Situations like economic recession could affect all kinds of business. But a company that works with full capacity and work efficiency will be able to predict such financial turmoil and adjust the operations accordingly. Apart from that they can also predict the future demands.
High growth potential: A company working with full capacity will be able to generate higher revenue. They can invest this profit for new ventures and expand.
Enhanced brand value: A high growing organization will naturally be successful. Hence employees will be happy to work for such an organization. Thus the work environment in that organization will also be better.
Following are some of the drawbacks or disadvantages related to capacity utilization:
Maintenance and safety issues: The plants that run in full capacity usually cannot carry out the routine maintenance and safety procedures as per the regulations and on correct time. Also there could be break downs that would prevent the firm from meeting the demands of customers. This would affect the name or reputation of the company.
Lesser innovation: If the firm is running in full capacity then there is little possibility of improvement. This way the business would be stagnant without any innovations. This also affects the firm’s capability to meet unexpected demand and contingency.
Employee issues: A firm running in full capacity needs its workers to be present full time a day. This way they are denied of any time for leisure and entertainment. Also there will be high work pressure on employee which further increases their frustration. Thus the result will be absenteeism and employee turnover. Hence over stress would decrease the productivity.
Poor working environment: Running in full capacity demands an organization to employ more people. Thus employee management will be a difficult process to be handled by the management. Also this would result in a poor work environment which in turn affects the work efficiency.
Increase in overall cost: Working in full capacity would also increase the overall cost. It is because the firm will have to employ more staff, buy more raw materials as well as build more infrastructures. Thus the overall cost is affected.
Due t this most firms work between 70%-90% efficiency. This would help them in reducing the unit fixed cost as well as unit variable cost. Also innovation can be brought about.
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