Question

Use the following news clip to work Problems 30 and 31 THAI to Downsize and Reduce Routes In the face of severe losses, Thai Airways International has drawn up a rehabilitation plan. The plan includes reduction of the airline's staffing from 25,000 to 20,000 and cancellation of its non-performing routes. It will also sell 22 old aircraft and decommission 14 Boeing 747 400 and Airbus \(A 340-600\) craft. Source: Vietnam Breaking News, May 30, 2015 Thinking of an airline as a production plant, explain why Thai Airways is making a decision to sell 22 old aircraft? Is Thai Airways's decision a long- run decision or a short-run decision?

Short answer

Thai Airways is selling old aircraft to cut costs and improve efficiency. This is a long-run decision.

Step-by-step solution

- Understand the Scenario

Thai Airways is facing severe losses and has created a rehabilitation plan. Part of this plan includes selling 22 old aircraft and decommissioning 14 Boeing 747 400 and Airbus \(A340-600\).

- Classify the Decision

Evaluate why Thai Airways is selling its old aircraft. This could be due to reasons such as high maintenance costs, inefficiency, and the need to cut costs which are typically operating concerns.

- Define Long-Run and Short-Run in Economics

In economics, the long run is a period in which all factors of production and costs are variable. The short run is a period during which at least one of these factors is fixed.

- Assess the Time Frame

Decisions such as reducing the workforce by 5,000 and selling aircraft usually involve significant changes. These are not easily reversible and aim to restructure the company over a longer period, suggests that this is a long-run decision.

- Conclusion

Considering the significant restructuring of resources and operations, Thai Airways's decision to sell old aircraft is a long-run decision.

Key concepts

Long-run decisions in economics

In economics, decisions that affect all aspects of a business and require significant time to implement are typically long-run decisions. For Thai Airways, strategizing to sell 22 old aircraft and cut routes is a decision aimed at restructuring for future efficiency and profitability. Long-run decisions involve planning for significant changes that cannot be quickly reversed. For airlines, this includes acquiring or decommissioning aircraft, adjusting the workforce, and modifying flight routes. The decision to sell old aircraft will bring long-term benefits by reducing maintenance costs and improving fuel efficiency, which are critical for competing in the global market. Thai Airways is making these long-run decisions to position itself better economically and operationally.

Production factors

Production factors in an airline include labor (employees), capital (aircraft, airports), and operational routes. Thai Airways is tweaking these factors to curb its financial losses. Let's look at labor, which involves reducing the workforce. Labor costs are high, and by reducing staff from 25,000 to 20,000, Thai Airways aims to minimize expenses. On the capital side, selling 22 old aircraft will help offload maintenance-intensive assets. Maintaining older aircraft often leads to higher expenses and inefficiencies. By decommissioning these planes, Thai Airways can invest in newer, more cost-effective models. Lastly, operational routes constitute another crucial production factor. Cancelling underperforming routes helps in focusing resources on profitable or strategically important routes, thereby improving overall efficiency and service quality.

Operating costs

Operating costs for an airline like Thai Airways include expenses such as fuel, maintenance, salaries, and airport fees. These costs can be substantial, particularly for older aircraft that require more frequent and costly maintenance. By selling these old planes, Thai Airways can cut down significantly on its ongoing maintenance and fuel costs. Also, reducing the staff by 5,000 employees will directly lower labor costs, which is one of the higher variable costs in airline operations. Canceling non-performing routes also helps lower operating costs by reducing fuel consumption and fees, which do not yield profitable returns. All these steps collectively help the airline to emerge stronger with lower operating costs, allowing a more streamlined and financially stable operation.

Business restructuring

Business restructuring is a critical step for any company in financial distress, like Thai Airways. It involves making strategic changes to the company's structure and operations to improve financial stability. For Thai Airways, this restructuring includes selling off less efficient assets such as old aircraft and decommissioning outdated fleet models. Additionally, reducing staff and canceling unprofitable routes are significant measures that indicate a thorough revamp of its operational strategy.
This kind of restructuring is focused on long-term viability rather than short-term gains. It aims to create a leaner, more efficient organization capable of navigating competitive and economic challenges more effectively. By undergoing this comprehensive business restructuring, Thai Airways aims to realign its operations, reduce unnecessary expenditures, and ultimately restore profitability and growth.