Question

what are implicit and explicit cost for an airline industry?

Answer 1

Implicit costs are considered to be opportunity costs of using the resources owned by the business and not putting them into other uses. However, these costs are not cash expenditure and are not recorded in the books. The resources being used could have been put to other uses but the business has foregone such potential income earning sources.

Whereas, explicit costs are the cash expenditure that is incurred on the factor of production and are recorded into the books of account. For example, purchasing production equipment or employing workers and providing them wages.

For the airline industry,

let's take an illustration of the ABC airline business that wants to purchase a new commercial aircraft. There are two best alternatives, Boeing or Airbus.

We are making an assumption that both the aircraft have the same seating capacity and equal performance potential.

The price for the Boeing aircraft is $69 million with $1360 per block hour as fuel costs and Airbus stood at $70 million with $1375 per block hour as fuel costs.

After checking out all such details, the ABC decides to purchase the Boeing aircraft.

The explicit costs here will be $69 million and the fuel costs of 1360 per block.

As for the implicit costs, it is about $1 million savings on the purchase and $15 per block hour additional on the fuel costs. This is the opportunity costs of foregoing the second-best alternative that was Airbus.

Taking another of implicit costs, the airline earns its maximum revenue from its passengers who are highly-paid businessmen, and the delays or canceled flights can cost them dearly by losing millions of dollars per year.