Economies of scale

Case: “Dogfight over Europe: Ryanair (A)” Harvard Business School case no. 9-700-115, November 21st 2007

Discussion question: What are some sources of economies of scale? How do they apply to British Airways in 1986?

Textbook Reading: Chapter 2 (Section 2.3; pp. 54-59)

During class I also recommend:

Case: “Dogfight over Europe: Ryanair (B)” Harvard Business School case no. 700116, June 12th 2000

A key source of economies of scale is ‘learning by doing’, and this video shows some fun examples:

This video shows how economies of scale played an important role in BIC

The Great Uncoupling‘, (episode 170 of Sam Harris’ Making Sense podcast, with guest Andrew McAfee), is a timely reminder that economics is about how to make best use of scarce resource, and that efficiency and productivity are good for society and the environment. It also provides an optimistic message about how computing reduces resource use.

A 2014 newspaper report likened the rise of budget supermarkets (such as Aldi and Lidl) to the strategy that saw Ryanair outcompete BA:

The pioneer of no frills airlines were Southwest. See “Why are no-frills airlines so cheap?” The Economist, October 18th 2013. This article explains some of their key decisions. Which include:

  • Only flying 737s
  • Simple fare structure
  • Point-to-point (for less congested airports)
  • No assigned seating
  • No inflight meals
  • Only one fair class

(Note that this demonstrates a lack of price discrimination. Whereas Ryanair do lots of it.)

If you are interested in aviation, this episode of Cockpit Casual starts with a fascinating account of how airline companies (and airports) reacted to covid given the large number of leased planes and the substitutability of passenger and cargo payloads.

Learning Objectives: Understanding internal and external sources of economies of scale.

Spotlight on sustainability: Use of waste products