South-Western College Publishing - Economics  
With less fuel, airlines will still get you there, but it may require a few trips
Subject FAA allows airlines to hold less reserve fuel on long flights.
Topic Scarcity, Choice and Opportunity Cost; Profit Maximization and the Firm, Production and Costs
Key Words

fuel, costs; reserves

News Story

In June, 2004, The Federal Aviation Administration (FAA) scaled back their requirements so that airlines must now carry only 5% over the estimated fuel needs on international flights instead of the previous 10% reserve requirement.

American Airlines studied over 100,000 flights and determined that reserve fuel was tapped on only 1% of flights. After analyzing fuel consumption, American determined that pilots never exceeded 40% of their reserve capacity on average. American convinced the FAA that a reduction in fuel reserves from 10% of estimated fuel needs to just 5% of fuel needs was warranted. Airlines were pleased with the move because of the recent increases in jet fuel prices, which correlate closely with oil prices. Further, a gallon of jet fuel weighs about six pounds, so airplanes can be flown lighter, allowing for greater fuel efficiency and speed.

Of course, a tradeoff arises. An American Airlines flight this summer from Frankfurt to Dallas, Texas got caught in bad weather with only 5% extra fuel on board. When it was forced to take a different route to avoid a storm, pilots did not have enough fuel to finish the flight, and had to divert to Chicago. After waiting three hours for a gate, pilots had exceeded their allowable flight time for the day, and could not complete the flight. Since American had no other crews in Chicago that could take the flight to Dallas, the crew and passengers had to be put up in hotels in Chicago or found alternative paths to Dallas, a significant expense.

(Updated October, 2004)

Questions
1.

How does the opportunity cost of the extra fuel reserve play into the decision by the FAA? How would you quantify or measure that opportunity cost?

2. Does holding less fuel for flights constitute a reduction in fixed or variable costs? Why?
3. How do you think the FAA would respond to the criticism that outcomes like the American flight this summer will happen over and over again? Why would they respond this way, and what does this have to do with opportunity costs of carrying lower fuel reserves?
Source Scott McCartney. "Airlines Cut Fuel Reserves on Long Hauls." The Wall Street Journal. 2 September 2004. http://www.wsj.com.

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