Research Paper on:
Cost Structure and the Airline Industry

Unformatted Sample Text from the Research Paper:
airlines industry. The Uniform System of Accounts as required by the Department of Transportation is utilized. THE CONCEPT OF OPERATING LEVERAGE There is a clear difference between business  risk and financial risk. Each one has its own effect on the cost of finance. In examining these differences and the subsequent effect each has on capital structure  of an airlines as well as the difference between the cost of equity capital and debt capital, financial managers can make knowledgeable business decisions. The term business risk is generally  not a well-defined one. More often than not the term is combined with operating risk. Business risk is created when there is a covariance of sales of any  particular industry, in this case the airline industry, with its market return. The likelihood that an airlines actual net operating profit will differ from its expected output is another  way of describing business risk. Operating leverage directly affects differences between expected and actual net operating profit amounts. An airlines with little or no operating leverage will have  small changes in net operating profit as output changes when compared with an airline having a great deal of operating leverage. In this way the more operating leverage an  airline has, the greater its business risk will be. Despite the fact that many analysts feel that business risk is one of the major determining factors of the capital structure  of an airline or any company, the existing research does not provide a definitive answer as to whether an increase in business risk should cause it to lower its level  of debt in its capital structure. Many textbooks, in fact, affirm that there is an inverse relationship between the optimal debt level and business risk. The reasoning behind