High Operating Leverage Essay Example

they had passed their fixed costs contributed directly to their bottom line, leading to inflated profits.

Since high profits attract investors and additional capital, high operating leverage was a very positive thing for Microsoft during this period. Oasis Airlines Hong Kong is an example of a company that was operating with a high operating leverage. Their fixed costs were generated as the result of the need for them to finance a great deal of their assets with debt. Such debts needed to be repaid, leading to large amounts of fixed costs. Although this situation is unavoidable for airlines due to the costs associated with leasing and buying planes, it is not a positive position to be in.

Demand for airlines services is typically elastic; it will fluctuate according to economic conditions. Such changes in demand will cause earnings fluctuations. For Oasis, their high operating leverage entailed that they did not do particularly well during recent downturn resulting in bankruptcy due to their failure to cover their fixed costs. Other airlines that have been unable to survive economic downturn due to their high operating level include Sabina and Skybus Airlines. The airline industry is thus extremely risky as a result of the high operating leverage nature of their business models.