1 CM/passenge for Business-travel hour flight Contribution Margin per passenger = Fare -Variable Costs (Passenger Processing + Foos & Beverage) Business fare/passenge = Passenge processing cost = 75 3 7.8 Food & beverage cost (business hour)= CM/passenger (business): 64.2 2 CM/ passenge for tourist- travel hour flight Contribution Margin per passenger = Fare -Variable Costs (Passenger Processing + Foos & Beverage) Tourist fare/passenger= Passenger processing cost Food & beverage cost (tourist hours)= CM/passenger(tourist)= 40 3 0 (no cost to the airline as it recovered through beverage charges) 37 3 Fixed cost/Busineess-Travel hour flight Fixed cost/flight = Crew cost +Fuel Cost Flight crew cost / hour = 400 Fuel cost per hour = 500 Flight duration one way = 45 minutes, round trip= 90 minutes, Fixed cost/Business -Travel hour flight = 1350 1.5 hour 4 Fixed cost/tourist - Travel hour flight since the fixed costs remain the samefor each flight the fixed cost per tourist-travel hour filight is also $1350 5 Non-flight(aircraft and ground services) related fixed cost/year /week Non-filight related fixed costs-Lease cost + Ground services cost Annual lease cost for 2 aircraft = Gound services cost/year= 7,600,000 (3800000 per aircraft) 1,500,000 Total Non-flight fixed cost/year= 9,100,000 Total Non-flight fixed cost/week= 175000 one year 52 weeks
Spiritual Airlines Spiritual Airlines is considering a proposal to initiate air service between Phoenix, Arizona and Las Vegas, Nevada. The route would be designed primarily to serve the recreating and tourist travelers that frequently travel between the two cities. By offering low-cost tourist fares, the airlines hope to persuade persons who now travel by other modes of transportation to switch and fly Spiritual on this route. In addition, the airline expects to attract business travelers during the hours of 7 a.m. to 6 p.m. on Mondays and Fridays. The fare price schedule or tariff would be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business far of $75 one way during business hours and a fare of $40 for all other hours would result in the passenger load being equal during business-travel and tourist-travel hours. To operate the route, the airline would need two 120 passenger jet aircraft. The aircraft would be leased at an annual cost of $3,800,000 each. Other fixed costs for ground services would amount to $1,500,000 per year. Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The costs of the flight crew are approximately $400 per hour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $500 per hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45 minutes each way. The costs associated with processing each passenger amount to $3. This includes ticket processing, agent commissions, and variable costs of baggage handling. Food and beverage services cost $7.80 per passenger and will be offered at no charge on flights during business hours. The cost of this service on non-business hour flights is expected to be recovered through the charges levied for alcoholic beverages. Required:
1. In each business-travel hour flight, what is the contribution margin per passenger?
2. In each tourist-travel hour flight, what is the contribution margin per passenger?
3. What is the fixed cost per business-travel hour flight?
4. What is the fixed cost per tourist-travel hour flight?
5. What is the non-flight (aircraft and ground services) related Fixed Cost per year? Per week?
6. If five business-travel hour flights and three tourist-travel hour flights are offered each way every weekday, and ten tourist-travel hour flights are offered each way every Saturday and Sunday, what is the average number of passengers that must be carried on each flight to break even?
7. What is the break-even load factor or percentage of available seats occupied on a route?
8. If Spiritual Airlines operates the Phoenix-Las Vegas route, its aircraft on that route will be idle between midnight and 6 a.m. The airline is considering offering a “Red Die” special, which would leave Phoenix daily at midnight and return by 6 a.m. The marketing division estimates that if the fare were no more than $20, at least 60 new passengers could be attracted to each “Red Die” flight. Operating costs would be at the same rate for this flight, but advertising costs of $1,225 per week would be required for promotion of the service. No food or beverage costs would be borne by the company. Management wishes to know the minimum fare that would be required to break even on the “Red Die” special assuming the marketing division’s passenger estimates are correct.
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