Chapter 21, Problem 21.2CP

Break-even sales, contribution margin

“For a student, a grade of 65 percent is nothing to write home about. But for the airline ... [industry], filling 65 percent of the seats ... is the difference between profit and loss.

The [economy) might be just strong enough to sustain all the carriers on a cash basis, but not strong enough to bring any significant profitability to the industry ..., For the airlines ..., the emphasis will be on trying to consolidate routes and raise ticket prices ...:

Source: Edwin McDowell, “Empty Seats, Empty Beds, Empty Pockets,” The New York Times, January 6, 1992, p. C3.

The airline industry is notorious for boom and bust cycles. Why is airline profitability very sensitive to these cycles? Do you think that during a down cycle the strategy to consolidate routes and raise ticket prices is reasonable? What would make this strategy succeed or fail? Why?