Northeastern Airlines is considering a proposal to initiate air service between Phoenix, AZ and Las Vegas, NV. The route would be designed primarily to serve recreation and tourist travelers who frequently travel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Northeastern. In addition, the airline expects to attract business travelers during the hours of 7 am to 6 pm on Mondays through Fridays. The fare price schedule would be designed to charge a higher fare during business-travel hours, so the tourist demand would be reduced during those hours. The company believes that a business fare 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 jets. These jets would be leased at an annual cost of $3,800,000 each. Other fixed costs for ground service would amount to $1,500,000 per year. Operating of each aircraft requires a flight crew. Flight crew salaries are based primarily on hours of flying time and cost approximately $500/hour. Fuel costs are also a function of flying time. These costs are estimated to be $500/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/person. This includes ticket processing, agent commissions, and variable costs of baggage handling. Food and beverage service 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 charges levied for alcoholic beverages.
i) Northeastern is considering a schedule that offers five business flights and three tourist flights
each way every weekday, and ten tourist flights each way every Saturday and Sunday. What is
the average number of passengers that must be carried on each flight to break even?
ii) Airlines measure activity in terms of load factor: the ratio of paid passenger seats to total
seating capacity of the plane. Compute Northeastern’s breakeven load for a route.
iii) If Northeastern operates in the Phoenix-Las Vegas route, its aircraft for that route will be idle
between midnight and 6 am. The airline is considering offering a red-eye special that would
leave Phoenix daily at midnight and return at 6 am. The marketing division estimates that if
the fare were no more than $20, at least 60 new passengers would be attracted to each red-eye
flight. Operating costs would be at the same rate for those flights, but advertising costs of the
$1,225 per week would be required to promote the service. No food or beverage costs would
be borne by the company. Assume the marketing division’s estimates are correct. What is the
minimum fare that would be required to break even on the red-eye?