Westcost Air Co. leases a single jet aircraft and operates between San Francisco and the Fiji. Flights leave San Francisco on Mondays and Thursdays and depart from Fiji on Wednesdays and Saturdays. Westcost Air Co. cannot offer any more flights between San Francisco and Fiji. Only tourist-class seats are available on its planes. An analyst has collected the following information:
Seating capacity per plane 380 passengers
Average number of passengers per flight 175 passengers
Flights per week 4 flights
Flights per year 208 flights
Average one-way fare $325
Variable fuel costs $14,000 per flight
Food and beverage service costs $4 per passenger
(no charge to passenger)
Commission to travel agents paid by Air Frisco 10% of fare
(all tickets are booked by travel agents)
Fixed annual lease costs allocated to each flight $53,000 per flight
Fixed ground services (maintenance, check in,
baggage handling) costs allocated to each flight $7,500 per flight
Fixed flight crew salaries allocated to each flight $7,000 per flight
1. Calculate the operating income that Westcoast Air earns on each one-way flight between San Francisco and Fiji.
2. The Market Research Department of Westcoast Air indicates that lowering the average one-way fare to $280 will increase the average number of passengers per flight to 212. Should the company lower its fare? Show your calculations.
3. Travel International, a tour operator, approaches Westcoast Air on the possibility of chartering (renting out) its jet aircraft twice each month, first to take Travel International's tourists from San Francisco to Fiji and then to bring the tourists back from Fiji to San Francisco. If Westcoast Air accepts Travel International's offer, Westcoast Air will be able to offer only 184 (208 - 24) of its own flights each year. The terms of the charter are as follows: (a) For each one-way flight, Travel International will pay Westcoast Air $75,000 to charter the plane and to use its flight crew and ground service staff; (b) Travel International will pay for fuel costs; and (c) Travel International will pay for all food costs. On purely financial considerations, should Westcost Air accept Travel International's offer? Show your calculations. What other factors should the company consider in deciding whether or not to charter its plane to Travel International? Summarize your findings in a report which answers the above questions.
The solution explains the use of relevant costs in determining if the airline should reduce the fare or charter out the aircrafts.