The WSJ recently presented data suggesting that United Airlines was not covering its costs on flights from San Francisco to Washington D.C. The article quoted analysis saying that United should discontinue this service. The costs per flight (presented in the article) included the costs of fuel, pilots, flight attendants, food, etc used on the flight. They also included a share of the costs associated with running the hubs at two airports, such as ticket agents, building charges, baggage handlers, gate charges, etc. Suppose that the revenue collected on the typical United flight from San Francisco to Washington does not cover these costs. Does this fact imply that United should discontinue these flights? Explain.© BrainMass Inc. brainmass.com October 25, 2018, 6:24 am ad1c9bdddf
The WSJ's reasoning is incorrect. The cost calculation should not include a share of the fixed costs of running the two hubs. Those costs will not change whether United operates the SF to DC ...
Cost analysis seems to suggest that United Airlines is losing money by operating its Washington D.C. - San Francisco route. This solution looks more closely at the data and comes to a different conclusion.
Please see attached.
1 Excel Spreadsheet - Completed Customer Demand Data spreadsheet
1 Memo Report - Analysis of Current and Proposed Pricing Strategy for Profitability
? Include an assessment of whether the current fare maximizes profits. If not, identify the fare that should be charged. Give evidence that it is the best by showing that profits are highest if this fare is charged.
? Complete the Customer Demand Data spreadsheet for Clear Blue Sky by calculating all appropriate revenues, costs, and profits.
? Discuss whether fuel costs should be used as a basis for pricing.
? Comment on the suggestion that the company could use price-discrimination strategies to improve profitability.
? Discuss the requirements for effective price discrimination, and describe how Clear Blue Sky satisfies these requirements.
? Identify and describe each group of travelers according to their price sensitivity. Analyze the price elasticity of demand for each group.
? Recommend a pricing plan that effectively separates each group of consumers. Providing actual prices is not necessary, but your plan should clearly indicate the level of pricing for each group.