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Applying Marginal Analysis to United Airlines

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.


Solution Preview

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 ...

Solution Summary

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.