62. C-V-P Analysis for Airline Fare Pricing* (Edward Deakin) Phoenix. to estern Airlines is considering a proposal to initiate air service between Arizona and Las Vegas. Nevada. The route would be designed primarily serve the recreation and tourist travelers that frequently travel between the two cities. By oftering low cost tourist fares, the airlines hopes to persuade persons who now travel by other modes of transportation to switch and fly Trans Western on this route. In addition, the airline expects to attract business travelers during the hours ofr 7 a.m. to 6 p.m. on Mondays through Fridays. The fare price schedule or tariff would be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of 575 one way during business hours and a fare of 540 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 jet aireraft. The aircraft would be leased at an annual cost of $3.800.000 each. Other fixed costs for ground services would amount to $1.500.000 per year. Operation of each aircraft requires a flight erew whose salaries are based Fuel costs are also a function of Aying time. These costs are estimated at $500 The costs associated with processing each passenger amount to S3. This in- primarily on the hours of fnying time. The costs of the light crew are approximately $400 per hour of flying time per hour of lying time. Flying time between Phoenix and Las Vegas is estimated at 45 minutes each way cludes ticket processing. agent commissions. and variable costs of baggage handling. Food and beverage services cost S7.80 per passenger and will be offered at no charge on flights during business hours. The cost of this service on non-business hour flights are expected to be recovered through the charges levied for alcoholic beverages. Required: 1. If five business flights and three tourist flights are offered each way every weekday, and ten tourist flights are offered each way every Saturday and Sunday, what is the average number of passengers that must be carried on each flight to break even? 2. What is the break even load factor or percentage of available seats oc- cupied on a route? 3. If Trans Western Airlines operates the Phoenix-Las Vegas route. its air- craft on that route will be idle between midnight and 6 a.m. The airline is considering offering a "Red Die special. which would leave Phoenix daily at midnight and return by 6 a.m. The marketing division estimates that if the fare were no more than $20, at least 60 new passengers could be attracted to each "Red Die" flight. Operating costs would be at the same rate for this flight. but advertising costs of $1.225 per week would be required for promotion of the service. No food or beverage costs would be borne by the company. Management wishes to know the minimum fare that would be required to break even on the "Red Die" special assuming the marketing division's passenger estimates are correct