Air Syracuse

Joe McMullen, who is the Vice President of Business Development and Strategy at Air

Syracuse, was staring blankly out of his office window. He had just returned from an

executive board meeting with the president and the other vice presidents. The discussion

at the meeting centered on how Air Syracuse has not been immune to the current

economic crisis. This downturn in the economy has exacerbated the economic crisis

within the air travel industry, and the company is increasingly concerned with the drop

in profitability of some of its service routes.

At the end of the meeting, the president asked that each of the vice presidents propose

ideas on how to turn things around for the company. He hoped to hear suggestions at the next meeting.

AIR SYRACUSE

Air Syracuse is an airline company operating out of Syracuse, NY$.$ Their primary

business is providing air travel to a select set of vacation destinations such as Orlando,

Las Vegas, and Los Angeles.

Air Syracuse operates based on a business model similar to that of companies such as

Southwest Airlines and JetBlue. These companies offer low cost, no frills air service

between selected cities. To provide added flexibility in their operations, Air Syracuse

only has Boeing $737$s in their aircraft fleet. Each plane has $100$ seats.

Air Syracuse has realized much success because of the lack of competition in this

segment of the air travel market in upstate New York. They have been able to draw

customers from not only Syracuse and surrounding areas, but from cities as far away as

Rochester, Utica, and Binghamton. While Air Syracuse primarily caters to the vacation

market, they have noticed that some business travelers have also flown on their airlines

because of the convenience $($for example, direct flights between Syracuse and their final

destinations, reasonable departure and arrival times$)$ and costs. Air Syracuse realized an

opportunity to hedge some of their operating risks by catering to this market in addition

to the primary vacation market that they serve.

In recent years, the travel industry has seen more and more vacationers choosing cruises

as a vacation option. Cruises have become more popular because of its all$-$inclusiveness

nature, the many different experiences and activities onboard the ship, and the exotic

destinations included in the travel itinerary. According to the Cruise Lines International

Association $($CLIA$),$ the North American cruise industry saw a $5\mathrm{.}1\%$ increase in the

number of travelers from $2012$ to $2013.$ The number of travelers is projected to increase

by $2\mathrm{.}3\%$ from $2013$ to $2014.$

Joe himself had recently gone on a cruise vacation with his family. They had thoroughly

enjoyed the experience and ever since then, his kids have been begging to go on another

cruise for their upcoming winter holidays. Just then, it dawned on him that this could be a

good business opportunity for Air Syracuse.

EXPANDING TO MIAMI

There are many cruise departure ports across North America. The region that sees one of

the highest departure volume is Florida because many of the cruise lines$$ itineraries

include exciting ports$-$of$-$call $($stops$)$ in the Bahamas, Caribbean, and Central America,

and perhaps more importantly, the sunny and warm weather. Joe felt that by adding a

daily round trip service to Miami, Air Syracuse could capture this portion of the upstate New

York vacation market. In addition, this direct flight might prove to be a convenient and

reasonable option for travelers who need to travel to Miami for business or other personal

purposes.

From studying the market, its competitors, and other companies who currently offer such services, Joe believes that they can continue to offer three different round trip fare types $$ Early

Saver, Full Fare, and Last Minute $$ as with Air Syracuse$$s other service routes. Customers who

purchase Early Saver seats will be charged $$149$ per seat. However, this fare will be

available only to customers who purchase their tickets at least one month in advance, as is

their current practice. The price per seat for the Full Fare class is $$220,$ and there is no

restriction on when the fare must be purchased $($i$.$e$.,$ the seats may be purchased anytime

up to the departure date$).$ Last Minute seats are offered for $$50$ in the last six hours before the flight is scheduled to start boarding. Last Minute seats are only offered if the total Early Saver and Full Fare reservations are less than the $100$ seat capacity of the plane.

Joe estimates that the demand for Full Fare and Early Saver seats will be normally

distributed with means of $30$ and $90$ seats, respectively. $($Assume a coefficient of

variation$1$ of $0\mathrm{.}3.)$ Based on past experience, Joe assumes that all available $($up to the plane capacity$)$ Last Minute tickets can be sold.

Because the total demand for seats is expected to be greater than the number of seats on the aircraft $($e$.$g$.,$ there is an average demand o