Case 3: Sky High Airlines (6 points)

Sky High Airlines has the following costs associated with a flight from Copenhagen to Paris. There are 80 seats on the plane. The costs associated with the flight are as follows:

Fuel: 1,500

Labor: 2,500

Airport fees and other fixed costs: 1,000

The airline had originally priced tickets at 150. As the flight began to reach the departure date, with three days to go, it was only 30% sold out, and the expectation was it would not significantly increase in occupancy % at current pricing levels.

At 85% occupancy, the total revenues would be $10,200. However, at 30% occupancy, the revenues would be only 3,600a loss when compared to the airlines total cost of the flight. Consequently, shortly before departure the airlines pricing department dropped the ticket price to 90!

You are the Director of Pricing for the airline, and you received a surprising email from a new graduate accountant in the accounting department:

At 30% occupancy, our costs are 208 per passenger! At 90 per seat, we are losing money on every seat we sell. Why did you do this?

Given the description above, respond to/address the following:

1)Write an email back to the accountant as to your thinking and rationale for the price change

2)What economic concepts within chapter 3 relate to this situation and helps explain your thinking?

3)What risks are inherent in your decision?