Case study question: Swift Airlines Swift Airlines has a daily return flight from London to Nice. The aircraft for the flight has a capacity of 120 passengers. Swift sells its tickets at a range of prices. Its business plan works on the basis of the following mix of ticket prices for each day's flight:

Business

30 @ 300

9,000

Economy regular

40 @ 200

8,000

Advance purchase

20 @ 120

2,400

7-day-purchase

20 @ 65

1,300

Stand-by

10 @ 30

300

Revenue

120

21,000

Swift's head office accounting department has calculated its costs as follows:

Cost per passenger (to cover additional fuel, insurance, baggage handling etc.) assuming full load 25 per passenger

Flight costs (to cover aircraft lease, flight and cabin crew costs, airport and landing charges etc.) 3,000 (120 @ 25) 7,500 per flight

Route costs (to cover the support needed for each destination) 2,000 (based on of the daily cost of 4,000 (balance charged to return flight)) Business overhead 3,000 (allocation of head office overhead)

Total 15,500

This results in a budgeted profit of 5,500 per flight, assuming that all seats are sold at the budgeted price. The head office accountant for European routes has advised the route manager for Nice that while the Nice-London inbound leg is breaking even, losses are being made on the London-Nice outbound leg. If profits cannot be generated, the route may need to be closed, with the aircraft and crew being assigned to another route. The route manager for Nice has extracted recent sales figures, a typical flight having the following sales mix:

% of tickets sold Business

60

18 @ 300

5,400

Economy regular

70

28 @ 200

5,600

Advance purchase

80

16 @ 120

1,920

7-day purchase

75

15 @ 65

975

Stand-by

100

10 @ 30

300

Revenue

87

14,195

The route manager has calculated a loss on each outbound flight of 1,305. She believes that there is a market for 48-hour ticket purchases if a new fare of 40 was introduced, as this would be 5 less than the price charged by a competitor for the same ticket. She estimates that she could sell 15 seats per flight on this basis. This would not affect either the 7-day purchase, which is used by business travelers, or stand-by fares, which are usually oversubscribed. The additional revenue of 600 (15 @ 40) would cover almost half the loss. The route manager has prepared a report for her manager asking that the new fare be approved and allowing her three months to prove that the new tickets could be sold. Comment on the route manager's proposal.