Diversification - Cargo (Group Contribution)

A diversification strategy involves entering multiple arenas in order to expand your business while reducing the risk of a decline in demand in core markets. Your airline starts off as a passenger-only carrier, but you have the option to enter the cargo business. If you decide to haul cargo, it will be loaded into the cargo bays of your passenger aircraft up to the maximum takeoff weight of the aircraft. In case there are more passengers and cargo than the aircraft can handle, the excess cargo will be held until the next flight out or placed on another carrier. Passengers will not be bumped to make room for more cargo, and there is no provision for having all-cargo aircraft.

If you want to initiate cargo service, you must budget at least $10,000 per quarter for cargo marketing. Spending more than $10,000 will provide additional funds for promoting the new service. Potential cargo revenues are estimated at $25,000 per route per quarter, but it will take about three quarters to build up the business and generate a profit.

Respond to the following questions based on the information above.

1. Airline X provides service on six different routes. What is the potential revenue the company could take in from the cargo business?
2. Would it make sense for Airline X to spend $100,000 on cargo marketing in the first quarter it is in the business? Why or why not?
3. Besides the cargo marketing budget, what additional costs do you expect to incur if you expand into the cargo business?
4. Does it make sense for your team to enter the cargo business? Why or why not?