Tyne Airlines

Tyne Airlines is considering a proposal to initiate air service between Hartlepool and London. The route would be designed primarily to serve the recreation and tourist travellers who frequently travel between the two locations. By offering low-cost tourist fares, the airline hopes to persuade people who now travel by other modes of transport to switch and fly Tyne Airlines on this route.

In addition, the airline expects to attract business travellers during the hours of 07:00 18:00 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 these hours. The company believes that a business fare of 75 one-way during business hours and a fare of 40 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 aircraft. The aircraft would be leased at an annual cost of 3,800,000 each. Other fixed costs for ground services amount to 1,500,000 per annum.

Operation of each aircraft requires a flight crew whose salaries are based primarily on hours of flight time. The costs of the flight crew are approximately 400 per hour of flying time.

Fuel costs are also a function of flying time. These costs are estimated at 500 per hour of flying time. Flying between Hartlepool and London is 45 minutes each way.

The costs associated with processing each passenger amount to 3. This includes ticket processing, agent commissions and variable costs of baggage handling. Food and beverage services cost the airline 7.80 per passenger and will be offered at no charge on flights during business hours. The cost of this service on non-business hour flights is expected to be recovered through the charges levied for alcoholic beverages.

Requirement

1. If 5 business flights and 3 tourist flights are offered each way every week day, 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 in order to break even?

2. What is the break-even load factor, or percentage of seats occupied on a route?

3. If Tyne Airlines operates the Hartlepool-London route, its aircraft on that route will be idle between midnight and 6am. The airline is considering offering a red-eye special, which would leave Hartlepool daily at midnight and return by 6am. The marketing division estimates that if the fare were no more than 20, at least 60 new passengers could be attracted to each red-eye 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-eye special, assuming the marketing divisions passenger estimates are correct.

4. Evaluate the usefulness of the calculations you have prepared.