Airline Economics

To calculate the financial return or the extra profit, the candidate needs to look at the revenue and costs associated with adding one more passenger per flight.

Revenue could be simplified as a product of the average price of a ticket and number of new passengers added.

1. Average ticket price

India:

• 50% of the flights fly between New Delhi and Mumbai; on average, a passenger pays $100 for this 2 hour journey
• 25% of the flights fly between other major cities which are 2.5 hours away from each other. We charge the passenger $100 for these flights
• The remaining 25% of the flights fly between other cities which are 3 hours away from each other. The average ticket price for these flights is $200

2. Number of new passengers

We know that number of new passengers would be equal to the number of total flights since we only add one more passenger per flight.

Therefore we should first estimate the number of airplanes owned by the firm and then the number of flights each airplane takes.

The company owns 110 planes. The candidate can assume that 50% of the total flights take the 2-hour route, 25% take the 2.5-hour route and the remaining 25% take the 3-hour route.

This gives us:

• Delhi-Mumbai, 2 hours route - 50% of 100 or 50 planes
• Major cities, 2.5 hours route - 25% of 100 or 25 planes
• Other cities, 3 hours route - 25% of 100 or 25 planes

To estimate the number of flights per airplane per day, we need to figure out the following:

• Total flight time: When does the first airplane depart? When does the last airplane of the day arrive?
• On ground time: How much time does on ground jobs such as taxing, cleaning and boarding need?

1. Average ticket price

The average ticket price would be $125.

2. Number of new passengers

Assumptions: The total flight time is 15 hours and the on-ground time per flight is 1 hour.

• Delhi-Mumbai, 2 hours flight: 15 hours/3 hours or 5 flights per plane per day
• Major cities, 2.5 hours flight: 15 hours/3.5 hours or about 4 flights per plane per day
• Other cities, 3 hours flight: 15 hours/4 hours or 3 flights per plane per day

Total flights:

• Delhi-Mumbai, 2 hours flight: 5 X 50 or 250 flights per day
• Major cities, 2.5 hours flight: 4 X 25 or 100 flights per day
• Other cities, 3 hours flight: 3 X 25 or 75 flights per day

Therefore, the monthly extra revenue would be about $1,600,000.

The marginal cost of one additional passenger per flight would be zero since most costs would occur anyways.

Since the marginal cost is zero, the monthly extra revenue is the monthly extra profit. Therefore the financial return of the addition of one more passenger per flight would be about $1,600,000 per month.