Airline Economics

Comments

The case is designed to be presented to the candidate by an interviewer, who plays the role of a represetative of an Indian airline major.

Short Solution

The financial return of adding one more passenger per flight would be approximately $1,600,000 per month.

Detailed Solution

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.

I. Revenue Analysis

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

1. Average ticket price

Therefore the average ticket price would be (50% X $100 + 25% X $100 + 25% X $200) or $125.

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.

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?

Assumptions: The total flight time is 15 hours and 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

Total flights = 250 + 100 + 75 = 425 flights per day.

Therefore, the monthly extra revenue would be 425 flights/day X 30 days X $125 or about $1,600,000.

II. Cost Analysis

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

III. Conclusion

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

Difficult Questions

If the interviewee solves the case very quickly, you can discuss the marketing strategy to attract more passengers with him.