Airspace Airline is a small regional passenger airline operating in southeastern
ID: 345035 • Letter: A
Question
Airspace Airline is a small regional passenger airline operating in southeastern United States. It operates as an independent airline between certain origin/destination pairs but also operates as a contract carrier for Delta out of Atlanta airport. Airspace currently has a fleet of aging SD 340B turboprop aircraft with capacity of 35 passengers. The aircraft fly at 230 miles/hour, consuming 80 gallons of fuels per hour, and have an average trip length of 250 miles. Airspace employs only Airline Pilots Association Union pilots.
Jim Gray is the Vice President of Operations for Airspace and is faced with challenge of minimizing the impact of fuel and labour costs on Airspace operating profits. Currently the operating expenses per seat mile for his fleet are approximately $0.12 which can be approximately broken down as shown below:
Breakdown of Operating Expenses
Flying Operations*
37.20%
Maintenance Costs
10.10%
Passenger Services
5.60%
Traffic Services**
14.20%
Promotion and Sales
5.20%
Administration
6.50%
Depreciation
4.30%
Transport Related Costs***
16.90%
Pilot wages are $55 per hour, plus an average 40% round trip extra cost allowance (for waiting, preparation). Current fuel price is $1.76 per gallon. (This is NOT included in the Maintenance Costs listed above). Fixed Costs are estimated at 20 percent of Variable Costs.
Variable costs = Operating Expenses + fuel + labour.
Delta has approached Airspace about increasing the number of flights it covers for Delta out of Atlanta. Delta can fully charter Airspace aircraft but is asking for a lower fare structure to help boost its profits. Jim is pessimistic that he can lower operating costs without significantly reducing fuel and labour costs. However, he is certain the future financial viability of Airspace relies on a continued relationship with Delta.
Please answer the following questions:
1) Should Jim accept or reject Delta’s request for expanded cooperation? Should Jim ask Delta for any assistance re fuel or labour costs?
2) How can Jim reduce his total costs if he fails to reduce fuel and labour costs?
3) If Jim seeks a minimum 10% profit margin**** and adopts a “cost-of-service” pricing policy, what price should he charge Delta per seat mile?
Breakdown of Operating Expenses
Flying Operations*
37.20%
Maintenance Costs
10.10%
Passenger Services
5.60%
Traffic Services**
14.20%
Promotion and Sales
5.20%
Administration
6.50%
Depreciation
4.30%
Transport Related Costs***
16.90%
Explanation / Answer
However, Traffic services expenses might not be possible to reduce, as it is conducted by Airports, so an Airline won’t have much control of it, even it is a major chunk in costs.
Besides, Promotion/ Advertising and Administration expenses have to be reduced significantly to control any profitability now. Delta would need to use Social media, customer/ employee discount referrals, Online marketing channels- YouTube, Daily Motion, Flickr, Veoh etc. to promote their services, thereby saving costs compared to any other highly paid media like TV/ Print.
Last would be Transport Costs- can be minimized with choosing better connecting routes, avoid too frequent travel transport, carry more load per trip sort of activities.
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