YP11-6 Giant Airlines operates out of three main \"hub\" airports in the United
ID: 402215 • Letter: Y
Question
YP11-6 Giant Airlines operates out of three main "hub" airports in the United States. Recently Mosquito Airlines began operating a flight from Reno, Nevada, into Giant's Metropolis hub for $190. Giant Airlines offers a prcie of $425 for the same route. The management of Giant is not happy about Mosquito invading its turf. In fact, Giant has driven off nearly every other competing airline from its hub, so that today 90% of flights into and out of Metropolis are Giant Airline flights. Mosquito is able to offer a lower fare because its pilots are paid less, it uses older planes, and it has lower overhead costs. Mosquito has been in business for only 6 months, and it services only two other cities. It expects the Metropolis route to be tis most profitable.
Giant estimates that it would have to charge $210 just to break even on this flight. It estimates that Mosquito can break even at a price of $160. Within one day of Mosquito's entry into the market, Giant dropped its price to $140, whereupon Mosquito matched its price. They both maintained this are for a period of 9 months, until Mosquito went out of business. As soon as Mosquito went out of business, Giant raised its fare back to $425.
Instructions
Answer each of the following questions.
(a) Who are the stakeholders in this case?
(b) What are some of the reasons why Mosquito's breakeven-pont is lower than that of Giant?
(c) What are the likely reasons why Giant was able to offer this price for this period of time, while Mosquito couldn't?
(d) What are some of the possible courses of action available to Mosquito in this situation?
(e) Do you think that this kind of pricing activity is ethical? What are the implicaitons for the stakeholders in this situation?
Explanation / Answer
a) The stakeholders are both the owners of the two firms (whether private, or owned through stock) as well as the customers who employ their airline services.
b) Mosquito's breakeven point is lower than Giant's possibly because of lower Sales, General, & Administrative costs. Not only is their overhead lower, it's explicitly stated in the exercise that they use cheaper labor and aircrafts to provide the same general service. Thus their breakeven point is obviously lower than Giant's.
c) Giant, being a giant company (pun intended) has far more cash reserves to afford a net loss annually for a longer period of time than Mosquito. In addition, this service is one of two routes that Mosquito offers, while Giant offers dozens of alternative routes. Losing money on this single route does not affect Giant's financial statement nearly as much as it does for Mosquito.
d) They could agree to raise their prices to a level where Giant does not feel the need to drive them out of business, and where they will both generate some profits. In addition, if Giant is monopoly, they may be forced to discontinue certain monopolistic practices.
e) It's not ethical, and is unhealthy for the majority stakeholders that do not have any ownership in either firm. Consumers are forced to pay far higher rates than is necessary.
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