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1. Calculate the operating income that Westcoast Air earns on each one-way flight between San Francisco and Fiji.
In actuality, the Westcoast Air maintains a stable marketing performance. In this respect, the evaluation of the operating income of the company per flight is important because it allows to define the extent to which costs of flights and fare per flight match each other. In fact, the operating income can reveal the extent to which the price of tickets is reasonable and probably the company can change its pricing policies to improve its position in the market compared to its major rivals. In this regard, the following calculations reveal the operating income of the company.
Operating income:
175 passenger * $325 = $56,875
Operating costs:
Variable fuel costs (total per flight): $14,000
Food and beverage costs (total per flight) $4 * 175 (average amount of passengers per flight) = $700
Commission to travel agents paid by Air Frisco – $56,870 * 10% = $5,687 per flight
Fixed lease costs per flight – $53,000 Fixed annual lease costs allocated to each flight / 208 flights = $255 per flight
Fixed ground services (maintenance, check in, bagage handling) costs to each flight – $7,500 per flight
Fixed flight crew salaries to each flight – $7,000
Total net income per flight – $56,875
Operating costs – $35,142
Operating income – $21,733
In such a way, the company has a high operating income that allows the Westcoast air to use its income to improve the quality of services delivered to passengers and, thus, to increase the customer satisfaction. At the same time, the current operating income, being high enough, allows the company to introduce new classes to attract new customers. For instance, the company can introduce the business class and offer services of the higher quality. In such a way, the company can use its operating income to accelerate its business development and to improve its competitive position.
2. The Market Research Department of Westcoast Air indicates that lowering the average one-way fare to $280 will increase the average number of passengers per flight to 212. Should the company lower its fare? Show your calculations.
In actuality, the operating income is high and the current level of the operating income allows the Westcoast Air to consider the possibility of lowering its fare, especially on the condition of rising the number of passengers. In this respect, it should be said that the net income of the company in case of the $280 average one-way fare and increase of the number of passengers to 212 per flight will be as follows: $280 * 212 = $59,360. At the same time, it is necessary to take into consideration the fact that costs of each flight will increase.
Food and beverage costs (total per flight) $4 * 212 (average amount of passengers per flight) = $848, i.e. $148 more than food and beverage costs are at the moment. In addition, the costs the company spends on the commission to travel agents paid by Air Frisco will increase as well because of the rise of the number of tickets sold: $59,360 8 10% = $5,936 that is $249 more than it is at the moment. In such a way, the total rise in operating costs will comprise $249 + $148 = $397 and the total operating costs will be $35,539, whereas the net income will increase to $59,360. Hence, the operating income in case of raising the number of passengers and decrease of the fare will be $23,821 that is $2,088 more than it is at the moment. Consequently, the decrease of the fare to $280 is reasonable on the condition of the increase of the average number of passengers per flight to 212 because the operating will increase even more, regardless of the increase of costs of flights. In other words, benefits outweigh costs of such changes being introduced by the Westcoast Air.
3. Travel International, a tour operator, approaches Westcoast Air on the possibility of chartering (renting out) its jet aircraft twice each month, first to take Travel International’s tourists from San Francisco to Fiji and then to bring the tourists back from Fiji to San Francisco. If Westcoast Air accepts Travel International’s offer, Westcoast Air will be able to offer only 184 (208 – 24) of its own flights each year. The terms of the charter are as follows: (a) For each one-way flight, Travel International will pay Westcoast Air $75,000 to charter the plane and to use its flight crew and ground service staff; (b) Travel International will pay for fuel costs; and (c) Travel International will pay for all food costs. On purely financial considerations, should Westcost Air accept Travel International’s offer? Show your calculations. What other factors should the company consider in deciding whether or not to charter its plane to Travel International?
Basically, the Travel International’s offer is attracting to the Westcoast Air because it provides the company with the possibility to save costs and to maintain relatively high profits. In this regard, it is necessary to take into consideration the fact that the Travel International will pay for fuel and food costs and, what is more, the Travel International will pay $75,000 per flight to charter the plane. In this regard, it is necessary to take into consideration that the costs saving will be $14,000 for fuel costs per flight and $4 * 184 = $736. In such a way, the company will gain $75,000 – $14,736 = $60,264 per flight. In this regard, it is also necessary to take into consideration the drop of passenger’s number from 208 to 184. The loss of 24 passengers means that the company will not gain 24 passengers * $325 fare = $7,800. Therefore, the change in costs of the company per flight after accepting the Travel International’s offer will be just $22,536 ($14,736 + $7,800). Consequently, the company will gain $52,464 ($75,000 – $14,736 – $ 7,800), if it accepts the offer of the Travel International. In such a way, it is possible to recommend the Westcoast Air to accept the offer of the Travel International because the offer can bring the company considerable profits. On the other hand, the company will still need to take into consideration possible costs on the improvement of the quality of equipment, services and possible training of the personnel to match requirements of the Travel International. In this regard, the company should consider far-going effects of the acceptance of the offer and its public image as well. The drop of the number of passengers and the decrease of price may raise doubts in passengers in regard to the quality of services of the company.

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