Air Frisco owns one jet and operates between San Francisco and the Fiji Islands. Flights leave San Francisco on Mondays and Thursdays and return to San Francisco from Fiji on Wednesdays and Saturdays; there is only one flight on each of these days. Air Frisco cannot offer any more flights between San Francisco and Fiji. Only tourist-class seats are available on its planes. You have the following information: Plane’s seating capacity 360 passengers
Average number of passengers per flight 200 passengers
Flights per week (one-way) 4 flights
Flights per year (flights per week x 52 weeks) 208 flights
Average one-way air fare $500 per passenger
Fuel costs $70 per passenger
Food and beverage service costs (all paid by AirOxford, no charge to passengers) $20 per passenger
Commission paid to travel agents by AirOxford 8% of fare
Fixed annual lease costs, allocated to each flight $53,000 per flight
Fixed annual ground service costs (maintenance, check in, baggage handling), allocated to each flight $7,000 per flight
Fixed annual flight crew salaries, allocated to each flight $4,000 per flight
Required: 1. Based on the average number of seats occupied, calculate the contribution margin (CM) that AirOxford earns for each one-way flight (i. e., per-flight CM, not per-passenger CM) between Oxford and Fiji.
2. The Market Research Department of AirOxford indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 220. Considering the financial impact, should AirOxford lower its fare?
3. Travel International, a tour operator, approaches AirOxford on the possibility of chartering (renting out) AirOxford’s plane twice each month, first to take Travel International’s tourists from Oxford to Fiji and then to bring them back. If AirOxford accepts Travel International’s offer, AirOxford will be able to offer only 184 (208 – 24) of its own flights each year. The terms offered by Travel International are as follows: a. For each one-way flight, Travel International will pay AirOxford $75,000 to charter the plane and to use its flight crew and ground service; b. Travel International will pay for fuel costs; c. Travel International will pay for all food costs. On purely financial considerations, should AirOxford accept Travel International’s offer? (this offer should be evaluated based on the original information provided; not the information pertaining to part 2.)
4. What other factors should AirOxford consider in deciding whether to keep operations as is (option 1) or charter its plane to Travel International (option 3)?