Operating Income of a One-Way

¶ … operating income of a one-way flight between SFO and Fiji is calculated first by calculating the revenues. There are as follows: 175 passengers x $325 = $56,875. The variable costs of each flight are $81,500 in allocated fixed costs and $20,387.50 in variable costs associated with ticketing, food & beverage and fuel costs. Thus, the total operating income is a loss:

20387.50 = ($45,012.50) per flight.

The company should lower its fare. The current revenue per flight is $56,875. With the lower fare, the revenue for the flight will increase to (212) [HIDDEN] = $59,360. There will also be an increase in food & beverage costs, to $848 from $700. The fees to the travel agents will increase from $5,687.50 to $5,936.

Therefore, under the new price the company will only lose

$59,360 -- 81,500 -- 6784 = ($28,924). Of course, the company is still losing a substantial amount of money on every flight.

If Westcoast allows its plane to be chartered by Travel International, it assumes that it will not lose any business. Its annual passenger load, which is currently (208) [HIDDEN] = 36,400 will then be spread out over only 184 flights, for an average of 197 passengers per flight. On Westcoast's flights, the company will now earn the following operating income per flight:

(197) [HIDDEN] = $64,025. The costs will be the same for their own flights. The fixed cost allocations per flight will not change $81,500. The variable costs per flight will be $788 for the food, and $6,402.50 for the commissions. Thus, Westcoast will lose $24,665.5 for each of their own flights.

For the chartered flights, Westcoast will earn $75,000, plus the fuel costs of $14,000 and the food costs. The $75,000 is then applied to the $67,500, and Westcoast will gain $7,500 per chartered flight. On purely financial considerations, the charter deal will give Westcoast more customers per flight on their own flights, and will allow them to operate some flights profitably.

However, there are other considerations that would impact this decision. The company is losing money -- a lot of it -- on every one of its own flights. The current load factor is just 46%. This indicates that the best course of action might be to break lease on one of the two planes. This would allow the company to nearly fill all of its flights. In doing this, Westcoast could make more money than if they chartered. The profit for a charter flight is $7,500. If the company put 350 passengers on every flight, it would make the following on each flight: