Question

The cost of flying a passenger plane from point \(A\) to point \(B\) is \(\$ 50,000 .\) The airline flies this route four times per day at 7 AM, 10 AM, 1 PM, and 4 PM. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full. Find the average cost per passenger for each flight. Suppose the airline hires you as a marketing consultant and wants to know which type of customer it should try to attract- the off-peak customer (the middle two flights) or the rush-hour customer (the first and last flights). What advice would you offer?

Short answer

The average cost per passenger for each flight is approximately $277.78. The airline should try to attract off-peak customers, as attracting more passengers to the off-peak flights can decrease the average cost per customer and thus increase the profit.

Step-by-step solution

Calculate Total Cost Per Day

Firstly, calculate the total cost per day. As the airline flies this route four times per day at 7 AM, 10 AM, 1 PM, and 4 PM. And the cost for each flight is $50,000. So, total cost per day would be \( 4 * 50000 = $200,000.\)

Calculate Total Number of Passengers Per Day

Now, calculate the total number of passenger per day. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full, i.e. 120 per flight. Therefore, total passenger per day would be \( 2 * 240 + 2 * 120 = 720.\)

Calculate Average Cost Per Passenger

Then, calculate the average cost per passenger. This can be obtained by dividing the total cost per day by the total number of passengers per day. So, average cost per passenger would be \( $200,000 / 720 = $277.78\) approximately.

Give Advice to the Airline

From the calculation, it is shown that the second and third flights are more expensive (from the company perspective) because these flights are only half full. Therefore, attracting off-peak customers can decrease the average cost per customer. The more filled a flight is, the lower the average cost per customer will be. This can increase the profit of the airline.

Key concepts

Average Cost per Passenger

Understanding the average cost per passenger is essential for airlines to evaluate their pricing strategy. For an airline, the cost of operating a flight remains relatively fixed regardless of how many passengers are on board. In our example, each flight costs \(50,000, whether it is full or only partially filled. To find the average cost per passenger, you take the total cost of operating the flights and divide it by the total number of passengers.

For the given example, with four flights operating at a total daily cost of \)200,000 and 720 passengers, the average cost per passenger is calculated by dividing these two amounts: \( \frac{\\(200,000}{720} \approx \\)277.78 \).

By evaluating the average cost per passenger, airlines can set more competitive prices, ensuring they cover costs while remaining attractive to customers.

Passenger Load Factor

The passenger load factor, known as PLF in the airline industry, is a measure of how efficiently a transport service fills available capacity. It is crucial in determining profitability. A high load factor means that the flights are operating near or at full capacity, which maximizes revenue. In contrast, a low load factor indicates that flights are not full, leading to higher per passenger costs.

In the example exercise, the first and last flights are fully booked with 240 passengers, achieving a load factor of 100%. Conversely, the middle two flights are only half full, with 120 passengers each, showing a load factor of 50%. This disparity affects the overall cost because fixed costs of operation remain the same irrespective of the number of passengers.

Improving the passenger load factor can be achieved through targeted marketing to boost flight occupancy, particularly on less crowded, off-peak flights.

Marketing Strategy for Airlines

Creating a robust marketing strategy is essential for airlines to optimize profits and ensure sustainable operations. With varying passenger load factors, airlines should tailor their strategies to manage demand effectively across different flights.

Effective tactics involve:

• Targeting the off-peak market by offering discounts or flexible booking options for flights that are traditionally less full, such as those in the middle of the day.
• Enhancing loyalty programs could incentivize more frequent flyers to choose less busy flights to earn additional points or rewards.
• Developing partnerships with businesses that require regular travel, as well as travel agencies, to secure block bookings for these underutilized flights.

By focusing marketing efforts on increasing passenger numbers for off-peak flights, airlines can lower the cost per passenger, filling more seats, and improving profitability across their schedules.