Question

Major airlines like American, Delta, and United are struggling to meet the challenges of budget carriers such as Southwest and JetBlue. Suppose the Delta CFO has just returned from a meeting on strategies for responding to competition from budget carriers. The vice president of operations suggested doing nothing: “We just need to wait until these new airlines run out of money. They cannot be making money with their low fares.” In contrast, the vice president of marketing, not wanting to lose market share, suggests cutting Delta’s fares to match the competition. “If JetBlue charges only $ 75 for that flight from New York, so must we!” Others, including the CFO, emphasized the potential for cutting costs. Another possibility is starting a new budget airline within Delta. The CEO cut the meeting short and directed the CFO to “get some hard data.” As a start, the CFO decides to collect cost and revenue data for a typical Delta flight and then compare them to the data for a competitor. Assume she prepares the following schedule:


Excluding food and beverage, the CFO estimates that the cost per available seat mile is $ 0.084 for Delta, compared with $ 0.053 for JetBlue. (That is, the cost of flying a seat for one mile—whether or not the seat is occupied—is $ 0.084 for Delta and $ 0.053 for JetBlue.) Assume the average cost of food and beverage is $ 5 per passenger for snacks and $ 10 for a meal. Split your team into two groups. Group 1 should prepare its response to Requirement 1 and Group 2 should prepare its response to Requirement 2 before the entire team meets to consider Requirements 3 and 4.

Requirements
1. Use the data to determine the following for Delta:
a. The total cost of Flight 1247, assuming a full plane (100% load factor)
b. The revenue generated by Flight 1247, assuming a 100% load factor and average revenue per one-way ticket of $ 102
c. The profit per Flight 1247, given the responses to a and b
2. Use the data to determine the following for JetBlue:
a. The total cost of Flight 53, assuming a full plane (100% load factor)
b. The revenue generated by Flight 53, assuming a 100% load factor
c. The profit per Flight 53, given the responses to a and b
3. Based on the responses to Requirements 1 and 2, carefully evaluate each of the four alternative strategies discussed in Delta’s executive meeting.
4. The analysis in this project is based on several simplifying assumptions. As a team, brainstorm factors that your quantitative evaluation does not include but that may affect a comparison of Delta’s operations to budgetcarriers.


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  • CreatedJanuary 16, 2015
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