CASE:

SARM Airlines is trying to evaluate non-stop route profitability of Ottawa (YOW) Munich (MUC). The airline is planning to operate Airbus A-321. Aircraft has total 190 seats including both economic and business. TAN Airlines will consider entire year operations.

There are annual estimates of several categories of traffic expected in terms of demand forecasts. The local origin to destination demand is 200.000 one-way passenger trips(summed over both directions) per year. % 80 of YOW-MUC market demand prefers TAN Airlines. The expected average fare or ticket price for this route is 600 USD per one passenger trip. It is known that high estimate of market share between YOW-MUCH prefers non-stop service. The rest of the demand will continue to choose other flights.

Of course, there are some additional traffics. These are as follows:

Connections North American Cities behind YOW to/from MUC (Type-1)

Connections to/from YOW beyond MUC (Type-2)

Connections behind YOW to/from destinations beyond MUC (Type-3)

TAN Airlines will also receive a cargo revenue from this flight. It is basically 15 % of total passenger revenue. Total numbers and average fare or ticketed prices for each type were tabulated below:

Type of Additional Traffic	Number	Average Fare
Type-1	30.000	500 USD
Type-2	15.000	450 USD
Type-3	5.000	400 USD

Total annual flights in each direction are 400 which reflects 98 % completion of daily schedule. Block hours from YOW to MUC is 9 hours and from MUC to YOW is 10 hours. Non-stop miles YOW/MUCH is 3900 miles. Average loading factor is 75 %.

There are two different type of costs as direct and indirect. The aircraft operating costs per block hour are given below:

Crew cost is 1500 $

Fuel-oil cost is 7000 $

Ownership cost is 1100 $

Maintenance cost is 1000 $

The indirect costs of an aircraft are given below:

Passenger service cost is 0.02 $ per RPM

Traffic servicing cost is 30 $ per enplanement

Aircraft servicing cost is 2000 $ per departure

Promotion and sales cost is 10 % of passengers revenue.

General and administration cost is 0.005 per ASM

QUESTIONS:

1. Estimate total annual revenue of SARM Airlines in YOW-MUC route. (25 points)

2. Estimate total direct cost of SARM Airlines in YOW-MUC route. (25 points)

3. Estimate direct cost of SARM Airlines in YOW-MUC route. (25 points)

4. Estimate profit of SARM Airlines in YOW-MUC route. (15 points)

5. If CEO of SARM Airlines sets 15 % profit margin as target profit margin, are you going to satisfy the target or not? (10 points)