Keith Russell, president of Eagle Airlines, a small airline operating in south-eastern
Australia, had been considering expanding his operation and now the opportunity was available. An acquaintance had put him in contact with the president of a small airline in the west that was selling an aeroplane. Many aspects of the situation needed to be considered however, and Keith was having a hard time sorting them out.
Eagle Airlines (“Eagle”) owned and operated three twin-engine aircraft. With this equipment,
Eagle provided both charter flights and scheduled commuter service between several cities in eastern Australia (Melbourne, Sydney, Canberra, Adelaide, Hobart, Launceston and smaller communities in the …show more content…
In the past, scheduled flights accounted for 60% of Eagle’s flights. Keith believed that this might very well change however. Although 60% was still his best estimate of the future situation, the proportion may decrease to 40% or increase to 70%.
Operating costs were fairly easy to predict, although they may vary a little. Keith estimated that his best guess of $1,200 could be wrong by $50 in either direction, mainly depending on fuel prices.
Ticket and charter prices were partly under Keith’s control, but were highly influenced by competitors’ moves. Especially the charter prices were under high competitive pressures, resulting in Keith more or less matching the prices set by his major competitors. This resulted in a charter price in the range between $1,600 to $2,200 per hour. Keith had slightly more control over the ticket price per hour for scheduled flights, which would probably have to be around $240 per person, but could range up to extremes of $200 or $300, depending on market conditions.
According to Keith, a delicate point was the utilisation of the scheduled flights, which was currently around 60%, and Keith saw no reason why that would change. However, he had experienced some variability in utilisation rates in the past, which he also expected to be there in the future. He therefore took into account that utilisation rates may turn out to be different, and range from lows of 50% to highs of 70%. However, the aeroplane utilisation