Question

In: Finance

Freedom Airlines recently started operations in the Southwest. The airline owns two airplanes, one based in...

Freedom Airlines recently started operations in the Southwest. The airline owns two airplanes, one based in Phoenix and the other in Denver. Each airplane has a coach section with 140 seats available. Each afternoon, the Phoenix based airplane flies to San Francisco with stopovers in Las Vegas and in San Diego. The Denver-based airplane also flies to San Francisco with stopovers in Las Vegas and in San Diego. Each airplane returns to its home-base with no stopovers.

Freedom Airlines uses two coach-fare classes: A discount fare (A) and a full fare (B). Discount fares are available with a 21-day advance purchase. Full fares applied at any time, up to the time of the flight.

Below is the daily fare and demand data for 16 selected Freedom Airline itineraries. Itineraries 1 through 6 apply to the Phoenix based airplane (leg 1); itineraries 7 through 12 apply to the Denver based airplane (leg 2); itineraries 13 and 14 apply to the Phoenix based airplane (leg 3); itineraries 15 and 16 apply to the Denver based airplane (leg 4):

1

Phoenix

Las Vegas

A

$ 180.00

50

2

Phoenix

San Diego

A

$ 270.00

40

3

Phoenix

San Francisco

A

$ 230.00

35

4

Phoenix

Las Vegas

B

$ 380.00

15

5

Phoenix

San Diego

B

$ 460.00

10

6

Phoenix

San Francisco

B

$ 560.00

15

7

Denver

Las Vegas

A

$ 200.00

50

8

Denver

San Diego

A

$ 250.00

45

9

Denver

San Francisco

A

$ 350.00

40

10

Denver

Las Vegas

B

$ 385.00

15

11

Denver

San Diego

B

$ 445.00

10

12

Denver

San Francisco

B

$ 580.00

10

13

San Francisco

Phoenix

A

$ 250.00

70

14

San Francisco

Phoenix

B

$ 600.00

10

15

San Francisco

Denver

A

$ 325.00

50

16

San Francisco

Denver

B

$ 585.00

10

  1. Develop a revenue management (maximizing) model based on the information given in the scenario.
  2. How many seats should be allocated to each of the 16 itineraries to maximize revenue?
  3. What is the (maximum) expected revenue to be earned per day for all 16 flights?
  4. Assume operating costs for each of the legs is as follows:
  5. Leg 1 = $20,250
  6. Leg 2 = $19,750
  7. Leg 3 = $20,500
  8. Leg 4 = $19,500

What is the expected operating income for each of the legs? And in total for Freedom Airlines, given these 16 itineraries?

  1. Develop a revenue management (maximizing) model based on the information given in the scenario.
  2. How many seats should be allocated to each of the 16 itineraries to maximize revenue?
  3. What is the (maximum) expected revenue to be earned per day for all 16 flights?
  4. Assume operating costs for each of the legs is as follows:
    1. Leg 1 = $20,250
    2. Leg 2 = $19,750
    3. Leg 3 = $20,500
    4. Leg 4 = $19,500

What is the expected operating income for each of the legs? And in total for Freedom Airlines, given these 16 itineraries?

Solutions

Expert Solution

Leg 1
1 Phoenix Las Vegas A $180.00 50 9000
2 Phoenix San Diego A $270.00 40 10800
3 Phoenix San Francisco A $230.00 35 8050
4 Phoenix Las Vegas B $380.00 15 5700
5 Phoenix San Diego B $460.00 10 4600
6 Phoenix San Francisco B $560.00 15 8400
Max Revenue 46550
Operating Cost = 20250
Operating Profit 26300
Leg 2
7 Denver Las Vegas A $200.00 50 10000
8 Denver San Diego A $250.00 45 11250
9 Denver San Francisco A $350.00 40 14000
10 Denver Las Vegas B $385.00 15 5775
11 Denver San Diego B $445.00 10 4450
12 Denver San Francisco B $580.00 10 5800
Max Revenue 51275
Operating Cost = 19750
Operating Profit 31525
Leg 3
13 San Francisco Phoenix A $250.00 70 17500
14 San Francisco Phoenix B $600.00 10 6000
Max Revenue 23500
Operating Cost = 20500
Operating Profit 3000
Leg 4
15 San Francisco Denver A $325.00 50 16250
16 San Francisco Denver B $585.00 10 5850
Max Revenue = 22100
Operating Cost = 19500
Operating Profit 2600

Total Operating Profit for freedom airlines = summation of operating profits of all 4 legs:

=26300 + 31525 +3000 + 2600

= $63425


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