Mgt 204 Group Project Assignment

Name: Kaiying Yan       St#: 861246006

Name: Xiaoyi Liang       St#: 861245068

MGT 204 Group Project Assignment

1.First estimate the 20007 and 2008 Break‐even point (BEP) load factor for Southwest (without considering the mix of Aircraft and without referring to the reported BEP load factors if any). What may be the reason for change in BEP?                   

[1]. The variable cost per passenger mile is very little. So consider it as $0.00 here.

[2]. Contribution Margin per Passenger(seat) Mile= Passenger Mile Yield - Variable Cost per Passenger mile.

[3]. Brea-Even Passenger (seat) Mile= Fixed Passenger Operating expenses/ Contribution margin per Passenger mile

[4]. Break-Even Load Factor= Breakeven Passenger Miles/Total Available Seat Miles

From the above sheet, we can find that the Break-Even Load Factor of 2012 increased 0.01% to 201, which means that in 2012 the southwest airline need more passengers to cover the expenses. Compare the data from two years, the ASM increased 6.27%, the RPM increased 5.42%. So the Passenger Load Factor is decreased 0.74%. Although the Southwest create more seats, the passengers didn’t increase at the same rate. This will increase the operating expenses. In fact, the Fixed Passenger Operating expenses in 2012 increased 9.97%, which is a jump of expenses.

In the end, the break-even load factor of 2012 increased 0.01% than 2011.

2.Based on your estimated BEP load factors, evaluate the relative weakness and strength of the airline.  

Weakness:

1. Airlines have a high "spoilage" rate compared to most other industries. Once a flight leaves the gate, an empty seat is lost and non-revenue producing. Aircraft is expensive and requires huge capital outlays. The return on investment can be different than planned.
2. The BEP load factors increased from 77.35% in 2011 to 77.36% in 2012, which means the cost is increased in 2008. The largest effective factor is fuel, whose price increased sharply.

Strength:  

1. When variable cost is low, increase the passenger load factors by increase variable cost such as provide better food on airplane, will increase the revenue that South West Airlines earns.
2. Break-even load factor of Southwest Airlines is lower than most of other airlines’ BEP load factor, which indicating that Southwest Airlines’ cost structure is very efficient. So it’s easier for Southwest Airlines to get profit by selling more tickets.

3. If air travel were expected to increase by 10% next year (2009, assume Southwest will have its proportional increase in demand for services), what will be the amount of increase in net income?

We considered that the variable cost per passenger mile is zero. So if the air travel increases by 10% next year, the fixed expense won’t change a lot. Since,