Airline Route Profit and Aircraft Reallocation
A regional airline is reviewing four short-haul routes for next quarter. Route A carries 1,200 passengers per month at an average fare of $180; variable cost is $95 per passenger, and route-specific fixed cost is $70,000 per month. Route B carries 800 passengers at $220; variable cost $130; fixed cost $55,000. Route C carries 1,500 passengers at $150; variable cost $110; fixed cost $50,000. Route D carries 600 passengers at $260; variable cost $150; fixed cost $40,000. The airline has one spare aircraft that can support a new route only if an existing route is discontinued. The finance team treats route-specific fixed costs as avoidable only when a route is discontinued; if a route continues, its fixed cost is unaffected by passenger volume. The network planner wants to add Route E, which is projected to contribute $65,000 per month after variable costs but before any fixed cost. The airline asks which existing route, if any, should be discontinued to maximize total monthly profit, and whether the answer changes if fixed costs are not avoidable.
1. Compute the monthly profit of each existing route and the total contribution of each route. Present the results in a compact list.
Read the worked answer
Compute contribution = passengers × (fare - variable cost), then subtract fixed cost.
- Route A: 1,200 × ($180 - $95) = 1,200 × $85 = $102,000 contribution; profit = $102,000 - $70,000 = $32,000.
- Route B: 800 × ($220 - $130) = 800 × $90 = $72,000; profit = $72,000 - $55,000 = $17,000.
- Route C: 1,500 × ($150 - $110) = 1,500 × $40 = $60,000; profit = $60,000 - $50,000 = $10,000.
- Route D: 600 × ($260 - $150) = 600 × $110 = $66,000; profit = $66,000 - $40,000 = $26,000.
Total contribution = $300,000. Total fixed cost = $215,000. Total profit = $85,000. Route A has the highest profit; Route C has the lowest profit and the lowest total contribution.
2. If Route E is added and one existing route must be discontinued, which route should be dropped to maximize total monthly profit? Compare lost contribution and avoided fixed cost, and state the net change.
Read the worked answer
If one route is dropped and Route E is added, compare each option's net change:
- Drop A: lose $102,000 contribution, avoid $70,000 fixed cost = -$32,000; add E +$65,000 = +$33,000.
- Drop B: -$72,000 + $55,000 = -$17,000; +$65,000 = +$48,000.
- Drop C: -$60,000 + $50,000 = -$10,000; +$65,000 = +$55,000.
- Drop D: -$66,000 + $40,000 = -$26,000; +$65,000 = +$39,000.
Dropping C gives the largest net improvement, $55,000, because C has the smallest contribution loss relative to the fixed cost avoided. The recommendation is to discontinue Route C and add Route E, assuming E has no additional fixed cost beyond the $65,000 contribution figure.
3. If route-specific fixed costs are not avoidable when a route is discontinued, does the recommendation change? Explain using contribution, not profit.
Read the worked answer
If fixed costs are not avoidable, dropping a route saves no fixed cost, so the only loss is that route's contribution. Route C still has the smallest contribution loss, $60,000. Adding E contributes $65,000, so the net change is $65,000 - $60,000 = +$5,000.
The recommendation to drop C does not change, but it becomes much less attractive. If Route E's contribution were below $60,000, or if E carried its own fixed cost, discontinuing any route would reduce profit. The decision now hinges on contribution, not on reported route profit.