Discussion Post and Peer Responses

The company World Airline System is composed of the routes X and Y, and each route requires 10 aircraft. These routes can be serviced by three types of aircraft — A, B, and C. There are 5 (five) Type A aircraft available, 10 (ten) Type B, and 10 (ten) Type C. These aircraft are identical except for their operating costs, which are as follows:

Annual Operating Cost ($ millions)

Aircraft Type

Route X

Route Y

A

1.5

1.5

B

2.5

2.0

C

4.5

3.5

The aircraft have a useful life of 5 (five) years and a salvage value of $1 million.

The aircraft owners do not operate the aircraft themselves, but rent them to operators. Owners act competitively to maximize their rental income, and operators attempt to minimize their operating costs. Airfares are also competitively determined. Assume the cost of capital is 10%.

1. Which aircraft would be used on which route, and how much would each aircraft be worth?

2. What would happen to usage and prices of each aircraft if the number of Type A aircraft increased to 10, 15, or 20? 

3. State any additional assumptions you need to make

  
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