Question

Airlines sometimes offer reduced rates during certain times of the week to members of a businessperson’s family if they accompany him or her on trips. How does the concept of relevant costs enter into the decision by the airline to offer reduced rates of this type?

Answer 1

The costs relating to a Airline are usually sunk costs in nature and are not relevant to be decided based on the number of passengers boarding the aircraft. Costs generally include the salaries of crew at ground or in air, fuel costs, utilities and the wear and tare ie, depreciation of the vehicle. These costs are sunk ie., they are incurred regardless of the number of passengers who board the aircraft. Hence, not really relevant.

However reduced rates may impact the contribution and margins on service revenues to the airline company.