Question Regarding Part 4: Calculating the revenue for the Economy Class

Question

Hi all,

I have a question regarding part 4 of this case, concerning the following calculation:

Für die Economy:

Passagiere vorher - Passagiere die in Premium Economy gewechselt haben = 144 - (20 * 60%)/3 =140

I don't really understand why we still calculate with 144 seats (180 x 80%) because the number of economy seats decreased to 150.

Wouldn't it then be 150 x 80% = 120 seats - 4 seats = 116 seats

Does the introduction of a premium economy class automatically lead to an increased seat utilization in the economy class?

Maybe someone can help me with this!

Answer 1

Hi all,

my understanding is the following (I admit, not clearly explained in the case). Before the intro of the Premium Economy, 180 seats / 144 of those actually occupied. Then we introduce the Premium Economy, reducing the Eco seats by 30 (180 - 30 = 150). HOWEVER, I think it is wrong to now conclude that the overall demand for economy seats would also decrease (150 * 80%). For me, in my understanding, there is still the demand for 144 Seats for Eco. This is why they take this number of 144 and subtract the number of ppl who want to go for premium economy (4).

In short, do not assume that since there are all of a sudden fewer standard economy seats that the market demand for those seats decreases as well. Think about it, just because we would decrease the number from 180 to 90 for example would NOT mean that the demand would decrease from 144 down by half. The situation would have been different if the case said 180 seats, 100% occupancy and then 30 seats need to be reduced. In that case we cannot offer everyone an economy seat.

Hope that helps. Best,

Denis