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Managerial Accounting: Discussion 6.3 Read the following and then thoughtfully discuss the questions. Often airline frequent flier programs upgrade high volume passengers one, three, or five days in advance. ◦What are the differential costs of this practice? ◦What are the opportunity costs? ◦What are the opportunity costs of not doing this? ◦Would it be wise to sell a seat to a passenger walking up to the gate at the last minute a ticket based on the variable cost? Why or why not?
Often times, first-class and business-class seats do not change in price. Aside of a slight variation, it does not compare to coach seats that aim to provide the lowest possible seat cost option. Frequent fliers are the best customers for an airline. Aside from the obvious revenue incurred, frequent fliers are loyal and easy passengers because they know and understand the process. The differential costs related to upgrading a frequent flyer relates to the seat made available by moving the frequent flier. Since business and first-class seats are not competitively priced like the coach seats, they generally do not see an influx of last-minute sales. Opportunity costs would be earned loyalty from the frequent flier through customer satisfaction. Another opportunity cost could be the potential loss of income if a last-minute customer did present himself. These are potential risks, however, to not upgrade would leave a potentially empty seat. Airlines cannot make revenue on empty seats, that is why often times, airliners are guilty of over-booking. For this reason, it is not wise to sell seats to passengers walking up to the gate last minute. Having the option to sell seats, if available, would be nice, but having it become a standard would not be beneficial for the long-run.
Reference: Peterson, L. (2018, June). Breaking Down the Frequent Flier Mile Programs. Retrieved from https://www.nytimes.com/2018/06/12/travel/frequent-flier-miles-airlines-tips.html