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Monday, Jan 31, 2005

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The logic of air tickets at half the rate

HOW is an airline able to offer as much as 50 per cent discount on its apex fare tickets?

Chengamalam, Mannargudi

This is a sales promotion technique backed by sound cost accounting.

An airline is in a capital-intensive business where fixed costs tower over the variable costs, with depreciation of the aircraft, fuel and salary of the crew — all fixed costs — accounting for the lion's share of the expenses per flight. In other words, these expenses will have to be incurred whether the aircraft flies full load or at a fraction of its capacity.

The endeavour must, therefore, be to ensure that no aircraft takes off without there being enough passengers paying for at least the fixed cost.

These then are the number of seats earmarked for such concessional sale. That they are non-cancellable should not be lost on anyone.

The normal passengers who pay the full price practically contribute to the profits of the airline.

And in case of no-frills airlines offering a few seats at as low as Rs 500 for a 2,000-km journey, there is an element of cross-subsidy with full fare travellers compensating for the huge concession given to the Rs 500 passengers.

CP explained

WHAT is 'commercial paper'?

Saroja Ramanathan, Ramnad

It is an instrument of short-term borrowing used by corporates with strong financials.

Instead of willy-nilly agreeing to the terms dictated by the commercial banks, corporates issuing commercial paper dictate terms. The buyers, mainly banks, find the rates of interest attractive vis--vis the treasury bills. The corporates however are able to save a couple of percentage points in the process. Commercial papers are issued as promissory notes at discount to the face value. It is the discount which is the reward for the investors. They can be issued for as short a duration as 30 days to suit the convenience of the borrowers.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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