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March 30, 2017

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An airline has a low marginal cost per passenger of $30 on a route from Boston to Detroit. At the same time the typical fare charged is $300. The planes that fly the route are usually full, yet the airline claims that is loses money on the route, how is this possible?

  • Economics - ,

    1) While the marginal cost of adding a passenger may be small, a typical flight typically has huge fixed costs.

    2) it may be that flights from Detroit have huge profit margins -- such that an airline is willing to take a loss on getting people to Detroit, knowing that it will more than make up the loss on any connecting flights.

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