Cloud and Charter

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Description

Cloud and Charter

On November 5 2003 Wayen Tebb was looking over his company’s income statement for the year ending October 31 2003. Cloud and Charter a small airline charter service company based in Vancouver, BC had incurred another net loss in fiscal 2003. Tebb needed to know the profitability of each of his three airplanes to decide whether he should continue to fly all three types.

Company Background

Cloud and charter was established in 1992 by Wayne Tebb who had accumulated substantial personal wealth from real estate investment. Tebb loved flying and yearned to own business. Tebb had hoped, at the very least, that the company would have earnings comparable to a low risk investment.

 

Chartered airline can their flights “on demand” rather than on a set schedule like the larger airlines. Customers would request a date, time, location and even plane type and Cloud 9 would attempt to accommodate the request. Sales come from two basic markets: business executive travel and medical emergency flight. The business sector represented 70% of Cloud 9’s revenue, while medical emergencies (paid for by the government) represented 25% of revenues. The remaining 5% of the revenues came from pleasure flights. The price was one of the Cloud 9’s key competitive factors. Costs were controlled by fueling at the cheapest locations; however, pilots salaries were generous to help promote customer loyalty. Cloud 9’s pilot were expected to be able to fly more than one type of the plane and be willing to be on call at any time for emergency medical flights.

 

Aircrafts

Cloud 9’s fleet was made up to three planes: the DVD, the WS21, and the J40. The DV5 was a small 5-seat propeller plane used mostly by the cost conscious customers. It was the slowest and least comfortable of the three planes. The WS21 was a pressurized 7-seat plane that was more comfortable and faster than the DVS. The J40 jet was the fastest plane; therefore, it was used for longer flights and was priced higher than the other two planes. Business travelers preferred the J40 or WS31 to DV5; however, the government only booked the cheapest alternative available. When the DV5 was not available the government often went to other competitors.

 

 

Income Statement Development

 

Currently, Tebb only had a consolidated income statement available (see Exhibit1) for review. Costumers were charged a basic fee for mileage.; as well as a fuel fee and landing fees (see exhibit 2 for total revenues by plane type).

 

Some cost data was kept for each aircraft. Costs like fuel, parts, flights insurance and landing fees could be traced to each of the three planes and vary in direct proportion to usage (see exhibit 3). All other costs are fixed. Some costs were shared by the three planes, but Tebb felt that he could allocate them using an appropriate cost driver. The following additional information is available.