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Rev. Oct. 25, 2011
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HIGH POINT AVIATION: OPERATING BREAKEVENS
George and Grace Cox had aviation in their blood. They had both learned to fly in their
teens and from that moment on had wanted to do nothing else but be around planes, in the air,
and spending their days with others who shared their passion. Even though they were still fairly
young (in their midtwenties), they had made three major decisions: to get married, to start a
small flight charter company, and to serve the mining, oil, scientific, and wilderness adventure
clients of northern Canada. After having wrestled with these decisions for what seemed like
years, a sweet feeling of relief and excitement settled in. They had a direction. They were in
agreement. They could not wait.
Late one night after George had been asleep for a couple of hours, Grace finally gave
up—sleep was not in the cards for her that night. Ever the more practical of the two and the more
financially concerned, she had a host of financial data rumbling around in her thoughts. The
combination of a visit to their banker that morning and the tacos from Sid’s Canadian Grill that
evening were working in tandem to keep her awake. She knew her indigestion would pass, but
she couldn’t shake the feeling that their thin financial base necessitated a sizeable scale of flight
operations during their first year. If a substantial revenue stream was slow to develop, or
expenses were too high, their first year might be their last year—they had no financial slack. The
fundamental question she wanted to get a handle on was, given their preliminary budget figures
for the coming year, what level of revenue-generating flight miles did they need to just break
even? Anything above that would be icing on the proverbial cake.
The Financial Bet
As Grace listened to George softly snoring in the bedroom, she quietly made her way to
the kitchen table, where the pile of papers comprising their legal, regulatory, and financial
business details were neatly arranged. Somehow though, the orderliness of the papers belied the
uncertainty of whether they could make the business financially viable. She had done her
homework. She had compiled a basic budget, assuming 1,600 flight hours as merely a starting
point, and classified all the expenses in it as either variable or fixed (Exhibit 1). In short, she had
determined that annual fixed costs were going to be about $840,000 (including salaries and
This case was prepared by Professor Mark E. Haskins. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright 2011 by the University of
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depreciation on two Twin Otter planes and a small hangar). She estimated total variable
operating costs would be close to $6.00 per flight mile.
Because Grace and George anticipated setting their fee structure based on flight miles,
she wanted to ascertain the baseline breakeven level of flight miles they needed to fly. With the
basic data she had crafted, it was not too difficult to derive 280,000 flight miles as their needed
breakeven level. As merely a starting point, she had assumed a reasonable revenue rate, no
matter the number of passengers on board, of $9.00 per flight mile. Clearly, that rate could be
changed. Her basic calculation was as follows:
Assumed base case data of:
FC = annual fixed costs of $840,000
VC = variable costs of $6.00/flight mile
RR = revenue rate of $9.00/flight mile
Breakeven calculation:
$FC ÷ ($RR/flight mile − $VC/flight mile) = breakeven annual flight miles
$840,000 ÷ ($9.00 − $6.00) = 280,000 flight miles
The 280,000 breakeven flight miles figure seemed high but doable. In her mind, she also
translated that figure into an approximate number of flight hours, determining that figure to be
about 933 hours per year for each of the Twin Otters.1 They would be pushing the planes pretty
hard, especially for the northern Canadian environment, but she felt fairly certain the
transportation demand would materialize that would require them to do it.
What If?
It was hard to tell if the warm glow Grace was beginning to feel was due to the hot
chocolate and her flannel pajamas or an optimism that bordered on overconfidence. Just to be on
the safe side (if there was such a financial concept) she jotted down a few “what ifs” she wanted
to explore. In particular:
1. If High Point were to decrease its $9.00 revenue rate by 5%, what would the new level of
breakeven flight miles be?
2. If High Point were to incur another $100,000 of fixed costs, what additional flight miles
would need to be flown at the $9.00 flight-mile revenue rate to keep the company at a
financial breakeven level?
1
At an average speed of 150 mph for each plane, the figure of 280,000 flight miles for the two planes combined
translates to 933 flight hours, per year, per plane. The normal cruise speed for this type of plane is 130 knots. One
knot = 1.15 mph. Thus, 130 knots equates to 150 mph.
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3. If High Point could renegotiate its fuel contract and thus decrease variable costs per flight
mile by 8% (to $5.52), how much could flight miles decrease and the operation remain at
a breakeven level (assuming all the other base case financial facts did not change)?
4. If High Point’s actual flight miles were 12% below the base case breakeven level of
280,000 flight miles, what fixed cost reduction would be required to keep the operation at
a financial breakeven level?
5. If the company landed three new contract clients, thereby increasing projected flight
miles by 20%, above the 280,000 base case level, to what level could variable costs (VC)
rise and the operation remain at a financial breakeven level?
Page 3 of 4
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Exhibit 1
HIGH POINT AVIATION: OPERATING BREAKEVENS
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Budgeted Cost Data
Variable Costs:
Fuel and oil
Repairs and maintenance
Total per flight hour
Average miles per flight hour
Average per flight mile
Per Flight Hour
$560
170
$730
150
$4.90
Supplies (cleaning, office, hangar)
Contract services
Equipment rentals
Advertising, promotional materials, trade shows
Landing fees
Recruitment and screening
Travel (hotel, meals, rental cars)
Catering
Miscellaneous
Total annual variable costs
Initially planned flight hours
Total annual variable costs per flight hour
Average miles per flight hour
Average annual variable cost per flight mile
Total variable cost per flight mile
Annual Total
$22,000
18,000
66,000
20,000
19,000
2,000
83,000
27,000
7,000
$264,000
1,600
$165
150
$1.10
$6.00
Fixed Costs:
Annual Total
Payroll, benefits, and payroll taxes
Insurance and licenses
Subscriptions and memberships
Telephone and internet
Professional development and training
All taxes not included elsewhere
Depreciation (planes and hangar)
Office rent
Miscellaneous
Total fixed costs
$315,000
80,000
4,000
11,000
30,000
56,000
300,000
36,000
8,000
$840,000
Source: Created by case writer. For purposes of this case, the variable cost data has been modified and
extended from general insights obtained from www.dornierseaplane.com/content/direct-operating-costs and
www.planequest.com/operationcosts/op_cost_info.asp?id=116 (both accessed August 7, 2011).
Page 4 of 4
Name
Accounting 540
Case 1 – High Point Aviation: Operating Breakevens
5/13/2020
Assumed base case data:
FC =
VC=
/flight mile
RR =
/flight mile
1. If High Point were to decrease its $9.00 revenue rate by 5%, what would the new level of breakeven flight miles
be?
If the revenue rate were decreased by 5%
the new level of breakeven flight miles would be
.
2. If High Point were to incur another $100,000 of fixed costs, what addition flight miles would need to be flown at
the $9.00 flight-mile revenue rate to keep the company at a financial breakeven level?
If fixed costs increased by $100,000 a total of
flight miles would be needed with is an additional
flight miles over Grace’s original calculation of 280,000 flight miles.
3. If High Point could renegotiate its fuel contract and thus decrease variable costs per flight mile by 8%
how much could flight miles decrease, and the operations remain at a breakeven level (assuming all the other
base case financial facts did not change)?
If variable costs per flight mile decreased by 8%, flight miles could decrease by
4. If High Point’s actual flight miles were 12% below the case breakeven level of 280,000 flight miles, what fixed
cost reduction would be required to keep the operation at a financial breakeven level?
If High Point’s actual flight miles were 12% below the case breakeven level
To keep the operation at a breakeven level with the 12% reduction in flight miles, fixed costs would need to be
decreased by
.
Name
Accounting 540
Case 1 – High Point Aviation: Operating Breakevens
5/13/2020
5. If the company landed three new contract clients, thereby increasing projected flight miles by 20%, above the
280,000 base case level, to what level could variable costs rise, and the operation remain at a financial
breakeven level?
If projected flight miles increased by 20% over the original 280,000 flight mile levels t
. The variable cost per flight mile could increase by
financial breakeven level.
to remain at a
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