Boston’s Logan airport is one of the busiest airports in the United States. In the late 90s, despite three runways in service, the airport was increasingly concerned about rising landing delays. The airport began to strategize on how to reduce the rising delay times and costs associated with them. Out of the few strategies that they developed, we believe that peak-period pricing will be the most effective way in reducing delay times in the short run.
Recommendation
In the short run, peak-period pricing will be an effective measure in managing runway demand and reducing delay times and costs. In our analysis, we found that when the arrival rate increased by merely five planes per hour in a system without peak-period pricing, large delay costs were incurred. These delay costs then rose exponentially as demand increased. When we applied peak-period pricing, and reduced the arrival rate by 5 planes, delay times and total costs were reduced drastically. However, we would like to note that the effectiveness of peak-period pricing also depends on the plane mix (percentage of planes using the runway) used by the airport. Computing this requires more data than is given in the case.
However, in the long run, after examining Logan’s projected operations for 2015, peak-period pricing will certainly not be enough to reduce the delays at the airport. Fuel and other operational costs will continue to rise in the coming years and Logan will be forced to raise its fares as well. This rise in price, as with peak-pricing, will never be enough to reduce the demand at Logan in the long run. As demand grows, the only way Logan Airport will be able to cope with demand it effectively will be by expanding its capacity by building more runways. Although community activists have contended that the addition of a new runway would increase noise, and decrease the appeal to waterfront development, this is the only viable solution if Boston wants to continue to be a major airline hub. Massport will have to assure that their promises of soundproofing homes will be fulfilled and other measures will be taken to appease the community members before a new runway can be built.
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Analysis1
Operating under the assumption that a small plane takes as much time to land as large plane, we found the following delay times in minutes for various capacities:
Good Weather Delay Time
Capacity
Delay Time in minutes
50 planes per hour
6.545
55 planes per hour
12.521
59 planes per hour
60.5
Assuming a 70% load factor for each plane and good weather at the airport, the estimated delay costs associated with the three plane sizes, (small, medium , big) with the various landing capacity would be:
TABLE A
Type of Plane
50 Planes per hour
55 Planes per hour
59 Planes per hour
Small Plane
$75.25
$143.95
$843.27
Medium Plane
$207.18
$396.35
$2,459.33
Big Plane
$467.26
$893.90
$5485.33
If we use the FAA definition of delay, assume a 70% load factor for each plane type and assume good weather at the airport, the delay costs associated with the three planes sizes with the various landing capacities’ would be:
TABLE B
Type of Plane
50 Planes per hour
55 Planes per hour
59 Planes per hour
Small Plane
$0
$0
$843.27
Medium Plane
$0
$0
$2,459.33
Big Plane
$0
$0
$5485.33
We don’t believe that the FAA definition is reasonable because as Table A shows, there is some cost to being late and that can’t be ignored because over time, that delay cost adds up to be quite a bit of money. Assuming the other same factors as above, we ran an analysis to find what would happen to the delay costs if Logan implemented peak period pricing. We also assumed thatAs mentioned in the case there would be a 28% reduction in demand caused by peak pricing.
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TABLE C
Type of Plane
36 Planes per hour
39 Planes per hour
42 Planes per hour
Small Plane
$38.47
$42.59
$48.26
Medium Plane
$108.29
$119.90
$135.84
Big Plane
$243.18
$269.25
$305.04
As you can see from comparing Table C with Table A, the reduction in demand caused by peak period pricing causes a sharp drop in delay costs. Any landing fee associated with peak period cost would totally be worth it with these sharp reductions in costs. Peak period pricing does represent an effective means of reducing the costs of over scheduling. 2 – Please refer the Excel sheet that I have sent you – tab 2
2.a>Currently the landing fee for TurboprobTurboprop is 2.8% of the operating expense and revenue. A landing fee of $100 will increase this percentage to 3.27%, landing fee of $150 will amount to 4.9% and $200 will amount to 6.54%.This shows that a peak period pricing will affect TurboprobTurboprop flights. However, as can be seen in the table, regional jet and conventional jet will not be affected as the percentage of landing fee, if peak pricing is used, is less than the present value.
Refer Exhibit – K
Type of plane
Seating Cap
Estimated revenue per passenger
Revenue per plane at 70%load factor
Landing fees as a percentage of Operating Expenses.
Landing fee as a % of revenue
$ 100
$ 150
$ 200
Turboprop
19
230
$ 3,059
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2.80%
3.27%
4.90%
6.54%
Regional Jet
50
154
$ 5,390
7.40%
1.86%
2.78%
3.71%
Convention Jet
150
402
$42,210
5.60%
0.24%
0.36%
0.47%
2.b>The effect on delays would depend on the particular mix of airplanes during the peak hour. If Logan has 40%turboprop then as seen in calculations above, they may want to shift their operations to other times as the landing fees during peak hours is more than what is currently charged. This would reduce the delay times during peak hours. However, if there is only 20% turboprop using the runways, then the peak-period pricing will have an insignificant effect on the demand and thus the delays.
2.c> The potential savings in delay costs that result from demand management can potentially offset peal-period fees. For Example, if the current peak period demand is 59 planes, and a peak period price can reduce the demand by 28%, 42 planes, then the total costs that conventional jets (big planes) incur reduction from $113,884 to $5,252 as seen in the excel sheet attached (Refer Exhibit – I and Exhibit-O) ( Exhibit O and Exhibit I).
However, if the demand is only 50 planes then the reduction will not be as drastic as 59 planes. Further, it must be noted it is the conventional jets which will benefit the most from the peak-period pricing. To conclude, the savings in delay costs that result from demand management can offset peak period fees, but only if the initial demand is high and usually only in the case of conventional jets.
If the arrival rates exceed service rates during any one period at Logan, we expect that there would be a huge back up in planes. A line would grow until planes would have to be diverted to other airports or would have to wait in the air, and this would cost everyone tremendously. If we assume that the weekday peaking pattern resembles the 2000 case that is shown in Exhibit 8 of the case, the estimated delay time for a plane landing at hour 17 would be 6.93 minutes while the delay costs, assuming 70% capacity and good weather would be:
Type of Plane
Delay Cost
Small
$79.67
Medium
$219.37
Large
$494.74
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Now if Logan drops to two total runways in operation, with a capacity of 22.5 arrivals per hour each, or to one runway with an average of capacity of 30 arrivals per hour then the delay costs and delay times will be astronomical and they will have to divert planes to other airports.
