Is This Business Planning To Fail? (A GMAT Practice Essay)


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The following appeared in a memorandum from the business planning department of Avia Airlines:

“Of all the cities in their region, Beaumont and Fletcher are showing the fastest growth in the number of new businesses. Therefore, Avia should establish a commuter route between them as a means of countering recent losses on its main passenger routes. And to make the commuter route more profitable from the outset, Avia should offer a 1/3 discount on tickets purchased within two days of the flight. Unlike tickets bought earlier, discount tickets will be nonrefundable, and so gain from their sale will be greater.”

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The business planning department has written a proposal which takes several illogical leaps of faith in the course of its argument.  Any or all of the assumptions may be incorrect, and not until each of these assumptions are justified should approval be given to the proposed changes.

First of all, the business planning department assumes that because Beaumont and Fletcher are showing the fastest growth in the number of new businesses that they will generate a large market share, and thus profitability, for Avia Airlines.  However no evidence is given to show that these cities will do more air travel than any other.  It may be that the industries predominant in Beaumont and Fletcher are more suited towards rail travel, or are very local (or digital) in scope.  It may be that these new business have very small travel budgets.  In the same vein, the business planning department has also made the illogical assumption that a commuter route between the two cities is the optimal solution.  Perhaps it would be more advisable to increase the number of routes between a major hub, such as Chicago, and these two cities.

The second major area of unfounded assumptions is in the pricing solution suggested by the business affairs department.  There are several flaws in this reasoning, the first of which is that a 1/3 discount on tickets purchased within two days of the flight is warranted.  If demand is indeed high for such flights, they will book up quickly and customers will compete for seats even at the full price.  Even if demand is not high, businesses are not going to be incentivized to make short-term reservations simply by a price reduction – they will either have a business need or they will not.  The business planning group assumes that it will be business flights being booked, but with new businesses moving to the cities of Beaumont and Fletcher, new residents of those towns may be doing more personal travel than business travel, which would need to be reserved farther in advance.  The other unfounded assumption in the argument is that the 1/3 price discount would be offset by making discounted tickets nonrefundable.  There is no data to show the extent of current refund requests from tickets purchased within two days of the flight, but logic would dictate that those numbers would be fairly low.  Instead business planning might choose to implement a universal policy which requires any refund requests to occur before two days of the flight time, after which a penalty would be paid.

In the end, the business planning department’s proposal should not be approved, despite their undefined statement regarding “recent losses on … main passenger routes”.  They simply do not offer enough justification to make such sweeping changes.  Instead, more study should be made to determine any changes to routes as relates to Beaumont or Fletcher.  Certainly more data must also be provided before any pricing recommendations are approved.

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