Friday, December 5, 2008

Should a Detroit Executive Drive to Washington?: A Comparative Cost Analysis

Congress is blaming the top auto executives of being wasteful for flying private jets to Washington rather than driving. It makes nice headlines and the auto execs were sufficiently embarrassed by the babbling Washington elite and the news media, but was the choice really inefficient? I decided to try to answer that question by making some heroic assumptions in order to estimate the relative cost of flying versus driving for a top auto executive. In addition, the costs of flying commercial (first class, I thought it was too much to ask them to fly with the hoi polloi) and by private jet were also estimated. The results indicate that driving is the most costly means of travel between Detroit and Washington. Both commercial travel and private jet travel are cheaper. In fact, commercial travel is only slightly cheaper than flying private jet. If the private jet is shared with other passengers, it is most likely the cheapest alternative.

The most important variable in the analysis is the opportunity cost of time. What is one hour worth to a top auto executive and the company? Let's assume that the average annual salary including bonuses and fringe benefits is about $14 million. Let's also assume that these executives work realy realy hard putting in an 80 hour week, twice as hard at the rest of us. Given these assumptions the hourly wage of $3,365 represents a top auto executive's hourly opportunity cost.

The driving time and mileage was estimated with Google Maps. Flying also requires some driving. The first-class air option includes cab fare to and from the airport, while the private jet option assumes a limo. Both air options include one and a half hours flying time. However, I assumed that using the private jet and limo would reduce time at the airport, eliminating the time in line and waiting on the tarmac.

A review of flights on Orbitz indicates that a first-class one-way fare is about $700 and $10,000 was mentioned by the media as the cost flying private jet. Driving costs are valued at the IRS standard rate of 58.5 cents.

Given these assumptions the cost of driving is over ten thousand dollars more expensive than the least cost alternative. Do we really want Washington running the auto companies?

One-Way Cost of Travel Between Detroit and Washington for a Top Executive

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