Airline Pricing who subsidizes whom?

[UPNAWAY]

Interesting article. Even those of us in the business don't always understand the pricing and this is a new twist for me. :blink:

http://www.usatoday.com/travel/columnist/g...-grossman_x.htm

 

[qwerty]

David is a former US Airways manager that left for greener pastures.

Maybe if the company had better compensated those with talent, the last few years would not have been so painful for everyone else.

 

[Kev3188]

A good read. Thank you for posting the article. 🙂

 

[whlinder]

"Why should business travelers subsidize leisure travelers who can book far in advance?" she asks."

She might as well be asking "Why do I have to pay more than other people?"

And the answer is "because you are willing to pay more, and the airline can somewhat effectively price discriminate based on advance purchase requirements".

 

[FWAAA]

Years ago, there was a similar column in American Way magazine by whomever was in charge at the time (Crandall or Carty - I don't remember) which also pointed out that business travelers should be happy that the airline didn't sell out all the seats at low advance purchase fares, since that would make it impossible for last-minute travelers to walk up and say "I want to buy a ticket right now for the next flight out."

Implication being, of course, that the airline could have easily sold out all the seats on every flight if it priced and populated the various fare buckets to do that. Of course, holding empty perishable seats that might not be sold at all means that they are necessarily gonna be somewhat expensive for that walkup pax. They don't really mind the high prices, the column pointed out, because they tended to be business travelers for whom the trip was very important - so high fares were ok.

 

[lowfareair]

Years ago, there was a similar column in American Way magazine by whomever was in charge at the time (Crandall or Carty - I don't remember) which also pointed out that business travelers should be happy that the airline didn't sell out all the seats at low advance purchase fares, since that would make it impossible for last-minute travelers to walk up and say "I want to buy a ticket right now for the next flight out."

Implication being, of course, that the airline could have easily sold out all the seats on every flight if it priced and populated the various fare buckets to do that. Of course, holding empty perishable seats that might not be sold at all means that they are necessarily gonna be somewhat expensive for that walkup pax. They don't really mind the high prices, the column pointed out, because they tended to be business travelers for whom the trip was very important - so high fares were ok.

This is all well and good except for one factor: why not shrink the fleet size? Suddenly, instead of having a 200 seat 757 flying that route, a 150 seat A320 is. I'll even say it costs another penny per seat mile to fly that A320. Let's see how this impacts revenue:

-757: 200 x .10 x 1500 =$30k
-80% LF makes it 160 seats, each one paying $375 r/t
-Sell 100 of the seats for an average of $200 r/t
-Must now sell remaining 60 seats for $667 r/t

-A320: 150 x .11 x 1500 = $24,750
-80% LF makes it 120 seats, each one paying $413 r/t
-Sell 60 of the seats for an average of $200 r/t
-Must now sell remaining 60 seats for $625 r/t

That makes the tickets approx. 6% cheaper. Go to an A319 with 125 seats and it becomes:

-125 x .11 x 1500 = $20,625
-80% LF makes it 100 seats, each one paying $413 r/t
-Sell 40 of the seats for an average of $200 r/t
-Must now sell remaining 60 seats for $554 r/t

Which makes the tickets about 17% cheaper than using a 757.

Now, this does not take into effect other items, such as the fact that when you lower the amount of leisure seats, you can raise the ticket price on them, or that when you lower the price of a last minute ticket, you will stimulate demand, both of which will have postiive effects as well.

 

[robbedagain]

not sure if this is where this fits but here goes:
ABE subsidizies carriers like Allegiant and Hooters. But they wont give any discounts to carriers like USAIR NWA CO DL and UA and they have been serving ABE for yrs on end while low budget airlines such as Allegiant who has been at the airport since December and Hooters since mid last yr. Hooters is getting ready to pull out of ABE i think in March. It stinks though.

 

[jimntx]

This is all well and good except for one factor: why not shrink the fleet size?

Reducing the number of available seats and raising the prices does not really work. SWA, et al, have seen to that. And, I don't mean that as a criticism of SWA. It's a fact of life that they can sell a seat cheaper than AA can and still make a profit.

Those leisure travelers who are getting the cheapo advance purchase tickets have one telling advantage over the business traveler. If the cost is too high, they can decide not to go, or change the travel dates, or go to RNO instead. Or, to get a cheaper ticket, instead of going non-stop DFW-LAS, they can decide to go DAL-HOU-PHX-LAS, if necessary. (I realize that last example is extreme and not necessary on SWA, I'm just making a point.)

The business traveler who has an angry customer whose business is located in LAS does not have the option of taking an extra 12 hours to get there if the customer wants him/her there at 8am sharp.