Do Rational Fares Reduce Revenue?

[BoeingBoy]

From the Office of Aviation Analysis, DOT, report:

This Special Feature focused on a set of large markets where America West had a competitive presence in order to better understand the effects of the new fare structure on America West and its competitors. Our analysis showed that America West is carrying more traffic at considerably higher average fares. Both its absolute amount of revenue and its share of total revenue have increased substantially as it has lessened its reliance on the lowest fares and at the same time reduced fares directed at time-sensitive travelers who book closer to departure.

Report

Jim

 

[autofixer]

It just show the great lack of foresight of UAIR management. They would not have ever rationalized fares if SWA had not encroched upon PHL.

 

[Art at ISP]

Not for nothing folks, but this is what I have been saying all along. If you rationalize the fares, you will have more people willing to make last minute travel arrangements, and pay a LITTLE more. Average fares will rise, therefore adding revenue.

Imagine where we would be if they listened to me a year or more ago..........


My best to you all..

 

[AtlanticBeach]

Not for nothing folks, but this is what I have been saying all along. If you rationalize the fares, you will have more people willing to make last minute travel arrangements, and pay a LITTLE more. Average fares will rise, therefore adding revenue.

Imagine where we would be if they listened to me a year or more ago..........


My best to you all..

A certain unnamed airline with a rationalized fee structure sells 36% of its' tickets at the highest published fare, makes money almost every quarter and can do it with a relatively low load factor.

On the other hand, the old navy blue and grey has a bewildering fee structure, only sells 9% of the tickets at higher fares and barely breaks even with the highest loads in their history.

Art, I think you've got it!

 

[luvn737s]

From the Office of Aviation Analysis, DOT, report:

This Special Feature focused on a set of large markets where America West had a competitive presence in order to better understand the effects of the new fare structure on America West and its competitors. Our analysis showed that America West is carrying more traffic at considerably higher average fares. Both its absolute amount of revenue and its share of total revenue have increased substantially as it has lessened its reliance on the lowest fares and at the same time reduced fares directed at time-sensitive travelers who book closer to departure.

Report

Jim

Rational fares only work if you reduce a substantial amount of your inventory that is placed in the likes of Travelocity, Expedia, etc. If you hold market dominance, the marginal passenger who will only fly for $69 won't make or break you. You are better off to establish new markets with higher yields (point -to-point for example) when faced with irrational competition.

 

[BoeingBoy]

Art,

Here's something in the way of "proof" of what you've been saying. The following link takes you to the Domestic Airline Fares Consumer Report from the DOT's Office of Aviation Analysis for the 3rd quarter of '03 (latest available).

Scroll down to Table 5, which shows the lowest and highest fares ($25 price range) that at least 5% of passengers paid in a city pair and what percentage of passengers paid that fare.

For most of the markets where we're listed (only carriers with at least 10% of the market are shown with some exceptions), more passengers paid the lower fare than the higher.

Now look at the entries for WN. Except where they compete directly with another low cost carrier, their numbers are usually the reverse of ours - more passengers paid a higher (though reasonable) fare than paid the lower fare.

Domestic Airline Fares Consumer Report

Jim

 

[mweiss]

Just so it's clear, the HP analysis might not be transferrable. Their RASM was especially low even in 1990 (it was 7.1), so an increase was relatively easy. I'm far more interested in seeing the AS results; their RASM has been closer to legacy values.

 

[Art at ISP]

Michael,

In one sense CASM is irrelevant. The point is that overall revenue increased, and the AVERAGE RASM increased. I am not saying whether or not this would make U profitable per se, but by increasing overall revenue, one would think it would make for a better overall picture.

If you take in more, and your costs remain the same, you make more profit.

Seems simple to me.

Jim,

Thank you for the link. I am sure it will come in handy August 7th

My best to you all.....

 

[mweiss]

In one sense CASM is irrelevant.

If you look again, you'll notice that CASM was never mentioned in my post. I specifically called out RASM. My point is that a low-RASM airline might get better yield out of rationalizing fares, but that a high-RASM airline might do worse. Hence why I'd like to see how AS is doing.

 

[whlinder]

I think that rational fares would reduce RASMs but have the potential to increase total revenue through greater passenger volumes. Whether or not CASMs decline according is the key as to whether or not the strategy works. The other key is your competitors; if everyone has "rational" fares, the is no competitive advantage. However, if your fares are rational and your competitor's aren't, you've got the advantage. This is why (IMHO) you hear stories of WN lowering their highest fares and seeing their RASM go up; because their competition isn't even close in price, they steal more passengers. But if they were to do that against competitors with similar structures, I doubt you'd see the increase in RASM.

However, to go to a rational structure and move more volume, you've got to have a CASM behind it that can support it. Right now US' CASM is not low enough where a wide-spread "rational" fare structure would be profitable.

AS is taking this approach with their strategy, by adding ASMs using the same resources through fleet utilization. Now they have followed with more "rational" fares. I'm as curious as Michael is to see their latest numbers.