Here We Go Again

[TomBascom]

... Did you happen to catch the Wall Street Journal article last week about how FF programs have cost the airlines $25 Billion in lost revenues last year? That's billion with a B. You kind of want it both ways...you want the "elite" perks, you want the FF trips, you want the first class upgrades....and you want it all for a Southwest price. It sounds good on boards that "I'd pay more for the quality service"...but the reality is - you love it when LUV enters a market because now you CAN have it all. I mean, US managment may be dense, but they aren't stupid - they'll match the fares and still offer you elite credits, ff miles, free trips, first class upgrades and interlining (something that is not used 99.999% of the time anyhow).

Missed it. Got a link anywhere?

I somehow get the feeling that that figure is # of "free" tickets multiplied by some fantasy figure for an average fare (US had something like a million or so "free trips" last year -- if you use a nice round $500 per trip figure you get half a billion bucks in "lost revenue" just for US easily enough...) If that's the kind of math they're using the Journal, of all places, should know better.

If it's such a big problem why hasn't SWA gone out of business yet? They do free trips too...

As for inter-lining -- IMHO it's an almost worthless feature. Trying to get a legacy airline to actually put you on another airline these days is nothing but an exercise in futility.

 

[KCFlyer]

Missed it. Got a link anywhere?

I somehow get the feeling that that figure is # of "free" tickets multiplied by some fantasy figure for an average fare (US had something like a million or so "free trips" last year -- if you use a nice round $500 per trip figure you get half a billion bucks in "lost revenue" just for US easily enough...) If that's the kind of math they're using the Journal, of all places, should know better.

If it's such a big problem why hasn't SWA gone out of business yet? They do free trips too...

As for inter-lining -- IMHO it's an almost worthless feature. Trying to get a legacy airline to actually put you on another airline these days is nothing but an exercise in futility.

Yep...Southwest has free trips. But how much revenue does US lose by people exercising their "right" to upgrade to first class from a loss leader fare?

The WSJ article on line requires a subscription, so I can't post a link. Yes, they most likely put an "average" fare in there. But they also mentioned that US is getting hurt more than others because people who are concerned about US going out of business are redeeming their miles at a much greater rate than they are for other airlines.

But the purpose of my post was to illustrate that LCC's are LCC's because they keep their costs down. Some of the ways they do that are by:

1. - no interlining. I don't know how much this saves them, but apparently it's enough to warrant them doing it.

2. - In the case of SWA - after you fly x number of segments - they send you a ticket, good for one year. Don't use it and it's no good. Compare that to the "majors"...miles keep accruing, as long as you fly one flight per year. So you've got a lot of potential liability sitting on the books.

The further point of my post is that while many (rightfully) say "it's the fares", and post on a message board that they would pay slightly more than SWA for more services, in reality, if the major doesn't match SWA, they rarely are willing to pay more. I don't buy the "reduced expectations" argument either. Anyone who has travelled in the last 10 years does not expect a meal anymore. They don't expect a wide comfy seat with loads of legroom in coach anymore. They pretty much expect to get from point A to point B.

And when a "major" takes steps to save some money that might involve a bit of sacrifice from *gasp* the customer in the form of reduced accrual rules towards their "elite" status, the "cockroachs" scream that they are screwing their "best" customers. So the companies response is to go to the employ groups, who have already given up a significant amount of pay and benefits, and they ask them to give up more. If y'all really care about the employees of U, you'd not only talk the talk, but walk the walk when it comes to paying more to fly them.

 

[USlurker]

I haven't read the WSJ article, but I am very skeptical about the figure you quote. The question of how to account for frequent flier milage is an old one and every airline has long insisted the costs are low. Yield management limits seats to very low levels, usually seats that would have gone empty anyhow. See Airline accounting web page where it says the average cost of providing transportation to a FF passenger is $8.

As for paying more to support US, I know that I do. I buy US tickets that are more expensive than alternatives at least once a month. I would bet that I am very much the exception, though.

 

[BoeingBoy]

Well, LUV announced their Philly fares today - $29 to $99 for the routes flown from PHL.

Press Release

In separate news, the company is having "some" difficulty with ATC over increased use of runway 17/35 at PHL. What!! You mean they didn't coordinate with the folks in the tower before the plan went into effect? That doesn't sound like our crack management team.

Jim

 

[TomBascom]

Yep...Southwest has free trips. But how much revenue does US lose by people exercising their "right" to upgrade to first class from a loss leader fare?

Zip. Zilch. Nada.

Upgrades occur into seats that haven't been or won't be sold. There is always at least one full-fare F seat available for sale pretty much until the door closes.

You also need to take a lesson on the economics of fares -- there are no "loss leaders" in this industry. The marginal cost to transport a customer is very, very low. About $8 one way. Fares priced below average cost or even break-even CASM are a way of capturing revenue from seats that would be otherwise empty. They aren't loss leaders until they drop below that $8 figure -- something that even WN doesn't do.

It may very well be that many customers accept the restrictions associated with those fares (knowingly or not) who would purchase other, less restrictive and more expensive fares if the top end of the fare structure were not so mis-aligned with reality. Goodness knows that that approach seems to work for WN and the other LCC's -- it seems to be why they sell a much larger percentage of "full fare" tickets than the legacy airlines do.

Customers don't "pay a little extra" today because there is essentially no way to do so. There are the rock bottom fares -- which customers are relentlessly steered to by the airline itself and then there are the unrestricted fares. The unrestricted fares aren't "a little bit more". They are extortionary. So hardly anyone buys them and most of the people that are forced to buy them for one reason or another carry a grudge about it for a very long time. The lack of sales has nothing to do with customers willingness to pay a premium -- it has to do with CCY continuing to think that 1000% is a reasonable premium when customers have very clearly told them that 10% to 25% is more in line with their expectations.

 

[BoeingBoy]

Hi Tom,

Can't really disagree with what you said, except for a teeny detail (if you were talking about my "loss leader" comment)'

That disagreement arises from one thing. The incremental cost of transporting a passenger is indeed very small. After all, the seat is already there so the incremental cost is a VERY small amount of extra fuel burn, a coke, and a pack of pretzels. However, the cost of providing the seat the passenger sits in is not incremental, since the seat isn't installed only if needed. If you want to use our average CASM and average stage length, it works out to about $80 - $90 per seat on mainline(I'm too lazy to dig out the latest average stage length for the math).

Aside from this small detail, I agree with everything you said.

Jim

 

[TomBascom]

Hi Tom,

Can't really disagree with what you said, except for a teeny detail (if you were talking about my "loss leader" comment)'

That disagreement arises from one thing. The incremental cost of transporting a passenger is indeed very small. After all, the seat is already there so the incremental cost is a VERY small amount of extra fuel burn, a coke, and a pack of pretzels. However, the cost of providing the seat the passenger sits in is not incremental, since the seat isn't installed only if needed. If you want to use our average CASM and average stage length, it works out to about $80 - $90 per seat on mainline(I'm too lazy to dig out the latest average stage length for the math).

Aside from this small detail, I agree with everything you said.

Jim

KC's "loss leader" comment is the one that I was quoting.

But in any event -- CASM is an average cost. You can't use it in a discussion about marginal costs. Averages and percentages are very slippery critters -- sometimes they're useful but you need to be very, very careful about the conclusions that are drawn from them -- you cannot extrapolate detail from aggregate data.

Optimizing a metric like CASM on a global level is the wrong thing for management to be focused on. Especially when their primary tool for doing it is to tweak the load factors through reductions in capacity.

 

[TomBascom]

Hi Tom,

Can't really disagree with what you said, except for a teeny detail (if you were talking about my "loss leader" comment)'

That disagreement arises from one thing. The incremental cost of transporting a passenger is indeed very small. After all, the seat is already there so the incremental cost is a VERY small amount of extra fuel burn, a coke, and a pack of pretzels. However, the cost of providing the seat the passenger sits in is not incremental, since the seat isn't installed only if needed. If you want to use our average CASM and average stage length, it works out to about $80 - $90 per seat on mainline(I'm too lazy to dig out the latest average stage length for the math).

Aside from this small detail, I agree with everything you said.

Jim

KC's "loss leader" comment is the one that I was quoting.

But in any event -- CASM is an average cost. You can't use it in a discussion about marginal costs. Averages and percentages are very slippery critters -- sometimes they're useful but you need to be very, very careful about the conclusions that are drawn from them -- you cannot extrapolate detail from aggregate data.

Optimizing a metric like CASM on a global level is the wrong thing for management to be focused on. Especially when their primary tool for doing it is to tweak the load factors through reductions in capacity.

 

[BoeingBoy]

Tom,

I missed a post or two, sorry. Thought you were replying to me.

You are absolutely correct, the "revenue drain" from free tickets or upgrades is small - as long as those seats would otherwise go empty.

Jim

 

[KCFlyer]

Upgrades occur into seats that haven't been or won't be sold. There is always at least one full-fare F seat available for sale pretty much until the door closes.

Might I bring to your attention the announcement from Alaska Airlines today...value pricing (it's in todays WSJ). They have pretty much done what I have been urging all along. They have also priced a refundable one way first class seat from Seattle to Orlando to $499. I would submit to you that there is a very high likelihood that come the day of the flight, they will have every first class seat filled with a paying passenger.

If someone else holds out for a $1,000 first class seat and it doesn't sell, so they upgrade the person paying $100 into that seat, they have lost out on an additional revenue. The more revenues they bring in, the less need their is for cost (read that as pay) reductions.

My further point is that if US would implement a similar policy, and implement restrictions on the ability of elites to upgrade, the elites would scream to high heaven because they KNOW that the first class cabin is likely to be filled and the precious upgrade will not be available. But touching the FF programs is something the "best' travellers won't tolerate. But IMHO, they need to do everything that they can do to insure the each and every first class seat is filled with a paying passenger. If it raises the hackles of the "preferred" customers, then I have to wonder just how much the people at the airline matter to them versus their own perks.

The employees of almost all the majors have felt their fair share of "pain". In due time, the frequent flyer members are going to have to share a little of that pain.

 

[tadjr]

Might I bring to your attention the announcement from Alaska Airlines today...value pricing (it's in todays WSJ).  They have pretty much done what I have been urging all along.

Preach to the choir, KC! We're all ready to sing that song, but are waiting for the leader of the flock to show up with the exact tune.

 

[BoeingBoy]

Right, the same leader that last year said simplifying fares would "cost us too much".

Jim

 

[tadjr]

Only revenue management would have the exact figures, but I can tell you that I see a lot more people asking about walkup fares, and then walking away from the counter over to FL or WN, than asking about walkup fares and whipping out their credit card. Of course all those walkup fares bought online or via a travel agency that are already ticketed we'll never see a direct affect of at the counter, but I would be interested to see the actual numbers they've come up with as to how many people buy the walkup fare vs how many sales we lose because they go to someone else last minute.
I had a club member the other day ask for a pass to the club since he was flying on WN. "Your fares for a flight out coming back tomorrow was too much for me" is what he said. Here is someone who obviously flys us enough to pay for a club membership, who would probably rather have flown US (possibly to be able to enjoy that upgrade), but chose to go to WN (total loss of US revenue) because the non excursions fares were so out of whack. How many of these guys are there around the system and how many of them WOULD be flying US if we offered a better alternative? Thats something that isnt in the statistics presented.

 

[TomBascom]

Might I bring to your attention the announcement from Alaska Airlines today...value pricing (it's in todays WSJ). They have pretty much done what I have been urging all along. They have also priced a refundable one way first class seat from Seattle to Orlando to $499. I would submit to you that there is a very high likelihood that come the day of the flight, they will have every first class seat filled with a paying passenger.

If someone else holds out for a $1,000 first class seat and it doesn't sell, so they upgrade the person paying $100 into that seat, they have lost out on an additional revenue. The more revenues they bring in, the less need their is for cost (read that as pay) reductions.

My further point is that if US would implement a similar policy, and implement restrictions on the ability of elites to upgrade, the elites would scream to high heaven because they KNOW that the first class cabin is likely to be filled and the precious upgrade will not be available. But touching the FF programs is something the "best' travellers won't tolerate. But IMHO, they need to do everything that they can do to insure the each and every first class seat is filled with a paying passenger. If it raises the hackles of the "preferred" customers, then I have to wonder just how much the people at the airline matter to them versus their own perks.

The employees of almost all the majors have felt their fair share of "pain". In due time, the frequent flyer members are going to have to share a little of that pain.

That's nice. U has done very well with a similar promotion to LAS. Of course the dimwits ripped out all the F seats in the middle of the promotion but that's the sort of thing we expect from the Palace these days...

Such a circumstance doesn't change a darned thing KC -- if US offered F seats for a reasonable price people would buy them, upgrade inventory would be justifiably smaller, the risk/reward ratio would change and so would customer's buying habits.

Keeping people out of F seats by limiting upgrades isn't a solution -- selling seats by offering them at a price people are willing to pay is. They lose NO revenue when someone holds out for an upgrade. The customer doing so is taking a chance -- we all know that the seat may not be there no matter how super duper "elite" we may be we're only entitled to it when we pay for it. Shut off the upgrades and the customer doesn't decide to pay an extra $1,000 -- the customer takes their $300 and goes elsewhere.

 

[TomBascom]

The employees of almost all the majors have felt their fair share of "pain". In due time, the frequent flyer members are going to have to share a little of that pain.

Good idea KC -- if they can't tank the airline any other way they can always shut the revenue off at the source!

Chasing me away is equivalent to getting rid of a whloe planeful of those once a year cheapskates in the back! Wow! It would be soooooo much more effective to just piss off the frequent fliers -- hardly any effort required at all for that one!

Make sure you pass that one straight on to Dave & Dave...