Is Uair Even Trying To Be Profitable?

[usair_begins_with_u]

I recently booked a flight from DCA to FLL.. The round trip fare inc taxes and fee's was $176 on UAir. UAir was the cheapest airline out of not only all the majors, but also: Spirit, SouthWest, & Airtrain. How can a carrier with twice the costs of it's competitors charge $30-$40 less for the same exact flight (did I mention it was a nonstop) and not lose money??

Now I think about it, I'm almost worried that UAir wont make it to my departure date.. How can their pricing and inventory policies be that wreckless yet have any chance of survival??

 

[ITRADE]

I recently booked a flight from DCA to FLL.. The round trip fare inc taxes and fee's was $176 on UAir. UAir was the cheapest airline out of not only all the majors, but also: Spirit, SouthWest, & Airtrain. How can a carrier with twice the costs of it's competitors charge $30-$40 less for the same exact flight (did I mention it was a nonstop) and not lose money??

Now I think about it, I'm almost worried that UAir wont make it to my departure date.. How can their pricing and inventory policies be that wreckless yet have any chance of survival??

I don't get this. US gets the shaft because it dares to match competitors' fares ($176 in this case). US then gets the shaft because it dares to charge a different fare (ISP-RDU) for $700.

Can't win for trying, eh?

 

[CLT-Douglas]

Let me get this strait, your worried you didn't pay enough? So if you go to Circuit City to buy a TV and see it's cheaper then the same model at Best Buy, do you ask them why you can't just pay the same price that Best Buy is offering even though it's more?

You should be happy you got a good fare down to FLL and fly US. Don't worry, there are many of other routes in which US Airways is charging an arm and a leg in order to fly them.

 

[Art at ISP]

ITRADE,

The problem is that they have failed at finding a formula which works--they give away the ship unnecessarily in some markets and make up for it by gouging in others. I believe the vast majority of customers are looking for an evening out of this structure--I am not saying nor have I ever said they have to be absolutely the cheapest but they should never be $300 to $400 above their closest competitor in a market. There has to be a balance somewhere.

So in a way, yes they can get burnt on both sides of the equation. Raising the bottom SLIGHTLY and lowering the top significantly would increase the average, and would result in an overall improvement. While you might lose SOME leisure travelers, you would likely make up for it in the gain of business or last minute travelers who would otherwise go elsewhere.

I never said you had to be the cheapest--just be competitive--on BOTH ends of the structure.

My best to you all.....

 

[usair_begins_with_u]

Dude.. UAir sets its own price.. If it prices itself into the red, who is to blame??

UAir mgmt is too concerned with load factor right now. I think they have fallen prey to the contribution margin paradox. CMP, is a rookie pricing mistake 1st year MBA students are taught about in both their intro econ & accounting classes. In a nut shell, CMP involves pricing only to cover variable costs.. More importantly, pricing to cover only variable cost is either a sign of total ignorance (well a possibility at UAir) or a sign UAir mgmt has given up.. and they are just treading water until Chap 7 or possibly even a buy out.

The only other consideration would be a dire need for cash.. That might also be the driver behind profit destructive fares like this, but thats just speculation..

In either 3 cases: ignorance, defeat, deseperation, the end is near.

 

[insp89]

ITRADE,

The problem is that they have failed at finding a formula which works--they give away the ship unnecessarily in some markets and make up for it by gouging in others. I believe the vast majority of customers are looking for an evening out of this structure--I am not saying nor have I ever said they have to be absolutely the cheapest but they should never be $300 to $400 above their closest competitor in a market. There has to be a balance somewhere.

So in a way, yes they can get burnt on both sides of the equation. Raising the bottom SLIGHTLY and lowering the top significantly would increase the average, and would result in an overall improvement. While you might lose SOME leisure travelers, you would likely make up for it in the gain of business or last minute travelers who would otherwise go elsewhere.

I never said you had to be the cheapest--just be competitive--on BOTH ends of the structure.

My best to you all.....

Well Said, Art !!

 

[JS]

There is a very simple explanation for this. Rather than ranting, do some homework. Use Expedia.com or Travelocity and get the published fares for the market in question of DCA-FLL.

I see that the lowest fare excluding add-on taxes is $138 roundtrip on NW, US, UA and AA.

The next cheapest is $158 on NW, US, UA, AA, DL, CO and NK.

While it might seem that the majors are under-cutting Spirit, the lowest one-way Sprit fare is $79, while all the majors require roundtrip purchase on the two lowest fares (maybe more but I stopped looking).

If you see that US is the cheapest when you do a search for particular dates, all that means is that the cheap inventory has sold out on the other airlines but not US.

There can be many reasons for this, such as US supplying more discount seats, other airlines supplying fewer discount seats, people avoiding US, someone cancelling a cheap seat on US but not another airline shortly before you look, purchases of cheap seats on other routes that share the same airplane, and so on.

 

[usair_begins_with_u]

It also means US Air is losing money on those routes... US Air has the highest CASM of all US carriers...

Profit = rasm - casm

 

[BoeingBoy]

"Profit = rasm - casm"

It's a little more complicated than that - if one uses standard industry measures.

RASM = passenger revenue per ASM - other revenue (cargo, etc) are not included.

CASM = operating cost per ASM - other costs (U Group overhead, etc) are not included.

More correctly put...

Operating profit from passenger operations per ASM = RASM - CASM

Jim

 

[BoeingBoy]

One correction....

RASM can mean either passenger revenue/ASM or operating revenue/ASM, though generally operating revenue/ASM. So RASM - CASM gives operating profit or loss, not overall profit or loss.

Sorry for the mixup....

Jim

 

[funguy2]

OK... But I think the point here was this:

RASM=Rev/ASM
RASM=$176rt / 1 seat*(903 miles*2)
RASM=$0.097

Operating Profit/ASM=RASM-CASM
Operating Profit/ASM=$0.097-$0.116
Operating Profit/ASM=-$0.019

Profit on Ticket=Operating Profit/ASM*ASM
Profit on Ticket=-$0.019*(1 seat*903*2)
Profit on Ticket=-$34.14

So I think his concern was that if US Airways continues to lose $34/pax, they will go out of business.

(And yes, I know using system mainline CASM may not be an accurate portrayal of CASM of DCA-FLL nonstop... But I have no other number to go by...)

 

[JS]

First of all, you need to subtract the taxes. $176 total is $138 plus 7.5% federal excise tax and segment, security and PFC fees.

That makes the numbers worse, but it doesn't matter because it is false that everyone on the plane paid the second-lowest fare of $138 roundtrip.

 

[usair_begins_with_u]

Yes.. you guys are getting closer to the true picture. I can understand the logic of maybe selling a few tickets that would produce ZERO "opertating" profit. I can't understand selling a ticket that will result in an "operating" loss for any reason. Wouldn't it be better not to take the reservation at that point??

 

[mweiss]

OK, U, here's the answer to that one.

We established that selling the ticket gave a RASM of 9.7¢. CASM was 11.6¢, giving a loss of 1.9¢, or $34.14.

The alternative is that the seat goes empty. CASM remains 11.6¢ (actually an oversimplification, since the weight of the passenger and luggage costs fuel, and the passenger may consume beverages &c. on the flight). This gives a RASM of 0.0¢, resulting in a loss of 11.6¢, or $209.50.

If you had a choice between burning $34.14 or burning $209.50, which would you pick?

 

[funguy2]

JS: You are right, the taxes should have been backed out. At $138 of revenue:

RASM is $0.076
Op. Profit/ASM is -$0.04
Profit on the Ticket is -$72.24

mweiss:

You are correct in your reasoning... However, the other side of that argument is that if you fill a large number of seats at the loss-leading fare, you create three things:

1. The need to sell more "profitable" fares to make the flight break even or profitable... This means raising the "gouging" fare or selling more of the already high last-minute fares.

2. For every loss-leader you sell, you take away a seat to sell at a higher fare later.

3. You need to have a "profitable fare" that people will actually pay... Southwest has this... AirTran has this... The legacies largely don't, except where they compete with an LCC (and these are not profitable for the legacy).

Lastly, the industry has set an expectation now, where what was once the fare paid only by "incremental passengers" is now the fare that all passengers expect. Thus, the "incremental passengers" who were originally viewed as icing on the cake, since the seat would have otherwise been empty, have become "non-incremental".

Let's look at this another way...

For each $138 rt UAIR sells, they need to sell a $282rt fare in order to break even. (Break even would be $0.116*miles, or $209.50)... Now, we have to consider that UAIR will not sell 1 $282rt fare for every $138rt fare... Let's say its 2:1... That means for every two $138rt fare sold, they must sell 1 fare at $354 to break even... Of course, the problem is that the demand for the $354 ticket is not at a 2:1 ratio to the cheap ticket, yet the company needs the higher fare tickets...

So lets assume a 4:1 ratio... 4 tickets sold at $138rt, require 1 ticket at $498rt, just to breakeven... Of course, as the high end ticket price continues to rise, demand continues to fall... So as you continue to extrapolate this out, you can see where $2,000rt top-end fares come from... However the demand at that fare level is so small that it is very hard to capture... And given the ability for passengers to search the web for the lowest fare, perhaps even impossible to attain, ever again.

And note, we haven't even discussed profit yet.

Now to go back to your point, its better to lose $34 (really $72)/ticket than $210 on an empty seat... Yes that is true... However, that also suggests that if you cannot profit by serving the market, you should no longer be in that market...