JS said:
For one passenger, it's not a loss, because down at the passenger level, there are no large fixed costs to be concerned with.
Well, all passenges have to pay a portion of fixed costs, no matter how small a portion of their ticket that is.
The point about people expecting low fares like this all the time is absolutely true. The way airlines have dealt with this is limited inventory.
It must not be that limited if RASM is less than CASM. This is the core issue. As a sidenote, Southwest, the "low-fare leader" almost always has a higher fare for tickets I've priced out months in advance. So I guess they better control their low-fare inventory and their profits show it.
If all the seats could be sold for $138, then fixed costs would have to be considered, because it's not possible for everyone to be on the margin. However, as you can see in the first post, US Airways was the cheapest because the other ailrines had already sold out of the cheapest seats.
I think we are very close to this situation today... Consider this... Info from US Airways 1Q04 numbers:
Mainline Pax: 9,851,000
Mainline Pax Revenue: $1,210,000,000
This means the average mainline fare is: $122.83
Mainline CASM: $0.1168
Average Stage Length: 773miles
Thus average cost per person per flight is $90.29
Next lets assume that 50% of US Airways traffic is nonstop and 50% is connecting... That means, you have to increase the average cost/ticket sold by 50% (i.e. half the people cost $90.29 and half costs $180.58) thus average cost per pax, each way is $134.44. Now this number will vary on the basis of how much traffic is making connections... I've heard that US Airways connecting traffic is higher than 50%. This is probably especially true for mainline, given the small O&D traffic at PIT and CLT (and PHL relative to its size... 5th largest city, 12th highest in pax traffic). Also, the highly local markets (i.e. LGA, DCA, and BOS to spokes) are largely flown on Express, making US Airways connecting traffic even higher...
If we assume US Airways mainline connecting traffic at 60%, then the cost per ticket sold is: $144.46. That means US Airways is losing, on average, $12 to $24 per ticket sold...
Let's look at this another way...
US Airways loss for the quarter was $177,000,000
Operating Loss was $143,000,000
Number of pax (mainline and express): 12,700,000
Loss per pax: $13.93
Operating Loss per pax: $11.25
Thus, the $138 ticket, at a loss of $72, is a much larger loss than the "average" ticket. Again, this assumes that average CASM can be applied to that flight.
Let's assume this is not true, and that CASM on DCA-FLL is $0.095. That means the ticket costs the company $171, and revenue is still $138... the loss on the ticket is $is still $33, or 3 times as high as the "average" loss per ticket.
You can keep saying that the fixed cost doesn't matter, but unfortunately, in the long run, it does... The fixed costs must be paid for from revenue.
One thing is for sure, and that is that removing all fares whose RASM is less than systemwide CASM will significantly reduce total revenue but only slightly reduce total cost, resulting in massive increase in systemwide losses.
This is true. But in the long run, if the company cannot operate a market where RASM is greater than CASM, they need to leave that market. Thus far, this does not seem to have occured. The assumption is that the economy will recover, and fare levels with it. This has been predicted for 2003, 2004, and now its supposed to happen in 2005. Will it? Maybe, who knows.