Is Uair Even Trying To Be Profitable?

So, USair begins with u, are you saying that USAIR should shrink to profitability?

If they can't make money DCA-FLL on a full cost basis on this fare mix, well, you say the flight shouldn't take off.

That might mean parking another plane, laying off a few more staff, further raising average costs (because junior staff go first) Depending on the lease of the plane, it may not save money parking it anyway...

I feel sorry for USAIR. An airline in a business death spiral is tough to get out of, and excruciatingly long lasting. It can be done though - Iberia have turned around, and Garuda.
 
Look at Aer Lingus for another even better example of recovery from near death -- and on Ryanair's home turf also ...
 
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So, USair begins with u, are you saying that USAIR should shrink to profitability?

Depends on what you mean by shrink.. If you mean shrink in scope of operations, I would say no. When a business is suffering from negative contribution margin, it cannot shrink into profitability. Avg ticket prices have to go up, or fixed and varible costs have to go down to save Uair. Shrinking wont really do either of those two things. Uair needs to expand smart, and needs to use its assets more effectively (more turns per plane per day).

Honestly, I think Uair is an entirely dysfunctional organization, and the only way its assets can survive to generate profits is for it to be broken up and sold. I would guess quite a few of the employees will be absorbed by the entities that purchase the pieces of Uair, but yes, some will be out on the street. I wish everyone their the best of luck.
 
JS said:
I agree. Let's say $25 of the $138 is for marginal costs for that passenger. Allocate $113 of fixed costs to that passenger, and now we're break-even.

On the other hand, you could allocate more than $113 of fixed costs to the $138 passenger and conclude the passenger "costs" US money, and you could allocate less than $113 of fixed costs to the $138 passenger and conclude that the passenger "earns" US money.

Any one of the three allocation choices are irrelevant, though, because in the real world:

1) People make decisions on whether to buy a ticket on US Airways based in large part on what the competition is charging. Discount carrier competition is what is forcing US Airways to offer these fares.

2) Fixed costs are exactly the same whether US Airways chooses to match low fares, beat the lowest fare, or stick to its high-fare model. You can allocate all you want, but it doesn't change the fact that fixed costs have nothing to do with number of passengers (in the short term anyway).
JS:

See... Now you are playing the shell game, which is another problem with the incremental passenger model.

You are right, you could allocate $113 to fixed costs in your example. However, if, based on fixed costs per ASM (a number I do not know), this trip costs $125 in fixed costs, then somebody else has to overpay by $12 in order to breakeven on fixed costs.... Or you cannot cover the assumed variable cost of $25... Again, you either take the loss or subsidise this loss producing pax with a profitable pax.

You are right that fixed costs are fixed in the short term. However, they are not immobile. Why isn't US Airways dropping DCA-FLL and adding DCA-STL, where presumably a higher RASM can be attained, maybe even a RASM greater than CASM? Also, CASM drops because the variable component drops based on STL being closer to DCA than FLL. Why isn't US Airways making moves like this across the system?
 
funguy2 said:
Why isn't US Airways dropping DCA-FLL and adding DCA-STL, where presumably a higher RASM can be attained, maybe even a RASM greater than CASM? Also, CASM drops because the variable component drops based on STL being closer to DCA than FLL.
CASM is higher, not lower, for shorter segments.
 

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