Madness!

[repeet]

Reuters
U.S. airlines roll back fare hike, add smaller fee
Tuesday May 25, 11:26 am ET

NEW YORK, May 25 (Reuters) - A fare increase led by Continental Airlines and matched by major U.S. airlines failed to stick after U.S. Airways rolled back its fare hike over the weekend and other airlines followed suit on Monday. ..Cont.

US AIRWAYS ROLLED BACK THE CONTINENTAL LED FARE HIKE, AND THE OTHER AIRLINES HAD TO FOLLOW SUIT.

If I ever hear management claim, ever agian, that they can't charge higher fares because we wouldn't be competitive, I'm going to shove this event up their a##.

Delta Air Lines, Northwest and Continental Airlines said they had to roll back their increases to "stay competitive."

I could just scream. They want to operate at a loss. Just so they can "justify" raping the employees.

The answer is NO!!!

 

[geo1004]

If only it were that simple...

It's not a matter of just tacking on a few extra dollars to all fares. And you don't REALLY believe that the reason they chose not to match the increase is to "screw the employees".

Did it ever occur that if the fare hike stuck, US would NOT have received the same percentage of ticket sales? If without the hike US was capturing X amount of the marketshare and with the hike they capture X minus 2% of the market then the fare hike ends up costing US money?????

 

[Capecod]

US AIRWAYS ROLLED BACK THE CONTINENTAL LED FARE


I could just scream. They want to operate at a loss. Just so they can "justify" raping the employees.

The answer is NO!!!

It's amazing how simple minded many on this board are. Ya, US Airways has about 4 months of cash left and they are TRYING to lose money just to screw you. Thats it. -Cape

 

[mweiss]

Geo's right. The view that the lower fares equal lower revenues is overly simplistic.

To take it to extremes, if all coach seats were $1M each systemwide, even if every airline implemented it simultaneously, the only result would be that nobody would buy any airline tickets.

The demand is elastic with respect to price. WN has proven that it is very elastic. Once one understands this, one can better grasp the true complexity of determining the ideal profit point.

Quick business math lesson.

Revenues = Price x Quantity. However, Quantity is a function of demand, and demand is a function of Price. Therefore, Revenues = Price x Q(Price), where Q(Price) is the quantity demanded at a given price. To maximize Revenues, the first derivative must be zero and the second derivative must be negative. To find that price point, then, one must know the shape of the Q(Price) function, which is basically the elasticity of demand with respect to price.

But that's only how you would maximize revenue. The goal is to maximize profit, not revenue. Profit, of course, is Revenues - Cost. Cost is, in and of itself, a mighty complex function made up of static costs, unit variable costs, and other variable costs. So,

Profit = Revenue - Cost = [Price x Q(Price)] - C(Quantity)

Since Quantity, as we established above, is a function of Price, we can say that Cost is also a function of Price and ultimately can use the following:

Profit = [Price x Q(Price)] - C(Price)

Again, as above, to maximize Profit, the first derivative of the Profit function must be zero, and the second derivative negative.

That is how you determine the price point at which you maximize profits for your business. And that only works if the entire industry has the same cost function (one subset of which is a monopoly). Toss in the different cost functions for the different players, and each player will have a different profit-maximizing price point.

Ever wonder what yield management does all day? That's it.

 

[AP Tech]

I believe this type of thinking reminds me of years ago when markets were reduced because they did not show enough growth year after year. Problem was though the load factor on the certain flights was over 85% so it was tough to show growth in that market year after year when the flight was always sold out....... :huh:

 

[RWerksman]

Not trying to be grumpy here, but...


In the last 10 or so years, you would assume that one airline would invest heavily into market research and actuaries. It cant be all educated guess work, can it?

Sometimes I feel the airline industry is doing the equivalent of "throwing parts at it" in an attempt to eek out a profit.

..I may just be overly idealistic.

 

[PITbull]

If only it were that simple...

It's not a matter of just tacking on a few extra dollars to all fares. And you don't REALLY believe that the reason they chose not to match the increase is to "screw the employees".

Did it ever occur that if the fare hike stuck, US would NOT have received the same percentage of ticket sales? If without the hike US was capturing X amount of the marketshare and with the hike they capture X minus 2% of the market then the fare hike ends up costing US money?????

THat doesn't even make sense.

Folks fly for convenience. They won't stop flying because the fare price goes a little higher for all carriers.

First U states that the flights are full, but the price of the ticket is too low to produce a profit....the above quote just doesn't compute with full flights that we already have. On many flights, its oversold.

If one carrier hikes ticket prices because of fuel, other should follow suit, not the other way around. Its called mutual survival.

This is when U shouldn't lead the way. So, now ALL the legacy carriers are back to losing even more money.

Good job. Leave it up to U.

 

[mweiss]

In the last 10 or so years, you would assume that one airline would invest heavily into market research and actuaries. It cant be all educated guess work, can it?

You have to know not only the demand functions, which change over time based on changing market conditions (cities grow and shrink, as does the economy as a whole), but also the cost functions of your competition.

Reported CASM isn't enough. What's the incremental cost to your competition to replace a 737 on the route with a 757 instead? They've added seats, and they certainly need an additional FA or two, plus the pilots are likely to be more expensive...but the fuel CASM drops. And what's your competitor's opportunity cost in putting the 75 on that route instead of a different one?

Then there're the variable costs that come from fluctuating fuel prices, and the hedging derivatives.

Then, once you've figured out your cost function and your competitors' cost functions, you move to the second-order analysis of the demand function.

How do you accurately segment the market? How do you prevent leakage of customers from a more expensive segment to a cheaper one? What are the demand functions for each segment?

Oh, yeah, then there's the recognition that the demand functions change from day to day. We all know that Wednesday and Saturday are particularly slow days, but conventions show up in various cities on various days. And morning and evening rush hours have higher demand. And there's just random noise in the demand functions as well. So you need to be able to dynamically determine these functions for each flight, in each market. So each airline needs to redo thousands of demand functions at a time, several times a day.

This ain't easy.

 

[oldiebutgoody]

I saw a news report on Tuesday morning that stated that SW was raising fares independently of the other carriers. I bet THEY don't retract theirs. Not only that, but I'll bet that they make a profit this quarter. UAIR and it's employees are screwed again by incompetent management.

 

[BoeingBoy]

oldiebutgoodie,

You are correct, LUV did raise their fares by $1 each way up to 600 miles and $2 each way for longer flights.

Jim

 

[geo1004]

Folks fly for convenience. They won't stop flying because the fare price goes a little higher for all carriers.

Again, that is oversimplified. Cost is a factor. Ever driven a little further down the street to save 2 cents a gallon on gas? Fuel up with 15 gallons and you've saved 30 cents on a full tank that just cost you $30 at todays $2/gallon prices. So you saved a whopping 1% on that purchase. Yet how many times do people drive another block to save 2 cents a gallon? All the time.

There is a reason the airlines can not just tack on a little more on their fares - the market does not support it. And on the reverse, sometimes an airline can not match another airlines sale fare because to do so may mean they sell more seats but in fact they end up with less revenue once they factor in costs.

 

[BoeingBoy]

geo,

Notice that Pitbull said "a little higher for all carriers". If every airline added a reasonaable fuel surcharge, travel patterns would probably change little.

The problem that the network carriers have with making a fuel surcharge stick is that they always want to tack on $10 per flight, or up to $40 per round trip. For many passengers, this is a large percentage increase in the cost of the ticket and could affect travel decisions (fly or drive?).

To put the amount of the fuel surcharge in perspective, in the first quarter US Airways fuel cost per passenger was $18.34. Southwest's $1 & $2 each way fare increase is a much more reasonable amount if all that's wanted is to cover the increase in fuel cost and will probably affect travel decisions little if any.

Jim

 

[openview]

Damn, mweiss you made me a believer. You've obviously stayed awake in accounting, stats and calculas class, and have worked, or are working in this area. Very good post and read.

Now if we can just have a few rants of no concessions and management maleficence, I'll feel I had a well rounded morning...

 

[openview]

calculus duh...maybe thats why i got a D+

 

[ITRADE]

Hahahaha.