Us Airways Considers Slashing Fares

[Busdrvr]

"Honestly, Busdrvr, do I need to be that detailed on every single analytical post?"

YES!!

You hit one of my personal pet peeves and a certain A320 Capt or FO awaiting training is the worst offender. Too many "amplifiers going to 11". I roll my eyes when folks suggest that U fly more transcon's to lower the CASM's. Just how in the HE11 does that change the cost of the specific PIT-PHL leg? Is it cheaper than $1 a mile for that leg? Sure, and you're right, it's likely profitable "stand alone". I think U is trying to maximize profits in this market to help make up for others. Doesn't matter how cheap the tickets are, there is a limit to the number of folks wanting that route. By the same token, they can't just start cutting "unprofitable" routes. Then they'd lose control over PHL and the new big dog would take over the money routes also.

U's problem is NOT "employee costs", it's structural issues. They are built around a hub and spoke system in a densely populated area. In the west, SWA's "sphere of influence" may only cover the single metro area they fly from. In the east, fares in PHL are influenced by fares in BWI, and NYC. Folks can drive to a nearby airport for a cheap ticket. Is this good for the local economy? NO. Businesses need local feed, and by having traffic siphoned off to the local Wal Mart airport, the feed gets smaller. A smaller (or vanished) U is a BAD thing for PHL and PIT and CLT for that matter (unless another hub carrier comes in and offers a similar service). Businesses can't afford to have employees on a five hop transcon just to save a few bucks (or effectively lose service to some areas).

 

[mweiss]

So, local12, if I understand your thought process correctly, you'll reject out of hand any suggestions for improving the company, point fingers at management for being so stupid, shrug your shoulders and say it's not your responsibility, and when the plans fail say "I told you so."

Is that an accurate assessment?

 

[mweiss]

Busdrvr, fair enough. I apologize for not being as clear as I could have. I figured, erroneously apparently, that my posts have on balance been reasoned enough to warrant being cut a little slack.

But anyway...

Flying more transcons would, in fact, lower CASM. Might lower RASM right along side, so it's hardly a guaranteed solution (unless your metric is CASM and not net margin), as you noted.

Losing control of a hub is a 1980s fear. There's no longer an effective way to prevent it, for dozens of reasons. This is actually the central theme of the research I'm doing.

I fear your picture of the current industry landscape is out of date, based on your suggestion that the alternative to US "owning" PHL is a five-hop flight to the LA basin. Take a look around you. B6's average stage length is higher than US and DL; it's almost as high as NW! ATA's is bested only by CO and UA. Even F9 has a higher average than US. The days of LCC=30-minute-flights are over.

Furthermore, the days of hubs being a necessity are coming to an end as well. They were needed in 1988 because of two factors. National demand was lower than it is today, and 100-150 seat aircraft were unable to do transcons.

We have entered an era where small aircraft are capable of handling ever-increasing distances, which today permits pretty much any city-pair in the lower 48 to be served non-stop. Couple this with the increasing travel demand, in part fueled by the lower fares of the LCCs, and you suddenly have many more markets that can be served by nonstop service. This decreases the relative value of the economies of scope created by the hub-and-spoke design.

The irony is that, after a shift to massive centralization in the 1980s, we seem to be going back to the future to a time when few airports are dominated by a single carrier, and where many second-tier cities are connected with nonstop service.

It's doubly ironic that Sloan and Bailey's vision may finally be coming to fruition.

 

[local 12 proud]

mweiss, if you choose to try and pyschoanalyze my thought process feel free to do so. i stand by my comments, the LEADERS who are hired to do a specific job have failed miserably and wish to deflect their incompentience onto the backs of labor all the while receiving their golden parachute's. the system is broken and all you seem to come up with is "well lets slash ticket prices"! how low must we go? BTW MY ONLY RESPONSIBILITY TO THE AIRLINE'S is to ensure you and millions other's have a safe and reliable a/c to carry you on your journey, you see im paid to maintain and repair those a/c to the highest standard, im not paid to ensure the ceo is making the right decision's. after all he's the one making $$$$$$$millions

 

[mweiss]

Fine, but then what's the point in coming in here and shooting down other people's ideas without a second thought and without an alternative offering?

 

[local 12 proud]

mweiss, the only thing im shooting down is that you cannot slash & burn your way to profitability, it does not work....when you convey to a person they are not worth what they are making and must take less, NOT ONCE, NOT TWICE, BUT THREE TIMES how do you get the best a person has to give? morale has become lost, loyalty is gone, it's no longer a proud carreer but merily a day to day existence, just a simple paycheck... were not robot's but management seems to think we can be treated as such....NO, I DON'T HAVE ALL THE ANSWERS because if i did would'nt i be the savior? it's the idea that LABOR can be used as the scape goat time after time that BOILS MY BLOOD, we are the frontline of defense and without us you the traveller will lose in the end!

 

[KCFlyer]

bus....let me simplify then. Southwest flies from cleveland to baltimore for about .38 cents per seat mile on a full fare ticket. An advance purchase ticket for the same flight is .16 cents per seat mile. Their costs are about 8 cents per seat mile. The trouble with US is that they are selling transcons for 6 cents a seat mile (which even a Prius hybrid couldn't do), and trying to make it up with $1.58 on short runs. If a short haul like CLE-BWI can be run with an Excursion pulling a trailer for no more than .38 cents per mile, why such a discrepancy between pricing on a similar route on US? As mweiss points out, even their advanced fare on that route is twice what Southwest would charge for their full fare. But there is only a 3 cent per ASM difference in their costs. While US is enjoying "industry leading load factors", the bottom line is that they must be overselling the 6 cent seats and finding that nobody wants to buy the $1.58 seats to fill the rest of the plane.

 

[mweiss]

local12, this thread is not about how much labor is being paid. If that's your issue, there are only about a hundred other threads that cover this point.

This thread is about the fares, particularly in markets competing with WN out of PHL.

 

[local 12 proud]

mweiss, i understand fully what the thread is about. slashing fares to compete with the lcc's and again i say you can't slash and burn your way to profitability....ive made my point and will leave it at that. have a nice weekend mweiss!

 

[KCFlyer]

mweiss, the only thing im shooting down is that you cannot slash & burn your way to profitability, it does not work....when you convey to a person they are not worth what they are making and must take less, NOT ONCE, NOT TWICE, BUT THREE TIMES how do you get the best a person has to give? morale has become lost, loyalty is gone, it's no longer a proud carreer but merily a day to day existence, just a simple paycheck... were not robot's but management seems to think we can be treated as such....NO, I DON'T HAVE ALL THE ANSWERS because if i did would'nt i be the savior? it's the idea that LABOR can be used as the scape goat time after time that BOILS MY BLOOD, we are the frontline of defense and without us you the traveller will lose in the end!

If you look closely local 12, you'll see that mweiss and myself aren't putting the burden on labor. Only pointing out that your management is giving away seats on some routes, and hoping to make a profit by charging $1.58 or more per mile on others. People aren't paying that price. Your ASM costs are 11.39 cents. You're right...if slashing fares means charging a fare that averages out to .10 cents a mile, then labor is percieved at the problem. If you charge .38 a mile, and FILL A PLANE, then your labor costs are covered and there are profits to be made. I used SWA as an example...their deep discount CLE-BWI fare still brings in more per seat mile than US's ASM costs. Do something like that and you CAN "slash and burn" your way to profitablity.

 

[PITbull]

First of all, the Tribune reports that the lowering of fares is a strategy by Bruce Lakefield... ah.... W-R-O-N-G!


It is Dave Siegel's business plan. Period. This "strategy" and new business plan was shown on Feb. 6 in a slide presentation.

I guess Brucey is going to get some kind of credit for that.

That article is so funny.....as if Brucey woke up Monday morning at his new desk in CCY and thought now for my first trick.... made a call to marketing and said:

"For all KMart shoppers, Ben, drop all fares to the basement ASAP".

 

[whlinder]

One thing I've wondered about is what would happen if a couple of legacy carriers "rationalized" fares. I.E., what if AA, NW and US all woke up and realized that their fare structures were too complicated, and they decided to simplify their fares to reflect AS/HP/B6/FL/WN/F9 structures?

Everyone seems to think that US rationalizing their fares is the way to go, and I think they should do some tweaking of their structure, but if everyone did it, where would the competitive advantage of having a rational structure go?

I guess what I am getting at are the questions, "If everyone has a rational fare structure, would total revenue increase?" and "Is the success of rational fare airlines soley due to their competitive advantage with fares against legacy carriers?"

just some food for thought...

 

[tadjr]

I am still confused as to why everyone automatically says rationalizing fares = rock bottom. There is a difference and I think it could be done without too much of a drop in $ if done properly. You do away with the round trip/excursion fares and price everything at one way. You dont offer anything lower one way than you are now (1/2 the roundtrip) and maybe add some between the 7 day advance current and walkup fares. I'm sure there are lots of people who dont make the 7 day advance (or 3, etc) who say no thanks when they see the walkup where if there were a couple more choices thrown in there before the highest Y fare, you'd get some takers. Also I seem to recall a lot more one way (higher) fares on Metrojet when we offered them. There are lots of people willing to pay for a ticket one way as long as its not the arm and a leg cost, who are currently purchasing round trips and throwing the back away. Which would be more $ for us? Someone buying a round trip $158 and not using the back end (and hoping that someone else buys it either thru oversales or walkup, right) or the possibility of selling two one ways for $129 each? Its a gamble either way you look at it, but I'd think the latter would have a better shot of happening in many instances vs someone deciding to book "the last seat" that the noshow would cause and paying full Y for it. There has to be a happy (and profitable) middle ground somewhere.

 

[PITbull]

Whlinder,


Your point is the point. Its a race to the bottom. Everyone will be trying to either match fares or push a few dollars lower to match the LCC. Once everyone is at the bottom price, then what?

My take, they will wait to see who goes out of business first. The employees who will subsidize this lunacy, will go into individual BK before any of the aforementioned happens.

The solution must be that with rationalizing fares, they must also create a demand for a unique product. They haven't done it yet. I've said before, the industry doesn't need six SW, six B6, six Am. West, six Air Tran, etc...

 

[mweiss]

If everyone has a rational fare structure, would total revenue increase?

It's a question that needs answering, of course. The evidence thus far is thin in many respects, but no airline with rational fares has thus far managed to extract more than 9 cents CASM. AS just announced their Q1 results, but Q1 was the quarter in which they were transitioning, so it's too early to tell if they've broken the 9c barrier yet.

One question one might ask is how HP's RASM compares before and after their fare rationalization. From 1995 to 2003, here's how their RASM breaks down:
7.9 8.0 7.9 8.3 8.5 8.6 7.8 7.6 8.1
They introduced the fare rationalization in 2002. The industry average RASM increase in 2003 was 5.2% over 2002. LCCs showed no RASM change at all (WN, FL, and TZ were up; FL and B6 fell), while legacies showed a 9.0% improvement. HP's RASM increase was 6.6%.

One might conclude that rationalization did well for HP, since they did better than the industry average and much better than the LCCs. OTOH, US's RASM, based on "irrational" fares, was up 7.2%, so one might also conclude that rationalization hurt.

Is the success of rational fare airlines soley due to their competitive advantage with fares against legacy carriers?

Since we can't evaluate AS yet, the only ones we can look at are WN/FL/F9/B6/HP/TZ. If any of them had CASM that matched the legacies, they'd be out of money in a matter of weeks. Well, WN would survive longer, but still...

It is hard to say whether or not rational fares creates success.