What’s causing the lack of network airline pricing power?

[USA320Pilot]

What’s causing the lack of network airline pricing power?


Prepared by Chip Munn, July 31, 2003

One of the interesting airline discussion’s centers around the lack of airline pricing power, why the airline’s simply do not raise fares, and the effect low cost airlines have on mature carrier revenues. As the major hub and spoke carriers continue to financially bleed and restructure, a simple fare analysis can easily shed some light into the problem facing legacy carrier’s in today’s cutthroat domestic market.

For US Airways, most line employees are witnessing record load factors, yet wonder why the company cannot be more profitable or simply raise ticket prices. However, when comparing ticket prices in key markets it’s easy to understand how low cost airlines continue to be profitable while mature carriers continue to struggle.

For example, in the Los Angeles to Pittsburgh market the lowest walk up fare is $158 round trip due to ATA competition. In addition, in the Phoenix to Pittsburgh market the lowest walk up fare is $158 round trip as well, due to price competition from low fare carrier America West Airlines.

However, when compared to the Caribbean, US Airways has significantly higher yields, which clearly indicates the purpose behind the company’s route reallocation and improved RASM. In the Philadelphia to Aruba market, the lowest 14-day advance purchase round trip fare is $429 and incrementally increases with less time to departure. For Charlotte to Aruba, the 14-day advance purchase round trip fare is higher at $528 and from Los Angeles to Aruba the 14-day advance purchase round trip fare is $671.

Even though the transcontinental and hub flying have about the same stage lengths, US Airways’ methodical route reallocation bodes well for future earnings with revenue about 3 times the amount of certain hyper-competitive transcontinental flying.

Separately, one strategic move that should improve yield RPM in US Airways West Coast markets is the United Airlines alliance, where US Airways has begun code sharing to Pacific destinations, where the company can charge higher fares to improve yields.

Best regards,

Chip

 

[trvlr64]

Yeah so! Do you have a fix Chip or do you like stating the obvious adnausem? Your customers (aka ME a US1) know all to well about the fares charged by this airline and how out of thouch they are. You didn't relate to the business fare but to more "leisure" fares. Discuss those. And by the way, the fares you stated for Caribbean desintations are not overpriced. I feel those are reasonable. Get to the real issue, business fares. That was once USAirways bread and butter. Not anymore.

You also need to do some research concerning that lovely codeshare. I've stated this many times. PIT to DFW on US, Monday to Friday = $970. Same flights on US metal with UA flight #'s = $560. Explain that!! So I still fly US and get my lovely Frequent Flyer miles and my boss doesn't have a fit! How much of the $560 did US get?

And as for charging higher fares to Pacific destinations. Believe me I flew UA to Tokyo and back from Taiwan. UA got the full share of that money, not US. Why you ask? Because we savvy, flying all the time customers, know exactly at what time to us our US DM# or our UA MP#. Which one do you think got me the upper deck on that 747 coming and going? Not US DM that's for sure.

 

[TomBascom]

Chip,

You're completely missing the point. The problem is not the lowest fares in a given market -- you have no problem selling those. You can (and apparently do) fill the planes with them all day long.

The problem is the other fares. You can't seem to sell those. And it isn't because you're offering them at such a remarkably low price. They have climbed into the stratosphere while the low fares have been dropping. You increase those fares all the time. In fact the highest fares have seen a greater rise than the lowest fares have dropped. A fact that we business travelers are all too aware of.

Meanwhile you've completely erased any differentiation in service or value that the different fare classes may have once had and made price the overwelmingly dominant factor in any purchasing decision. So, of course, nobody in their right mind pays full fare. And you're very rapidly erasing all positive differentiation between yourselves and the "low fare" competition -- and that is going to have very ugly consequences indeed.

We have 4 choices:

1) Buy a "business" fare on US -- at a price that would make a congressman blush. The numbers speak eloquently regarding how often you can expect that to happen.

2) Buy a leisure fare -- if we can fit ourselves into the strait-jacket of rules and restrictions. Trust me -- that strait-jacket doesn't look at all bad to the boss.

3) Fly on some other airline.

4) Don't fly.

Ask Dave how many "business" fares you're selling these days. Then wander into the back of the plane or just do some counting as customers get on and off. How many suits & laptops do you see? Does it match the number of "business" fares that you ought to have seen? Or are your business travelers maybe buying leisure tickets? Business travel isn't off 40% -- the purchase of business fares is though.

If you want to have a real pit in your stomach find out which customers actually bought Y & B tickets -- then find out how much their corporate discount is...

 

[DLFlyer31]

There's a big problem with U's "run and hide in the Caribbean" strategy. As U pulls down domestic travel, it is becoming harder and harder for business travelers to stay loyal to U. Simply put, U is no longer a convenient travel option. This is particularly evident when you look at the change in U's ASM vs. the change in RPM's. In the first half of 2003, U cut capacity (ASM's) by 11.9%. However, U's RPM's dropped by 12.2%. This indicates that as fast as U cuts capacity, passengers are abandoning U at an even faster rate.

Other carriers have cut capacity, but none of them have seen RPM's drop equally as fast...especially in the domestic markets where U is getting hammered.

There's another problem with U's strategy which is that it hinges upon yields in the Caribbean staying high. Unfortunately, those days will not last. Many other carriers see the same goldmine in the Caribbean that U does and some of those carriers happen to be of the low-cost variety. Both B6 and FL are eyeing that region and see a lot of potential.

Chip, I know you are a strong believer in U's "run and hide strategy," but where will U run to next when B6 and FL expand their Caribbean flying?

 

[USA320Pilot]

Per US Airways' earnings conference call revenue is 104% of industry average. In addition, according to AVMARK US Airways has the highest Yield RPM of any hub and spoke carrier. I agree the Caribbean will come under attack, but US Airways' route reallocation strategy helps to buy time to continue to restructure the company to get it's unit costs down to a point that it can compete with the low cost carriers.

In regard to revenue, the Charlotte Observer reported on July 29, earlier, US Airways executives warned that the third and fourth quarters will be "seasonally weaker." They said that business travel, as measured by tickets purchased within seven days of departure, was down 40 percent from the same quarter a year earlier. Historically, airlines rely heavily on business travelers, who pay high fares for the privilege of booking close to departure. Analysts said the airline did as well as could be expected, given the weakness in the airline industry. "In their defense, it's a horrible revenue environment," said Ray Neidl, aviation analyst for Blaylock & Partners.

According to the July 29 Philadelphia Inquirer, US Airways will continue to use cost-cutting, rather than lower fares, as its main tool to make money, the officials said. Senior vice president Ben Baldanza said efforts by several other major airlines to drum up business by reducing the normally high last-minute fares charged to business travelers had not worked to produce a net increase in revenue for the industry.

In my opinion, the only way for US Airways to compete is to further reduce its CASM to about 8.5 cents, which will be no easy task, however, there is reason to believe there will be major cost carve outs occurring in the not-so-distant future.

Best regards,

Chip

 

[Bluestreak]

Cost carve outs in the not so distant future... What are you getting at Chip? Are they finally going to close PIT? I am a fan of your posts, but I can't stand when you try to string us along like this. If you have some info tell us.

 

[N628AU]

Trvlr64...

If the flight is on US metal, US gets 100% of the revenue generated from the flight, regardless of who books the ticket, and under which code it is booked. I do agree that this is very inconvenient for customers, who should be able to get the same fare regardless of if they call US or UA. Maybe someone in pricing/yield management can shed some light on this.

If I were to make an educated guess, it would be that each carrier has X amount seats in a given fare class. US probably sells out their seats faster, since a customer who is choosing a US flight intuitively calls US first. That leaves UA with the only available seats in that fare class. Like I said, this is just a guess.

As for transcon pricing pressure, I find it interesting the comments made by ATA earlier in the week that although profitable, they do not have sufficient cash on hand for next year, and are unable to raise more long term capital. Could this be a glimpse into the future that LCCs are going to face the same financial mess that the majors are in now?

 

[USA320Pilot]

Bluestreak:

Due to sensitive negotiations, confidentiality, and on-going efforts, it would be premature and disruptive for me to comment further. I wish I could, but I cannot say more.

Best regards,

Chip

 

[TomBascom]

----------------
On 7/31/2003 10:06:31 AM Chip Munn wrote:
Senior vice president Ben Baldanza said efforts by several other major airlines to drum up business by reducing the normally high last-minute fares charged to business travelers had not worked to produce a net increase in revenue for the industry.
----------------​

Isn't it funny though that the airlines making money don't have "normally high last-minute fares" to offer?

Perhaps Ben ought to look closer at whether or not these supposed efforts by other "major airlines" were anything other than token attempts to show "we tried" with no honest effort made to actually change anything significant.

 

[DLFlyer31]

----------------
On 7/31/2003 10:06:31 AM Chip Munn wrote:


According to the July 29 Philadelphia Inquirer, US Airways will continue to use cost-cutting, rather than lower fares, as its main tool to make money, the officials said. Senior vice president Ben Baldanza said efforts by several other major airlines to drum up business by reducing the normally high last-minute fares charged to business travelers had not worked to produce a net increase in revenue for the industry.

----------------​

That quote from Baldanza explains what is truly wrong at USAirways along with some of the other majors, but there is a small glimmer of hope that some majors can see the light. Here is quote from a recent Business Travel news article in regard to the recent reduction in business fares at SLC and ATL by Delta:

"Delta Air Lines today detailed new business fare pricing on nonstop flights between its Salt Lake City hub and 60 markets, including Boston, New York and San Francisco. The move, which Delta said addresses customer requests, follows similar pricing changes in the Atlanta market.

Specifically, Delta said walk-up coach fares were slashed 40 percent and are fully refundable, unlike United Airlines' new nonrefundable business fare offerings (BTN, Jan. 20). "For as little as $50 more than the reduced coach walk-up fare, customers can sit in first class," said Harlan Bennett, Delta vice president of revenue management."

Delta termed the new Salt Lake City business fare structure "an expansion of a successful strategy" enacted in Atlanta. The carrier would not divulge specific results of the Atlanta fare redesign, saying only that "revenue performance meets and exceeds our expectations.""


DL's RASM in the 2nd quarter rose 6.1% while USAirways RASM rose 1.1%. I'm not saying cost controls aren't important, because all of the majors have to keep their costs in line. However, if USAirways thinks the only way to compete is by cost cuts, then US is not likely to survive in the long-term.

 

[leadmech8]

Bluestreak

I think what chip is trying to say but cant is the cost cutting has already been started. A meeting was held at the piedmont maintenance hangar in ORF last night by the V.P. of piedmont maint. At the end of the meeting half......yes......50 % of my fellow mechanics lost their jobs..

 

[ClueByFour]

----------------
On 7/31/2003 10:06:31 AM Chip Munn wrote:


Per US Airways' earnings conference call revenue is 104% of industry average. In addition, according to AVMARK US Airways has the highest Yield RPM of any hub and spoke carrier. I agree the Caribbean will come under attack, but US Airways' route reallocation strategy helps to buy time to continue to restructure the company to get it's unit costs down to a point that it can compete with the low cost carriers.

 

In regard to revenue, the Charlotte Observer reported on July 29,  earlier, US Airways executives warned that the third and fourth quarters will be "seasonally weaker." They said that business travel, as measured by tickets purchased within seven days of departure, was down 40 percent from the same quarter a year earlier. Historically, airlines rely heavily on business travelers, who pay high fares for the privilege of booking close to departure. Analysts said the airline did as well as could be expected, given the weakness in the airline industry. "In their defense, it's a horrible revenue environment," said Ray Neidl, aviation analyst for Blaylock & Partners.

 

According to the July 29 Philadelphia Inquirer, US Airways will continue to use cost-cutting, rather than lower fares, as its main tool to make money, the officials said. Senior vice president Ben Baldanza said efforts by several other major airlines to drum up business by reducing the normally high last-minute fares charged to business travelers had not worked to produce a net increase in revenue for the industry.

 

In my opinion, the only way for US Airways to compete is to further reduce its CASM to about 8.5 cents, which will be no easy task, however, there is reason to believe there will be major cost carve outs occurring in the not-so-distant future.

 

Best regards,

 

Chip

----------------​

First, HP is doing a helluva business, largely due to their efforts to sanify business fares.

Baldanza ignored this, because his counterpart at HP apparently gets it. I'm sure that B. Ben would come back and say that HP is not a "major," but at the rate US is shrinking, it'll be close pretty soon.

The run and hide strategy just won't work. It did not work in California with PSA, it did not work in BWI, it has not worked in Florida. It's only a matter of time before it fails in the Carribbean.

Airtran already goes to the Bahamas, for instance. I've heard their 717s are packed into Freeport, for instance. How long before they go to 3x day to say, FPO, and start poaching CLT pax off of US?

It's a failing strategy. And Chip, please don't quote Ben Baldanza as an informed source on anything. The man is clueless.

 

[SalesGuyCCY]

Actually, if its a UA code share flight on US metal, it is my understanding that US gets nearly 100% of the revenue but not all it. US has to pay UA for the cost of ticketing it. It's not much though.

In terms of why you can buy the same US flight for $500 on UA* that cost $900 on US, it's because US prices on an O&D basis, and UA and other carriers on a segment basis. So, two segments may be open for pricing for UA but the O&D is closed (or at higher fare buckets) for US to price. It's a problem that needs to be resolved.

 

[deelmakur]

In another forum, the subject of corporate discounting was brought up, and the number of respondents indicating their employers enjoy such benefits was astounding. Many indicated discounts up to 40% for Y and B, along with the ability to buy discount fares without Saturday stay conditions. Could this be having an impact on yields? Airline pricing depends on cost shifting (i.e sticking the business guy with a fare ten times higher than a leisure traveler, who is often in the next seat). You cannot cost cut your way to long term profitability. That only comes with increased revenue. While matching your dumbest competitor is what management says is causing the problem, perhaps somebody should be looking at excessive discounting with core business customers.

 

[trvlr64]

----------------
On 7/31/2003 11:02:51 AM N628AU wrote:

If I were to make an educated guess, it would be that each carrier has X amount seats in a given fare class.  US probably sells out their seats faster, since a customer who is choosing a US flight intuitively calls US first.  That leaves UA with the only available seats in that fare class.  Like I said, this is just a guess.

----------------​

Since we are pushed to use our corporate travel website to obtain fights I have turned into my own RES AGENT!!

When making flight arrangements we are given a list of all available flights for that time frame on all the carriers who fly to and from my desintations. What shocks me is that when I plug in the US flights and get the price quote, it inevidably comes up....WE HAVE FOUND A LOWER PRICED OPTION FOR YOUR REVIEW. And 8 times out of 10 it's always the same US flights with the UA codeshare # or even just UA flights (at even lower prices). I just don't get it. But living in PIT has taught me not to be surprised by the high fares from this airport.

So it's good to know that US will get my money even when it's the UA codeshare.