Why Don't The Airlines Just Raise Fares?

[Wretched Wrench]

Here is an interesting link from Forbes:

http://www.forbes.com/2004/12/14/sp05_18_x...ines_newsletter

 

[funguy2]

Bob:

So are you going to continue to argue meainingless semantics?

I apologize if I implied you said "only". The point stands. You say raise fares on full flights. I say almost all flights are full. The statistics back me up, whether or not I use the word only.

Should, could... All semantics. If the airlines COULD raise fares, they WOULD. Naturally if they COULD, and you believe that it WOULD not decrease demand, then they SHOULD. I continue to believe that the airlines DON'T because they CAN'T without facing decreases in demand that make the fare increases less profitable than today's low-ball fares. All this talk about Delta LOWERING fares WOULD seem to support my theory as well. Apparently DAL is beginning to think they will be better served by lowering fares, not raising them. Maybe they are trying to kill US Airways and inflict some collateral damage at the LCC's. Who knows, but its clear they DAL is not even attempting to raise fares. Maybe with a combination of lower fares and better revenue management, they can increase revenue and RASM... Worked for America West as that was the idea behind their big fare change a few years back.

I agree with the fare increase attemps being a PR sham. Fare increases can be acheived though revenue management as markets dictate.

 

[funguy2]

Here is an interesting link from Forbes:

http://www.forbes.com/2004/12/14/sp05_18_x...ines_newsletter

[post="235494"][/post]​

Interesting indeed... to paraphrase:

Lisa Di Carlo says there is too much supply.

Mark Tatge says when there is consolidation and other supply reducers, fares will increase.

Sounds as simple as Marketing 101. Sure, there will be subtleties and nuances. Fares at LAS probably won't go up as much as, say Ithaca, but fares will increase, it just won't be because Airline X raised fares by $20 across the board, or even in select markets. There will be reduced supply and altered revenue management.

 

[eolesen]

It's a fact that customers will fly someone else to save $5 in airfare.

What's funny is that Bob mocked me repeatedly for driving a little extra to save 3c per gallon of gas (and I still do -- with the price of diesel these days, I'm even tankering fuel in the bed of my truck......).

When we raise the price just $5, we lose about 3 pax out of 100. Go up $10, and we lose 5 or 6 per 100.

100 seats at $200 = $20000
97 seats at $205 = $19,885
94 seats at $210 = $19,740

Get the picture now?...

 

[Bob Owens]

funguy2,Jan 5 2005, 12:17 AM]
Bob:

So are you going to continue to argue meainingless semantics?

Its not semantics because as you must be aware the addition of a word can change the whole meaning of a statement. Your added words were an obvuios attempt to change my statement to suit your arguement.


I apologize if I implied you said "only". The point stands. You say raise fares on full flights. I say almost all flights are full. The statistics back me up, whether or not I use the word only.

If almost all the flights are full then they can raise almost all the fares. How much they can raise them is really the only debate. I say in most cases 10 to $20 would not impair demand because as you know air transportation is an "intermediate good", demand is a "derived demand", people buy airline airline tickets as "a means to achieve some other purpose".While shorter trips may start to get affected at lets say anything over $10, because then it may be cheaper to drive, longer trips could easily go up $20(less than the cost of dinner) without much impact.

Should, could... All semantics.

So you say. The fact is that there are so many variables that those are the only appropriate terms that apply.I

f the airlines COULD raise fares, they WOULD.

Not neccissarily. Sometimes it pays to lose money. History shows that the airlines often realize rapid extreme recoveries. UAL was near BK in the early 90s and their stock was well over $100/share a few years later.

Naturally if they COULD, and you believe that it WOULD not decrease demand, then they SHOULD.

Well it depends on how much they raise fares, as I said earlier demand for air travel is derived, people buy airplane tickets for reasons other than going for a ride. So what we really need to know is how much to the airlines need to raise fares in order to break even.

I continue to believe that the airlines DON'T because they CAN'T without facing decreases in demand that make the fare increases less profitable than today's low-ball fares.


Well once again we go back to Jet Blue and their 60 airplanes. Let jet blue fly full airplanes, all at a discount, and we will fly the rest. Time is on the big guys side, Jet Blues costs are rising, they already pulled out of the Dominican Republic because they could not compete with AA.

All this talk about Delta LOWERING fares WOULD seem to support my theory as well. Apparently DAL is beginning to think they will be better served by lowering fares, not raising them.

Just more hype.

Maybe they are trying to kill US Airways and inflict some collateral damage at the LCC's. Who knows, but its clear they DAL is not even attempting to raise fares. Maybe with a combination of lower fares and better revenue management, they can increase revenue and RASM... Worked for America West as that was the idea behind their big fare change a few years back.

I agree with the fare increase attemps being a PR sham. Fare increases can be acheived though revenue management as markets dictate.

The same goes for the big announced fare cuts by Delta.[/COLOR

 

[Bob Owens]

It's a fact that customers will fly someone else to save $5 in airfare.

What's funny is that Bob mocked me repeatedly for driving a little extra to save 3c per gallon of gas (and I still do -- with the price of diesel these days, I'm even tankering fuel in the bed of my truck......).

When we raise the price just $5, we lose about 3 pax out of 100. Go up $10, and we lose 5 or 6 per 100.

100 seats at $200 = $20000
97 seats at $205 = $19,885
94 seats at $210 = $19,740

Get the picture now?...

[post="235557"][/post]​

Go away with your silly charts and unsustantiated facts. If all the airlines needed was formulas and charts then how come they were not prepared for this recession?
Besides your formula has too many assumptions, one of course is that all three/100 consumers can get a seat at $5 less somewhere else.

 

[FWAAA]

Go away with your silly charts and unsustantiated facts. If all the airlines needed was formulas and charts then how come they were not prepared for this recession?
Besides your formula has too many assumptions, one of course is that all three/100 consumers can get a seat at $5 less somewhere else.

[post="235579"][/post]​

How polite of you. When individuals post arguments with which you disagree, and your arguments are exposed as fallible, you tell people to "go away."

You assume that everyone on board HAS to fly at all. What you apparently can't fathom is that flying is discretionary for millions of people. Not everyone HAS to fly. Some choose to fly because of the price. Raise the price on these very price-elastic customers, and they just might stay home.

And the "silly charts"? You keep harranging everyone with your stupid mechanics pay v. CPI graph, yet insult others? You are a piece of work.

 

[funguy2]

Bob: You are still dancing around the point.

I am not arguing your "derived demand" theory. Most airline passengers do not fly for the shear joy of flight. However, increasing fares increases the total costs of the trip. Thus as fares go up, total trip costs go up, and we know that demand decreases as prices increase. Thus your "derived demand" theory doesn't do much to address the basic supply/demand argument. Nice try.

You continue to demonstrate a lack of understanding of how airline pricing and revenue management work. Delta is "lowering" their fares. However, I suspect they are trying to increase AVERAGE fares. How? Simple, they will offer less cheap seats and more "expensive" seats. Now, the price range on their one-way transcon fares will probably be $99 to $599 vs. $99 to 2499. Since $2499 is not a reasonable fare to most folks, they probably sold almost none anyways. However, by capping fares and reducing the availability of $99 seats, they can "reduce fares" and increase average fares and RASM. I suspect that is their goal. AMR failed when they attempted this a decade ago. America West was successful trying this strategy. Will DAL be successful? Who knows. Yes, there is some hype here, as DAL is just eliminating fares that nobody purchases anyway. But there could be some underlying value.

 

[mweiss]

Go away with your silly charts and unsustantiated facts.

[post="235579"][/post]​

:down: This is where we need one of those with a middle finger extended instead. Nonetheless....

If all the airlines needed was formulas and charts then how come they were not prepared for this recession?

I'm going to give the benefit of the doubt that you're not as stupid as your post sounded. I hope I'm right.

Air travel customers tend to be bimodal. Berry, Carnall, and Spiller did a study in 1997 that showed this clearly. The two modes are, basically, business and leisure travelers. (Of course, AA pretty much knew this over two decades before that.) For business travelers, price elasticity is low (i.e., increasing the fare by $10 would make little difference in the number of passengers).

OTOH, price elasticity for leisure travelers is very high. Why? Because they:

• are paying out of pocket, and thus feel the price difference viscerally.
• can't deduct the cost of the ticket, so they bear the full brunt of the price differential.
• have far more substitutes available. Business travelers don't go unless they have to be at the destination. Leisure travelers, by definition, are going because they want to. They can go elsewhere, or not at all.
• usually buy several tickets, rather than only one. As a result, each dollar increase is felt multiple times by leisure travelers.

So, if your airline manages to capture the entire business market, you can change prices almost with impunity. If, however, you're using the leisure travelers to close the profitability gap, you must price carefully.

Besides your formula has too many assumptions, one of course is that all three/100 consumers can get a seat at $5 less somewhere else.

If you followed the reasoning above thus far, you can look at my post from several months ago about how to properly set a price. It illustrates exactly why those "assumptions" are not really assumptions at all. I'd put a link here, but the search hasn't been re-enabled yet after the move. If you're truly interested, I can rewrite it and put it in this thread, but I'm not going to do it unless you are.

 

[funguy2]

mweiss... nice to see your back around for a bit...

 

[eolesen]

I'm going to give the benefit of the doubt that [bob owen's] not as stupid as your post sounded. I hope I'm right.

I'm sure he's very knowledgable in his work area, but......

 

[seed]

It's good to read a few explanations of this ticket market. I really felt depressed when I heard DAL was lowering the tickets, but now I see there may be a method in their madness. Great insight and thx!

 

[Oneflyer]

I really felt depressed when I heard DAL was lowering the tickets, but now I see there may be a method in their madness

Actually, DAL simplifying their fares is really good for AA long term. Alaskan, Aer Lingus, and Americawest all INCREASED their revenue once they simplied their fares. The idea is that you sell more mid priced tickets rather than deeply discounted tickets to compensate for the loss of high end revenue.

 

[Bob Owens]

Nothing is more deceptive in this industry than the fare structure.

It gives the airlines so much ammunition to frighten off their employees.

I love when they complain that most of their tickets sold are at a discounted rate, as if this is a new challenge that the airlines face. Well back in 1983 the C.A.B found that "over 80 percent of coach revenue passenger miles" on all certificated carriers were at discount fares.

According to the ATA the figure was 91 percent in 1987.

So the fact is dicount rates are the norm, not the exception. Did Delta realy "lower fares" or did they simply lower the highest listed fare at which hardly, if any, tickets were actually sold?

 

[mweiss]

...the fare structure...gives the airlines so much ammunition to frighten off their employees.

[post="236201"][/post]​

Uh huh...as if the legacies offer discounted airfares just so they can beat labor down. 🙄

Did Delta realy "lower fares" or did they simply lower the highest listed fare at which hardly, if any, tickets were actually sold?

My bet is more of the latter than the former. But, honestly, that's exactly how WN sets their prices. So, does that make it deceptive or not?