Madness!

[fix_airplanes]

Regarding LUV raising fares. Once a year I buy full fare on LUV for travel to a specific event. Same route--same day of the year. Two years ago LUV fare was $109. Last year $129. This year is $159.

The problem with the U.S. airline industry is the management of just about all the airlines are crummy business persons. Instead of trying to make more $$$ per seat, they keep lowering the $$$. Normally this is a monkey-see, monkey--do industry except when it comes to raising fares. Nothing wrong with raising fares. Right now all the airlines are doing is hauling around a bunch of un-grateful people while burning up valuable petroleum polluting the skies.

 

[ITRADE]

Regarding LUV raising fares. Once a year I buy full fare on LUV for travel to a specific event. Same route--same day of the year. Two years ago LUV fare was $109. Last year $129. This year is $159.

The problem with the U.S. airline industry is the management of just about all the airlines are crummy business persons. Instead of trying to make more $$$ per seat, they keep lowering the $$$. Normally this is a monkey-see, monkey--do industry except when it comes to raising fares. Nothing wrong with raising fares. Right now all the airlines are doing is hauling around a bunch of un-grateful people while burning up valuable petroleum polluting the skies.

Of course, part of that fare is eaten up by increases in taxes, PFCs, and security charges...

 

[geo1004]

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

Well you did better than me!

 

[funguy2]

One of the convoluted things about this industry is that fares are not the only variable.

All fares are sold individually. The el-cheapo $99 transcon fare is only available on a certain number of seats per flight, and naturally, the number of seats varies based on expected demand of higher priced seats. For example, if UAL thinks they can sell every seat on flight 1 LAX-JFK for $1000, then no $99 seats will be available.

Thus, airlines can increase revenue by offering less seats at the discounted fares. Raising fares by $40/rt is not the only way increase revenue, or to increase the average fare paid. This is fairly unique to airlines... The only other example I can think of is amusement parks or concerts that offer a pre-sale via ticketmaster or a grocery store, and they charge a higher "door" price.

So if US Airways feels that their aircraft are full at unprofitable levels, they are having a failing in their revenue management strategy.

 

[Ch. 12]

So if US Airways feels that their aircraft are full at unprofitable levels, they are having a failing in their revenue management strategy.

But by revenue manageing flights to increase the yields and average fares, the demand would shift away from U. The thing is that ALL carriers are flying heavy loads these days but thanks to immense competition, it is next to impossible to increase unit revenue either by fare increases or inventory allocation. An airline seat is one of the most elastic commodities and since 2000, it has become exuberantly more elastic. Unlike the most recent hay-days of the 90's, demand will shift quickly from one carrier to another if there is any upwards pressure on yields no matter how minimal. That includes inventory management.

 

[Tim Nelson]

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

I wouldn't be too quick to discard what repeet suggest. It makes 'good sense' in the context of trying to get more cuts from labor in the next 90 day window. I would think that NW, CO, and DL were actually shocked that it was US that didn't go along.
Certainly if I were a greedy businessman that intended to lower my permanent labor cost then I would wish profits away and make darn sure I secure that by cooking continual losses on the books. How can you get these deep cuts otherwise?
At any rate, let's not suggest that management's plan isn't to enter bankruptcy once again. Such a thought isn't unreasonable if it is part of a plan.

regards,

 

[Ch. 12]

The market dictates the price, not the airlines. The market never permits a $5-10-plus fare increase because there are too many alternatives to the legacies. These increases are always rescinded because the legacies start losing many bookings therefore decreasing revenue (higher yield + many fewer seats does not equal profitability).

That is the simple explanation of why the fare increases were rescinded. It is not a conspiracy. The market won't allow it. Try a $1 increase like WN and the impact will be less and demand is not as likely to shift away. But as I stated before, this is a highly elastic business and the passengers feel every increase no matter how "insignificant". With the current climate, they are not going to have price dictated by the legacies and will easily find other ways to travel or not travel at all.

I honestly don't understand why everything has to be a conspiracy. Especially when the facts and nature of the industry are so apparent that there are no other ways to "read into" these actions.

 

[morepower]

Tim:

A couple thoughts.

I think US may have backed off because WN didn't go along. A new reality is that WN is the big boy on the domestic front, wiht about 700 more daily departures than DL, the next biggest. They are also targeting the core of US's operations in the northeast. If WN won't go along with a price hike, US won't either.

US should however, take whatever revenue the $1 or 2 gives and experiment with smaller increases in non-competing markets.

 

[mweiss]

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

ROTFLOL

Ironically, advanced calculus sunk me in undergrad. I can handle the basic calculus stuff, but start to get into the really advanced stuff and my mind shuts down.

 

[diogenes]

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

That's why universities offer business ad!

 

[Pylit]

What is incredulous to me is that our vaunted pax are not willing to pay $10 more for their seat, but are more than willing to pay:
- $150/night for a hotel room
- $15-45 for a steak dinner
- $55 pp to get into Walt Dizzy Werld or SeeWerld or Universel (sic)
- $10 for a below average box lunch on the a/c
- $thousands for a week on a ship in the carribean during hurricane season.
- $15 to send a couple sheets of paper on FEDX

I continue to shake my head in wonder...... :blink:

 

[luvn737s]

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.

Sounds impressive, bit a bit of Macro Ec for you to consider:

Demand elasticity is directly related to competition, not from other carriers but from other modes of transportation. In the US, there is no competition from other modes. Greyhound is not trying to lower it's fares to grab more of the transcon market.

Additionally, due to the airlines choosing the suicidal route of posting all their inventory and fares on the likes of Expedia, Travelocity, etc, they act as an oligopoly and as such should be able to set and fix fares with impunity. But they don't. Imperfect knowledge on the part of the consumer is a cornerstone to pricing above cost. Such internet "show me yours and I'll show you mine" has destroyed any ability to control revenue and insted they focus on costs (specifically labor).

Combine that with the commodity nature of the airline ticket and the fact that all airlines provide an equally mediocre product and the last hope of wringing out profit (the perception of value added to justify a premium fare) and you're left with an industry that is bent on destroying itself while the customer enjoys fares below cost.

US Airways has an enviable position in many smaller markets where they don't face direct competition with LCC's. As far as I know SWA hasn't announced service to Dubois or Erie or Harrisburg. Exploit your strengths before being hobbled by your weaknesses.

As far as what airline managers do all day, I don't think I give them the credit you do. Whether it's an airline ticket or a drill bit or a computer chip, the costs of production must be established and then the product priced at the highest possible point that the market will bear. The airline managers you refer to have allowed one or two carriers (who don't account for 20% of the total market) to dictate an arbitrary price point and then try to find a way to produce for that price.

 

[mweiss]

Demand elasticity is directly related to competition, not from other carriers but from other modes of transportation.

Point taken. I could have mentioned the competition from other transportation modes (Amtrak among BOS/NYC/PHL/WAS, automobiles in the Texas Triangle, etc.), though I figured I had made the explanation complicated enough already by that point.

Additionally, due to the airlines choosing the suicidal route of posting all their inventory and fares on the likes of Expedia, Travelocity, etc, they act as an oligopoly and as such should be able to set and fix fares with impunity.

Taft-Hartley would make that rather difficult. AA was slapped for even making the suggestion of price-fixing. I've had many conversations with different industry "experts" on this topic, and they differ in explanations as to why the prices have not held as well as, say, Detroit's did in the 1970s. None of them have passed close examination.

Imperfect knowledge on the part of the consumer is a cornerstone to pricing above cost.

Yup. One of the things I have been working on for a while is improvement in disintermediation applications of the Internet. Even if the airlines didn't publish fares on Expedia or Travelocity, it'd be very easy to build a site that would take care of exactly that. Thus far, the legal ramifications of doing so are still murky, but it is technically easy to do.

Combine that with the commodity nature of the airline ticket and the fact that all airlines provide an equally mediocre product and the last hope of wringing out profit (the perception of value added to justify a premium fare) and you're left with an industry that is bent on destroying itself while the customer enjoys fares below cost.

There's the rub. All of the airlines are behaving as if travel were a commodity. In a pure oligopolistic market, the path to success is market segmentation. Target matches Wal-Mart's price point, but not their target demographic, and thus the two companies succeed side by side.

The airline managers you refer to have allowed one or two carriers (who don't account for 20% of the total market) to dictate an arbitrary price point and then try to find a way to produce for that price.

I spoke of yield management. And they do not have the tools to handle competition against the LCCs yet. But ultimately they will, or their employers will cease to exist.

 

[cavalier]

It's also called Collusion, price fixing along with some other more distasteful names.

You rail against the price of gasoline and call for government intervention when OPEC and the oil producers raise prices in concert. But for the airlines it's OK to do that because you work for them. That's called hypocracy.

hypocracy.hypocracy.hypocracy.hypocracy.

Come on now Bob, you invented the word, by your own words you invented it.

 

[cavalier]

Cav,
Never let your personal agenda with me get in the way of facts.

You want high wages and NO accountablility for performance or profitability.

I have never suggested that I do not have a vested interest in maintaining the Status Quo as it applies to me. CP status,Mile, perks the whole deal. If I can get all of that on a "GoFare" then good for me. The fact that i lobby for my position and have more leverage because I can vote with my walet rankles you and frankly I don't care. There are to many GREAT people who work at US Airways an unfortunately among them are the whiners, Malingerers, nay sayers and die hard unionist who care neither for the company or their fellow workers as long as the union is served.

I will let it go Bob, but you entirely missed my point here....

Hint; don’t throw stones when in glass house.