New Twist on the Fare Debate

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Oliver Twist

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Aug 20, 2002
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Raleigh, NC
Everyone knows our fare model in this industry as a whole is in serious trouble, and NO ONE in US or the other majors seems to be trying to change much. Why not try this approach.
Begin in a Non-stop market that does not involve hubs and cut the fares to reasonable levels with out the silly rules like Sat stayovers and non-refundable, etc.
Put out 5 or 6 fares:
F Walkup
F 14 Day Advance
Y Walkup
Y7 7 Day Advance
Y14 14 Day Advance
Y30 30 Day Advance
All refundable, changable, DM miles as usual, seat assignments. In other words, the good stuff without the nutty rules. Price it to make a profit and see what happens. Its only 1 city pair. If it works, expand it, if it dosen''t work drop it and I''ll be quiet. Just give it an honest try.
Any takers??????
 
It'll never happen. If they were to try it on a route that was running a 60% load factor and suddenly find that they are running an 80% load factor AND making a profit, then it would really hamper any efforts to contain costs, which is apparently the number one issue right now. [BR][BR]The last resort is to adjust the revenue model, and even then, the adjustment usually takes the form of money losing advance fares to lure the coveted leisure traveller who will rush in to save the airline. I really wish this board had the rolleyes feature.
 
None here!
 
Actually some sort of experiment might be underway. There are markets where U seems to be trying something along the lines of a more rational fare structure.

But without some attempt to make customers aware of it and to support the process of buying better fares I don't see how it can hope to prove anything. Unless, of course, the point is to demonstrate that it can't work.
 
Here's a good example. I received a call from a Preferred member last week wanting travel PHL-LAX Nov 19-21. US fare nonstop 2456.00 ...he didn't like it to say the least so ( to overcome objection ) I suggest another scenario at 1/4 the cost. PHL-LAS on US conx to HP to LAX roundtrip 7 day advance for 561.50.....Sold paper ticket . Why not give us in res a 7 day advance fare for travel Tue/Wed/Thu ( the low days ) for like $800.00 r/t?
 
If the flight involves non-hub cities, than what market will it be? Unless it generates enough demand at a decent average fare, it's probably not going to be profitable unless you achieve a WN or B6 type of CASM level. That is what makes the hub/spoke model so powerful. Because of the beyonds that you carry on each particular flight, you're adding strength to your network. But point to point service, you're only generating locals. If you take away the power of your hubs by adding non-hub, point to point flights, they better be added in O & D's that can generate enough strong demand to be profitable. Because absent a very low cost structure, you won't cover your costs. Let me illustrate my point for a moment. Let's assume US wants to start service in MHT-PBI. Stage length is 1222 miles, so we'll use 1200 as a round number. Let's assume an A320. I believe US A320 seat capacity is 132. Let's also assume an optimistic 75% LF in an off-peak month. Let's also assume the avg segment fare is $150 (all psgrs are locals, so the segment fare = the local fare). Let's also assume US current CASM level, about 10.94 cents.

So, CASM = 10.94 cents
Yield = segment fare/stage length
So yield = $150/1200 miles = 12.5 cents

Total ASM's = 132 seats x 1200 miles = 158,400 ASM's

132 seats with a 75% LF = 99 psgrs
99 psgrs x $150 fare = $14,850 onboard revenue

RASM, or unit revenue, = total segment revenue/total segment ASM's, so RASM = $14,850/158,400 ASM's = 9.4 cents.

So, if CASM is about 10.94 cents and RASM is 9.4 cents, the segment is not profitable. You're only breaking even by carrying about 116 passengers, or about an 88% LF, which is pretty darn tough to average.

This is why it is so difficult for traditional major carriers to make money flying point to point. Unless you have a CASM level similar to WN or B6, or unless you're able to get passengers to pay a premium type fare, you're probably not going to make much money, if any. If the market is absent any non-stop competition, your chances of charging a premium are greater. But than you open yourself up to other carriers undercutting your fares with less-than-nonstop offerings through their hubs.
 
[blockquote]
----------------
On 11/18/2002 10:31:52 AM UAL777flyer wrote:

If the flight involves non-hub cities, than what market will it be? Unless it generates enough demand at a decent average fare,
[/blockquote]

Tell me again why you chose an indecent average fare of $150? Why not work out what the fare needs to be to be profitable and then figure out how to market that fare to U's customers?

It's not like U doesn't have some interesting and presumably valuable differentiators available to it.

If all you ever focus on is the lowest price guess what people are going to pay?

I go to the website or call reservations and what gets quoted? The lowest price. And if there are other flights on the same day that are cheaper than the ones I originally chose? They get offered to me.

Does the website (or res) offer me the unrestricted alternative? No.

But guess what... Southwest does.
 
I used that fare because it was reasonable for my example. There was no rhyme or reason to it, other than it's fairly representative of the garbage fares being paid today by leisure travelers.

Markets are segmented. People fly on different timelines. Some book far in advance, thereby getting the lowest fare (presumably) and others book close-in and should therefore have to pay a premium above those that booked far in advance. Do you have a thorough understanding of how the airline pricing game is played relative to a carrier filing new fares and what types of reactions it stimulates? That is what prevents a major pricing restructuring from taking place. Unless the other carriers match it, they will put pressure on you by undercutting your lower structure, forcing you to then undercut them, which then eats into whatever profits you had hoped to stimulate. This is called a CMI. It happens ALL the time, every day. In fact, 3 times a day with each tape released by ATPCO. Airlines scream about the need for pricing sanity, yet nobody wants to go along with it. That is because each airline is in a different situation. Everyone knows US and UA are bleeding to death. So why help them out of their mess by going along with a fare overhaul when you don't have to? Take NW for example. They enjoy a significant amount of leverage in the market simply because they have almost no exposure to low cost competition, save for Spirit's small operation out of DTW. So NW is able to leverage their market superiority when they price. So they can, in essence, charge a premium to get their customers to pay it simply because often they're the only nonstop show in town. So along comes US who is bleeding to death and files a major fare restructuring for their markets. Chances are, those are going to involve NW markets. So NW isn't bleeding to death nearly as badly as other carriers. However, to show their displeasure with US's fare cuts, they undercut further, forcing US to undercut them or pull the fare changes. This type of activity goes on EVERY single day, 3 times a day, but almost never gets publicized. There have been numerous attempts over the last 6 months to bring some rational sense to the fare structure. But each time, NW had led the way on quashing it. Don't you think that if it were simply so easy as filing lower fares to become profitable that every carrier would be doing it? It's not that simple.
 
UAL777flyer...seems to me that if someone offers a fare that on the low end breaks even, if the others want to capture those coveted liesure travellers by undercutting you and flying them at a loss - let them. Because they will be losing money. Say a sample flight broke even on a $200 fare. The other airlines costs aren't that much better than U's, so let's say they offer the same flights for $150. They are losing money. U is breaking even. Now...how about this for a U ad campaign...picture this:[BR][BR]A garbage can full of cash...$100 bills preferably...to illustrate how one single change is going to cost you on the other airlines. Then show a wallet with some extra $100 bills in it. To show that you won't be penalized for changing or standing by on U. Think someone (think really cheap business flyer here) might be willing to pay $50 extra bucks for that kind of benefit? I do.
 
[blockquote]
----------------
On 11/18/2002 2:47:06 PM UAL777flyer wrote:

I used that fare because it was reasonable for my example. There was no rhyme or reason to it, other than it's fairly representative of the garbage fares being paid today by leisure travelers.
[/blockquote]

News flash -- those fares are being purchased by business travelers.

[blockquote]
... and others book close-in and should therefore have to pay a premium above those that booked far in advance.
[/blockquote]

That's an interesting assumption. Have you ever tried thinking about doing it the other way around?

[blockquote]
Do you have a thorough understanding of how the airline pricing game is played relative to a carrier filing new fares and what types of reactions it stimulates?
[/blockquote]

I'm familiar with it. I doubt that it's possible to have a thorough understanding without being either responsible for it or a DOJ lawyer.

[blockquote]
Don't you think that if it were simply so easy as filing lower fares to become profitable that every carrier would be doing it? It's not that simple.
----------------
[/blockquote]

No, I don't think that it's a simple as it looks from seat 2A. Nothing is. That doesn't make it not worth giving a serious try.

If a whole lot of people suddenly start buying those lowered fares from either carrier that would tell you something wouldn't it?

And if NWA is such a thorn in the side of rationality then gang up and bust 'em. It's not like there's never been any collusive activity in this industry...
 
Tom Bascom,

Thanks for the news flash. Trust me. I'm well aware of the garbage fares being paid these days, especially by business travelers. The trends are alarming. Are you aware that new fare actions are being tried by EVERY airline EVERY day? They just don't get any publicity because they are being tested in trial markets. No airline with any common sense is about to roll out a major fare structure change without first having tested it in certain markets and certain segments to gauge its potential for success.

Newsflash: that is what is currently going on every day at every airline, including US. You'd be amazed at the kinds of CMI's it triggers from other carriers, like NW, who continue to do everything in their power to stop new fare levels.

And yes, we have tried it the other way around in terms of offering lower fare incentives for walk-up's. Numerous times. And so far it hasn't spurred the increase in demand necessary to make the flight profitable. We continually are trying new things. You just don't ever hear about it because until it bears large fruit, the press isn't interested. Maybe if you can spare some free time, you can drop by and show us what we're doing wrong.
 
[blockquote]
----------------
On 11/18/2002 10:31:52 AM UAL777flyer wrote:
Let's assume US wants to start service in MHT-PBI. Stage length is 1222 miles, so we'll use 1200 as a round number. Let's assume an A320. I believe US A320 seat capacity is 132. Let's also assume an optimistic 75% LF in an off-peak month. Let's also assume the avg segment fare is $150 (all psgrs are locals, so the segment fare = the local fare). Let's also assume US current CASM level, about 10.94 cents.

So, CASM = 10.94 cents
Yield = segment fare/stage length
So yield = $150/1200 miles = 12.5 cents

Total ASM's = 132 seats x 1200 miles = 158,400 ASM's

132 seats with a 75% LF = 99 psgrs
99 psgrs x $150 fare = $14,850 onboard revenue

RASM, or unit revenue, = total segment revenue/total segment ASM's, so RASM = $14,850/158,400 ASM's = 9.4 cents.

So, if CASM is about 10.94 cents and RASM is 9.4 cents, the segment is not profitable. You're only breaking even by carrying about 116 passengers, or about an 88% LF, which is pretty darn tough to average.

----------------
[/blockquote]

Hi UAL777Flyer,

Thanks very much for providing this illustration of the mysterious world of airline pricing. Holly could use someone like you.

Your formula explanation leads me to ask you more questions in my eternal quest for a greater understanding of these issues. So I hope you don't mind, but I have to ask you a few things:

1) [i]Yield = segment fare/stage length. So yield = $150/1200 miles = 12.5 cents.[/i]

So am I to understand that yield is a fixed value and it remains constant regardless of whether the flight is empty or full? I did not know that.

2) [i]RASM, or unit revenue, = total segment revenue/total segment ASM's, so RASM = $14,850/158,400 ASM's = 9.4 cents.[/i]

As you explain RASM, it would appear to me that given a fixed, constant number of paying passengers, the RASM will always be greater with a smaller plane because there are fewer ASM's to divide into the segment revenue. If that's the case, why are there so many large planes flying routes that smaller aircraft could service?

3) Now what about CASM? Can you give us a similar breakdown in terms of how CASM is calculated? Armed with that knowledge, we will have the tools necessary to solve United's problem using industry accepted formulas, or if the formulas don't make any sense, there would now be a rationale for modifying them.

4) [i]Unless the other carriers match it, they will put pressure on you by undercutting your lower structure, forcing you to then undercut them, which then eats into whatever profits you had hoped to stimulate. This is called a CMI. It happens ALL the time, every day. In fact, 3 times a day with each tape released by ATPCO.[/i]

OK, what does CMI stand for? How about ATPCO?

5) [i]So NW isn't bleeding to death nearly as badly as other carriers. However, to show their displeasure with US's fare cuts, they undercut further, forcing US to undercut them or pull the fare changes. [/i]

Seems ironic when it's NW that always leads the charge in killing fare hikes. And as I've said in the past, if the others just ignored them, they lack sufficient capacity to threaten a unified opposition. Let 'em sell seats cheaper. They'll be out of seats to sell before you know it, and the others can then get the higher price they want. Meantime, the others need only set aside a token number of seats at the NW fare in order to look competitive on paper if they so desire. AA, DL, UA, US and CO ought to be smart enough to spot a trend without engaging in Crandall-Putnam style anti-trust phone calls. Together they could exert far greater pressure on NW by dumping seats dirt cheap in all the NW hub markets they fly, from/to DTW, MPS, MEM. It seems to me that would put the hurt on NW pronto. NW cannot effectively retaliate against the rest of the big six -- they simply do not have enough capacity to put their money where their mouth is.

6) [i] Don't you think that if it were simply so easy as filing lower fares to become profitable that every carrier would be doing it? It's not that simple. [/i]

Everybody is doing it except AA, UA, DL, NW, CO and US. And most of the others that are doing it are either profitable or getting much closer to it. I'm not only referencing B6, WN, AirTran and the like here, but AWA, ATA, and Alaska, as well. In terms of international, how about high-cost BA and LH? Why are they profitable and UA and AA are losing on Trans Atlantic, etc???

Thanks in advance for answering my questions. I expect to learn something on this one so please fire away!

Take care,

Marky
 
Looks like AA is giving it a shot:

Reuters
American tries lower full fares on some routes
Monday November 18, 8:13 pm ET
By Peter Henderson


LOS ANGELES, Nov 18 (Reuters) - American Airlines said on Monday it was testing a simplified fare structure on a handful of routes that would cut prices on business tickets by 40 percent while raising some leisure fares.

Dallas-based American, which is owned by AMR Corp. (NYSE:AMR - News) and is the world's largest airline, implemented the cuts last week on unrestricted fares used by many business customers on certain routes serving 23 cities, a spokesman said.

Analysts said the trial could simplify air travel and help full-fare carriers like American compete with discounters such as Southwest Airlines Inc. (NYSE:LUV - News), which operates on many of the routes where American is conducting its trial.

American also raised prices slightly and put more conditions on at least some of its cheapest fares, although a spokesman denied a contention by analysts that leisure tickets were going up across the board in the test markets.

The 23 test markets include a number of flights from such airports as Dallas-Fort Worth, Baltimore-Washington and Seattle.

J.P. Morgan analyst Jamie Baker welcomed the change, which he said would encourage more travel. Baker said that since the Sept. 11, 2001, attacks by hijacked airliners on the United States, airlines had adopted policies, such as restrictions on standby travel, that inconvenienced travelers.

Airlines should be doing more to get people out on the road. They have been doing the exact opposite, he said.

Baker said American's competitors had so far matched the new full-fare reductions but avoided deeper cuts that would lead to a price war.

Effective last Thursday, American cut its fare schedule to five core offerings in the test markets, although the spokesman said it would offer additional fares in response to competitors.

Previously, the 23 markets had about 15 to 20 fares per route, American said. Baltimore to Albuquerque had 39 fares, the spokesman said.

FULL-FARE COACH PRICE DROPS

The changes revolve around the full-fare coach price, which is about 40 percent less than previously.

The cheapest new rate is 70 percent less than the new full fare and requires a 30-day advance purchase. There are two levels of 14-day advance purchase -- one 60 percent less than full fare, and one half off -- with the cheaper seats in limited supply. There is also a first-class fare 35 percent above the new coach.

Terry Trippler, an independent analyst and head of terrytrippler.com, said the changes were similar to American's 1992 introduction of Value fares, a systemwide change that set off a price war that quickly ended the experiment.

The next step is to see what the other airlines do, he said. If the scheme worked, business travelers who had avoided highly expensive full fares for cheap restricted ones would trade up to the new full fares, Trippler said.

The outlook for leisure travelers was mixed.

Bestfares.com Chief Executive Tom Parsons said consumers would pay more under the new regime but would still be able to find deals.

The unrestricted Dallas to Los Angeles fare in late January had dropped to $647 one way from $1,078, he said.

But the cheapest round-trip flight under the new plan is $350, with a 30-day advance purchase, compared with a $258 ticket with a 14-day requirement before the new plan came into effect. There had also been a more limited $228 ticket before the change, he said.

American would still have to match competitors' sales, he said.

I think John Q. Public shouldn't lose sleep, he said.
 
[blockquote]
----------------
On 11/18/2002 2:47:06 PM UAL777flyer wrote:

.............There have been numerous attempts over the last 6 months to bring some rational sense to the fare structure. But each time, NW had led the way on quashing it. Don't you think that if it were simply so easy as filing lower fares to become profitable that every carrier would be doing it? It's not that simple.
----------------
[/blockquote]

I'm always a bit puzzled at what the big deal is if an airline like NW does not adjust their fares but undercuts or continues to price low. Why not let NW offer the cheaper fares (probably money losing) to scoop up the 'leisure' passengers and the other airline(s) would then pick up the high(er) yield passengers? Why not say Screw you NW!

And, USAirways, is right now in an almost perfect position to try a different pricing formula. I mean, they're in chapter 11! The way I see it, if US tried a different pricing formula there are 3 possible outcomes:
1) no change, continue to lose money as before
2) make some money/profit
3) lose more money
Whatever the outcome would be there would be no harm done as the company is in chapter 11!
 
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