Airline Debate Over Cheap Seats

[USA320Pilot]

The Airline Debate Over Cheap Seats

If the majors restructure fares to fight low-cost competitors, revenues could fall

NEW YORK (Business Week) - It's no secret that the major airlines' complex pricing system has long been broken. Now, though, change is starting to come as low-cost carriers increasingly flex their muscle around the country. In the biggest face-off yet, US Airways Group Inc. is slashing its heftiest fares and simplifying its pricing on some routes following the arrival in May of low-cost Southwest Airlines Co. in its core Philadelphia hub. And on May 13, the carrier was set to slash fares on several Boston routes; it has also vowed to roll out similar reforms in other markets in coming weeks. Those moves could hasten a wholesale fare restructuring throughout the industry.

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Regards,

USA320Pilot

 

[Dont call me Shirley]

For a split second there, the mention of "Cheap Seats" made me think of RyanAir's proposed nonreclining seats! It seems there are less expensive to purchase and much expensive to maintain. .
(Since I rarely recline my seat when in coach it wouldn't matter to me.)

 

[mweiss]

Thus far, nobody's been able to extract more than 9c RASM with the "rational" fare structure. That isn't to say that it can't change, but that's the evidence to date.

Once Q2 is done with, we can see how AS has done in that regard. Before they restructured fares, they were getting about 10.5c.

 

[funguy2]

That was a good article....

And mweiss... spot on as usual. That is the crux of the problem for the majors. However, they will eventually be at 9c RASM domestically, whether they embrace the changes or not (as long as they continue to exist). In the meantime, the LCC's continue to cherry-pick markets from the majors one-by-one. Eventually, the majors MUST capitulate to a 9c RASM system or die... Or hope that the LCC's are willing to be more profitable and that they raise fares and RASM goes up to 10c.

 

[MrAeroMan]

Great article and one point to be made is the fact that the legacy carriers are carrying an enormous amount of debt that has been run up just since 9/11 that has to be paid back. That does nothing but increase costs as the interest on that debt is huge. The LCC's have the majors over a barrel here as their debt is far less that the majors.

If UAIR marketing people were on the ball they'd be trying to grab the brass ring for leading the fare reductions but that will arguably go to HP.

 

[SVQLBA]

Where to begin

a) the article completely ignores the fact that experience (AWA, the UA biz fare experiment, etc etc) shows that done right, simpler lower fares boost RASM because people no longer are forced to bargain hunt to avoid getting shafted

a2) Numerous analyses and reports show that where SW and jB goo head to head with majors (say DL/Song in the NY Florida market) the LCCs get higher RASM.

B) The LCCs are not cherry picking. SW built up serving posunk little short hops that the majors wanted nothing to do with. Say, Lubbock TX to Kansas as an imagined, but possibly actual example. Jetblue started transcons with redeyes. The legacies have no right to price gouge fares on trunk routes just because they can, and as jetBlue, SW, and AWA are entering these markets, the chickens are coming home to roost for the legacy carriers.

Start serving the customers, providing a competitive product (not just up front) and charging reasonable fares (people want more space, not warm nuts), and the legacy carriers may yet fight back ...

 

[MrAeroMan]

(people want more space, not warm nuts),

HEY.....SPEAK FOR YOURSELF!!

 

[mweiss]

SVQLBA,

Lower fares can boost RASM in some cases, but there is no evidence to date that one can extract more than 9c from it. HP's RASM hasn't been over 8.6c in the past 15 years (don't know about before that).

The fact that the LCCs beat the legacies in RASM on head-to-head doesn't mean that an LCC-free market wouldn't garner more RASM with the legacy pricing model than with the LCC pricing model.

WN cherry picks in a sense, but it's typically misunderstood. They pick up markets that have sufficient demand to support nonstop service, and are not constrained by the need to support a hub.

 

[ClueByFour]

Just about every major has always matched WN in one form of another. US did the same thing at BWI (or tried it).

This is nothing new, despite what the heads at the top of all the legacy airlines would lead you to believe.

 

[BoeingBoy]

Just a comment (query, thought, whatever) on LCC and the RASM level....

Is it a question of the LCC's not being able to get more than 9 cents or so RASM or is it a question of them not needing to charge fares that produce a higher RASM to make a profit.

Seems to me that WN (the grandfather of and model for LCC's) basically uses a milage based fare structure - the longer the flight the higher the fare. With their record of profitable years they obviously make money at their fair levels.

I guess the question is, do they not charge higher fares - $5 at the short end to $50 at the long end - because they can't, or because they don't need to?

Comments, anyone.

Jim

 

[sfb]

Just a comment (query, thought, whatever) on LCC and the RASM level....

Is it a question of the LCC's not being able to get more than 9 cents or so RASM or is it a question of them not needing to charge fares that produce a higher RASM to make a profit.

Seems to me that WN (the grandfather of and model for LCC's) basically uses a milage based fare structure - the longer the flight the higher the fare. With their record of profitable years they obviously make money at their fair levels.

I guess the question is, do they not charge higher fares - $5 at the short end to $50 at the long end - because they can't, or because they don't need to?

Comments, anyone.

Jim

BoeingBoy-

Actually, it's a little bit of both. WN has always recognized that one of their competitors on short routes is the automobile; if you charge too much and/or offer an inconvenient schedule, folks will choose to drive instead. And, of course, their efficient operation allows them to be quite profitable at relatively modest fare levels when compared to most other airlines.

Actually, WN has been above 9 cents for RASM -- they averaged nearly 9.5 cents in 2000 and were at nearly 10 cents in the second quarter of that year (driven largely by the strong travel market and record loads at the time). I remember a comment made in an analyst call (at the time) that the airline's management didn't view the high load factors as an opportunity to raise fares so much as a signal that they needed to increase capacity.

 

[mweiss]

Jim,

That's the $64,000.09 question, isn't it? Some possible answers I see:

1) They could charge more, but if they did, someone would come in and steal their markets from them at 9c.
2) Perhaps someone could do a better job at the fare mix, and extract more that way.
3) (My favorite theory du jour) Someone with a good network, combined with the 1990s Midwest Express service levels, could obtain in excess of 11c. I'd pay for that.

 

[BoeingBoy]

mweiss,

I think sfb probably hit on the answer because RASM is not strictly fare dependent, it's the combination of average fares (yield) and load factor.

WN has been the 800 lb. gorilla of the LCC's for well over a decade. If someone else undercut them in a small corner of their system, they could just match them in competitive markets while maintaining slightly higher fares elsewhere - thus higher RASM.

If loads dropped off, they could shrink capacity if they wanted to in most markets by dropping frequency, thus raising RASM, but they generally don't..

While I certainly don't know for a fact, I strongly suspect it's a case of setting fares at profitable levels without overcharging, and if loads increase expand capacity. After all, growth has many cost benefits.

Jim