It''s a Revenue Problem---Costs Cutting Alone Won''t Work

It''s sorta both - cost and revenue. Fix the one you have some control over; I think that would be COSTS. Revenue will recover when business travel picks up. It may never pick up - but that (or liquidation of a weaker competitor) looks like the only way to raise revenue right now.
 
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On 5/15/2003 8:51:07 AM Resman1 wrote:

Once again another article that cites the major airline''s
biggest problem. Their mistaken belief that business travelers are still willing to pay on average
6 times more than the lowest fare (higher in many markets).
This article explains AA and the majors problem with
pricing.

http://www.dallasnews.com/sharedcontent/da...ravel.9d56.html

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Kinda sounds like a cost problem to me.
 
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On 5/15/2003 5:03:09 PM FWAAA wrote:

It's sorta both - cost and revenue. Fix the one you have some control over; I think that would be COSTS. Revenue will recover when business travel picks up. It may never pick up - but that (or liquidation of a weaker competitor) looks like the only way to raise revenue right now.

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YOu've got control over both. It seems to me that the airlines could have a happier labor force if they tried something other that "select markets" for "value" fares. Instead, they maintain the attitude (with the blessing of many unionists like Bob Owens) that "If that meeting in STL is so important to you, you'll pay the $1,200 to get there from DFW". And they focus solely on cutting costs - especially labor costs. Instead, that $1200 should be no more than $600. At the same time, the 21 day advance fare should be no lower than what it costs you to fly the seat. Maybe even a bit more if the market can support it Right now, the airlines want that all important "market share", so they offer a bunch of advance purchase flights that cost them twice what they are getting from the customer to operate it. They load the ticket up with restrictions and change fees so that if the customer changes the ticket to a fare that just lets the airline break even, they feel like they've been screwed. Screw market share if your not making a profit. Better to operate as #2 in the market and at a profit than #1 while bleeding cash. Raise the lowest fare to cover costs, drop the change fees, and if they can't go, give them a year to decide where they CAN use their money to go and the customer will feel like they are getting a fair deal. Initially yes, the bottom feeders will be upset that they can no longer fly coast to coast for a hundred bucks. For everybody else, they will soon see that buying an airline ticket isn't like playing the slots in Vegas - they would be getting something for their money. In the days after 9/11, Southwest lowered their maximum one way fare to $199. Then they watched their average fare paid INCREASE. Because people were buying more than just the rock bottom special fares.
 
The marginal cost of carrying an additional passenger is almost nil. An airline''s costs are tied up in the size of the network that they operate.

Given that assumption, it does not make sense to try to charge a passenger a per-trip fee for using the network. Instead, the best way to price the product is essentially the same as a telecommunications company might: stratify the product as much as possible (packages include different markets, booking requirements, stay requirements, peak/off-peak travel days), try to price each product according to its demand, and allow the customer to use the product as much as they like.

I''ve worked up the numbers on this before by assuming that our customer base would be approximately the same size as our active AAdvantage member pool. The average package per customer would need to be $120 per month to break even. I could see the cost of these packages ranging between $30 and $1,000+ per month.

Just think of the ground that we could gain on Southwest and JetBlue if we were able to sign customers up for a reasonable price per month, and their marginal cost to fly was zero on American. Southwest and JetBlue could not counter that program because they don''t have the network to support it!
 
The problem with a fixed-price scheme like that is the fact that your network has a significant ongoing operating cost to go with large capital costs. In telecom, by contrast, there are large capital costs to build the network, but operating costs (mostly maintenance, some electricity and rent) are relatively small.

What keeps a subscriber to a fixed-monthly-cost airline from buying the lowest-priced plan he/she can use and then using the heck out of it? Let''s say I buy a plan where I can only fly mid-day Tuesday/Wednesday -- and then book tickets every week that I can find something available. When there''s little or no marginal cost to me for using an additional flight/ticket/seat, why not use it? I realize that some form of yield management would help here, but you''d still end up with a lot of ticked-off people who could never get the seats they had "paid" for.

That does open up a couple of interesting thoughts, though. How about a plan where an individual could pay $500/year and have access to an equivalent to NRSA travel for, say, $25-50 per domestic segment. Or a plan that again was standby-only, space-available, for $99/year and $0.10/mile traveled (to basically recover the airline''s operating cost). Both would be mostly profit (you''d see some other revenues shifted, especially in markets which rarely fill planes) since you''d be filling seats which were empty otherwise.
 
(It''s sorta both - cost and revenue)

My point exactly, it''s not just cutting costs. We have to make last minute business travel an option for people to consider,right now it isn''t on most of our routes. I just quoted a full-fare Y tonight DFW-LGA at 1200.00 one way. How many do we sell a day at that rate? Instead of us having a rate and praying we can gouge one or two people for 1200.00, let''s set a fare of 800.00 roundtrip, which may entice 3 or 4 to buy. Adding addtional passengers to a flight doesn''t drastically increase the cost of operating a flight. You can make the lower fares non-ref and limit availibility, but sooner or later all network carriers will have to realize the days of "I''ve got to be there tomorrow no matter what the price" is over. If it''s too high, the meeting gets dealyed or a video conference is set up. As much as we compete with DL, UA, WN and B6 the fax machine and video conferencing are fierce competitors also.
 
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On 5/16/2003 11:51:24 PM Resman1 wrote:

(It''s sorta both - cost and revenue)

My point exactly, it''s not just cutting costs. We have to make last minute business travel an option for people to consider,right now it isn''t on most of our routes. I just quoted a full-fare Y tonight DFW-LGA at 1200.00 one way. How many do we sell a day at that rate? Instead of us having a rate and praying we can gouge one or two people for 1200.00, let''s set a fare of 800.00 roundtrip, which may entice 3 or 4 to buy. Adding addtional passengers to a flight doesn''t drastically increase the cost of operating a flight. You can make the lower fares non-ref and limit availibility, but sooner or later all network carriers will have to realize the days of "I''ve got to be there tomorrow no matter what the price" is over. If it''s too high, the meeting gets dealyed or a video conference is set up. As much as we compete with DL, UA, WN and B6 the fax machine and video conferencing are fierce competitors also.

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Problem is - would you sell any more last minute fares no matter how low you priced them? In other words, would you gain revenue by lowering full Y and full F or would it cost you revenue.

AA (and most of the other majors) still believe that across-the-board fare cuts would decrease revenue, not increase it. I think the jury''s still out on the whether businesses would buy enough of the new lower fares to make up for the smaller price on each one. In my line of work, airfare really doesn''t much matter - if you bill for your time at anywhere from $400 - $600 per hour, clients may not want to pay us for 6 or 8 or 10 hours of travel each way, even if the airfare is reduced from $1,200 to $400.

Besides, with our very generous discount from full Y - we''re already not paying anywhere near the rack rate. Why cut it further?

When clients do demand our presence - we might willingly pay $1,600 or $2,000 - but don''t tell AA that.

The big problem? Air travel is no longer as fast as it used to be, especially for shorter trips. When clients demand a video conference, it really wouldn''t matter if airfare was free that day. We still wouldn''t be flying. And I don''t think that the way to defeat the video conference is with a lower full fare structure. But we are free to disagree.
 
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On 5/17/2003 12:10:34 AM FWAAA wrote:


Problem is - would you sell any more last minute fares no matter how low you priced them? In other words, would you gain revenue by lowering full Y and full F or would it cost you revenue.

I think you''d gain revenue - if you took a page from SWA''s book. Lower the last minute fares to something that isn''t highway robbery. REduce the number of fares offered to only about 4 or five. Then get rid of the penalties and change fees. And don''t allow same day standby''s - that''s a change so they pay full one way fare. IMHO, here''s what would happen - some businesses would still book the 21 day advance. In fact, more might go ahaead and book them, knowing that if something changes, they only come up with the fare difference and not a bunch of penalty fees. They do that and the seats available at that rate would fill considerably earlier than they do now...the next fare bucket comes into play. And so on, until the plane is 80% filled with profitable seats rather than 90% filled with loss leading seats. Oh, and those fare buckets - only the lowest bucket should be below cost (actually at cost would be fine) - all the rest will bring in more than it costs you to operate it.

AA (and most of the other majors) still believe that across-the-board fare cuts would decrease revenue, not increase it. I think the jury''s still out on the whether businesses would buy enough of the new lower fares to make up for the smaller price on each one. In my line of work, airfare really doesn''t much matter - if you bill for your time at anywhere from $400 - $600 per hour, clients may not want to pay us for 6 or 8 or 10 hours of travel each way, even if the airfare is reduced from $1,200 to $400.

The majors are looking at across the board cuts as cutting the already discounted fares. I follow a consumer advocates bulletin board and they''ve got folks thinking that they ought to be able to do better than $240 round trip from Jacksonville to Los Angeles. Airtran and Southwest don''t have any fares available at that level. The fares they offer are double that amount...but Delta does. So does American. Is the butt in the seat worth the loss? Apparently Airtran and Southwest don''t think so, as they seem to be willing to let the other guys fly them at a loss. Will that mean they fly some empty seats? With SWA''s load factor in the mid 60% range, I''d have to say that yes indeed, they will. Why is it I can get on a half full SWA flight that is making a profit, but a full AA flight operates at a loss. AA''s costs are only 3 cents a mile higher than SWA''s, but they are offering a fare that is only bringing in half the amount they need to break even. And it''s all in the name of "market share". And the "big boys" change airfares on an hourly basis - and the "consumer reporters" know it. So you''ve got someone wanting to go across the country and they say "The fare was $240 but now it''s $300 - should I buy now or wait to see if it drops". The answer invariably is "wait". That needs to change. When you run out of $250 seats, the new price is in effect - period.


Besides, with our very generous discount from full Y - we''re already not paying anywhere near the rack rate. Why cut it further?

When clients do demand our presence - we might willingly pay $1,600 or $2,000 - but don''t tell AA that.

I think that when someone can see that the differance between an advance purchase fare and a last minute fare are not huge, they''ll book the flight anyway, and if all the bogus penalties are removed, they''ll feel comfortable in knowing that if they have to change, they won''t get screwed in the process.

The big problem? Air travel is no longer as fast as it used to be, especially for shorter trips. When clients demand a video conference, it really wouldn''t matter if airfare was free that day. We still wouldn''t be flying. And I don''t think that the way to defeat the video conference is with a lower full fare structure. But we are free to disagree.

My sister, who is in telecom, urged her employer to find a better way to do some business. This was because of a $1200 trip to St. Louis at the last minute. Employees at many companies are now very aware of their own companies financial condition, and they are actively looking for ways to cut waste. Not too long ago, they wouldn''t have batted an eye, since their stock options were looking good and the money was rolling in. Now, their stock options are worthless and 60% of their coworkers are gone. They know every penny counts and are taking steps to actively look for ways to cut their own costs.

As far as the video conference or webcast goes - I''m still a bit old fashioned - sometimes a face to face meeting and a handshake might be what''s needed to swing the deal. Then again, while I''m aware of the costs involved in getting there on a moments notice, and in most cases, I am the "client" who is actually paying for the travel, I can understand the desire for a video conference.
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On 5/16/2003 9:53:20 AM Connected1 wrote:

The marginal cost of carrying an additional passenger is almost nil. An airline''s costs are tied up in the size of the network that they operate.

Given that assumption, it does not make sense to try to charge a passenger a per-trip fee for using the network. Instead, the best way to price the product is essentially the same as a telecommunications company might: stratify the product as much as possible (packages include different markets, booking requirements, stay requirements, peak/off-peak travel days), try to price each product according to its demand, and allow the customer to use the product as much as they like.

I''ve worked up the numbers on this before by assuming that our customer base would be approximately the same size as our active AAdvantage member pool. The average package per customer would need to be $120 per month to break even. I could see the cost of these packages ranging between $30 and $1,000+ per month.

Just think of the ground that we could gain on Southwest and JetBlue if we were able to sign customers up for a reasonable price per month, and their marginal cost to fly was zero on American. Southwest and JetBlue could not counter that program because they don''t have the network to support it!

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Well said!! This idea should be developed further, my compliments to sfb for adding to this thought.

Obviously this pricing plan has some appeal, the fractional jet carriers have already demonstrated this fact. Plus you''ll have cash in the bank before the obligation has to be honored.

Unlike other utilities however, airline travel has that troublesome ''hassle factor'' as a barrier to overcome. For instance, I don''t have to plan my day around when I''m going to turn on the toaster!
 
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On 5/16/2003 11:17:42 AM sfb wrote:

What keeps a subscriber to a fixed-monthly-cost airline from buying the lowest-priced plan he/she can use and then using the heck out of it? ...you''d still end up with a lot of ticked-off people who could never get the seats they had "paid" for.
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These are all questions that I had to consider before submitting this idea to Ask Don Carty last summer, so let me see if I can remember my rationale from back then.

Clearly the challenge in the new world would be to avoid the "tragedy of the commons" in the booking process. Your suggestion, which resembles my idea in its initial phases, is similar to the Sam''s Club approach - pay up front for reduced prices on the back end. That would achieve the desired effect, but even paying a reduced price per segment is out of line with the company''s cost structure.

An alternative that I have been toying with lately is a bidding system. Instead of dollars, though, passengers would bid for seats using a pool of points that they acquire with their package. That would give us the ability to award seats to the passengers that need them most, as well as moderate the excessive booking that may occur otherwise. Also, if a passenger were to run out of points, we would gladly sell them some more!
 
The pre-purchased plan sounds like a cross between AAirpass and the now-discontinued Senior Coupon books, without the age restriction.

We sold a lot of those, but they didn''t make us a lot of money in the long run. AAirpass is still a good deal for the business travelers who have a lot of last-minute walkups, but still too expensive for the person who only travels domestically once every two months...
 
My goodness, as if air fares weren''t complicated enough as it is, let''s make it worse!

I''m sure in theory such a setup with bidding and points would work fine. However, I think there will be a problem similar to what the insurance industry calls "anti-selection", where the only people who buy insurance are those that will make a lot of claims.

I think what would happen is that the people who would participate in this setup would be the most sophisticated passengers. It would be akin to selling every seat through Priceline and every passenger has done lots of research from biddingfortravel.com, and the airline ends up losing a lot of money.

Depending on how it''s set up, another problem may be continually sold-out flights. Remember Jim Bakker and PTL? More people than expected had bought lifetime hotel packages when the resort was under construction, and as a result they could never get their free hotel room. It was like trying to get frequent flyer tickets during peak season, where peak season is every day of the year.
 
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On 5/19/2003 1:33:04 PM eolesen wrote:

...AAirpass is still a good deal for the business travelers who have a lot of last-minute walkups, but still too expensive for the person who only travels domestically once every two months...
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I received pushback of this flavor from Revenue Management when I first began promoting the idea. My response is yes, AAirpass has a limited market. If it makes the idea more comfortable to swallow, think of this program as an enhanced AAirpass that is able to touch new groups of people other than the well-traveled, last-minute business passenger.

As you slice the product along different markets (i.e. cities) or groups of markets, peak/off-peak flight months/days/times, advanced booking requirements, stay requirements, etc., you end up with a broad portfolio of products that have a wide price range. You could easily end up with a $50/month package that would work fine for a leisure passenger.

Be careful when you assume that a person''s travel patterns would be the same under the new scheme. Just as your travel patterns would change if you were not an employee, so would the average leisure passenger''s behavior. There is incremental value to the passenger in this "free refills" scenario.