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

[Connected1]

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On 5/19/2003 1:42:01 PM JS wrote:

...there will be a problem similar to..."anti-selection", where the only people who buy insurance are those that will make a lot of claims.
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Hold onto your hats, folks, because this is where I start getting highly theorectical...

Draw a graph with fare on the y-axis and quantity of trips on the x-axis. Let''s assume that the 5 most important trips of the year are worth $1,000 each to you. The next most important 5 trips are worth $750 each. And the last 5 trips are worth $300 each.

If AA were to price each trip optimally according its importance to you, the total revenue that it could gain from you is $10,250 (5*1,000 + 5*750 + 5*300). However, AA does not do that. Instead, they charge a standard fare. If that fare were $500 per trip, you would fly only 10 times, netting AA only $5,000 of revenue. That leaves $5,250 of value on the table - some in the passenger''s pocket, and some completely forgone.

Adverse selection is unavoidable, but you can make up for that in accurately identifying your passengers'' marginal value curves, savvy product stratification, and the identification/extraction of value left on the table by charging up front. This is the same concept as pricing free refills, which are becoming more common, if you have noticed.

 

[Connected1]

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On 5/19/2003 1:42:01 PM JS wrote:

My goodness, as if air fares weren''t complicated enough as it is, let''s make it worse!
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If you fast-forward to a world where air travel is priced upon a subscription basis, you may find that fares are less confusing. You have only one conversation with your provider regarding price, and you understand the terms of your package up front. Whereas today, you must have a price conversation every time you fly (read "unnecessary complication") and you have terms imposed upon you that you may not realize, such as a booking or stay requirement. These terms affect the fare you are quoted, and that is the source of much of the confusion today.

 

[FWAAA]

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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).

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AA''s revenue, while down, is not drying up. With approximately $4 billion in annual cost reductions, AA should be break-even or better for 2004. The Q1 operating loss was slightly less than $1 billion, and that was with a mid-east war looming, the SARS crisis and very high oil prices. All three of those factors are now gone or disappearing. Look for a break-even Q3 and a slightly profitable Q4, as revenue is already recovering.

 

[Connected1]

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On 5/19/2003 1:42:01 PM JS wrote:

Depending on how it''s set up, another problem may be continually sold-out flights.
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Perhaps, but I would suggest that if this did happen, it would be because a) Revenue Management is not doing their job correctly, B) Capacity Planning is not doing their job correctly, or c) both. I have a couple of things going for me though: 1) at our current load factors, we are capable of handling almost 50% more traffic (I know, I know, that assumes our capacity is perfectly placed!), and 2) I would bet that a large chunk of our RPMs are flown by passengers who are physically incapable of increasing their flying by 50%.

 

[Connected1]

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On 5/19/2003 302 PM FWAAA wrote:

Look for a break-even Q3 and a slightly profitable Q4, as revenue is already recovering.
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Wow. Just wow.

 

[AAmech]

I think your being just a tad over optimistic!!!

 

[FWAAA]

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On 5/19/2003 8:06:24 PM AAmech wrote:

I think your being just a tad over optimistic!!!

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Perhaps I am.

On the other hand, the economy is recovering, oil is cheap and getting cheaper every week, the media-created SARS scare is winding down, the summer travel season is upon us, AMR just banked $361 million in cash from the US Treasury, and the company has secured $4 billion in annual cost reductions.

In light of all those positive developments, if AA can''t turn it around now, then it probably never can.

 

[KCFlyer]

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On 5/19/2003 826 PM FWAAA wrote:

Perhaps I am.

On the other hand, the economy is recovering, oil is cheap and getting cheaper every week, the media-created SARS scare is winding down, the summer travel season is upon us, AMR just banked $361 million in cash from the US Treasury, and the company has secured $4 billion in annual cost reductions.

In light of all those positive developments, if AA can''t turn it around now, then it probably never can.

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I don''t know how related the two are, but the gas prices at my local stations are bouncing around like a superball in a tornado. Up, down, way up, way down. Seems like if some shiek is constipated, gas prices shoot up. Considering fuel is the second largest cost at airlines, I''d be a little wary of counting on today to reflect what can happen tomorrow in the way of fuel prices.

 

[FWAAA]

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On 5/20/2003 6:02:22 AM KCFlyer wrote:
I don''t know how related the two are, but the gas prices at my local stations are bouncing around like a superball in a tornado.  Up, down, way up, way down.  Seems like if some shiek is constipated, gas prices shoot up.  Considering fuel is the second largest cost at airlines, I''d be a little wary of counting on today to reflect what can happen tomorrow in the way of fuel prices. 

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Well, then it''s a good thing that AA doesn''t have to look to your corner gas station for its 3.2 billion gallon annual purchase.