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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.
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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