Rational fares -- is it working?

[TomBascom]

Is America West''s new rational fare structure working?
It seems like it must be -- the airline doesn''t seem to have backed away from it, they don''t seem to have gone belly up as a result and in fact seem to be on the road to recovery. But maybe I''m missing something?
I''d pretty much be in heaven if such an option existed in the north-east.

 

[lowfareair]

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On 9/1/2002 3:12:05 PM

Is America West's new rational fare structure working?

It seems like it must be -- the airline doesn't seem to have backed away from it, they don't seem to have gone belly up as a result and in fact seem to be on the road to recovery. But maybe I'm missing something?

I'd pretty much be in heaven if such an option existed in the north-east.
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It is working. They reported a much lower than expected loss, and even though the industry has gone south of their projections to the ATSB in January, they have stayed on target.

 

[TomBascom]

Have they had to reduce services to make it work or are they maintaining the "full service airline" aspect of things?

 

[lowfareair]

I don't believe that they have reduced any services. Right now their employee cost is very low and is expected to go up 10-15% shortly. That will get them. They currenly have hot snacks from PHX to the east coast(It was a fairly large hot pocket and a bunch of wafers when I flew them PHX-PHL), and the entertainment is good too. The Airbus is actually very nice inside, and a slight departure from the norm(dark blue/gray seats on most majors) and the ugly(UA 737s). It adds a more Greenish tint to it, which adds some uniqueness.

 

[motnot]

Management has said the new fare structure is working better than they expected even as the retaliation by the big boys has been worse than expected. AWA's current financial situation, in terms of being close to making money, is probably the second-strongest among the hub-and-spoke airlines to NWAC. AWA's outperforming on RASM and load factors, which is why it may have a chance to break even this quarter.

Actually, only AWA's pilots are due to get a new deal in the near future, although they admittedly are the most expensive group.

I don't think it will have much of an effect, though. The fare structure still has momentum, and AWA is expanding, which helps by spreading out fixed costs and such and averaging down salaries when new folks are hired at the bottom of the scale.

In fact, AWA's CASM was only 3-4 percent above that of LUV in Q2 and will probably be even closer this period.

At the moment AWA has three roads to profitability: if National Airlines dies (we'll know by the end of this week), if the majors stop their "testosterone" retaliation against AWA, or if the economy picks a little bit.

If none of those things happen, they'll still be able to cruise along at darn-near-breakeven. Not bad for this industry.

 

[TomBascom]

Any idea why the majors are being so obtuse about going to rational fares? I've thought it obvious that they needed to do so for years.

 

[motnot]

It's simple: They can't afford it.

AWA could do it because it historically had had very few full-fare passengers, maybe 1 percent of tickets. So it could cut walkup fares by 50-70 percent and make it up by selling more of the now-cheaper tickets. A big part of that is from stealing passengers from the cartel airlines.

The other airlines may have as much as 10 percent of ticket (and an even higher percentage of revenue) coming from full fares. So they have a lot more to lose.

If one of them wanted to take a risk that it could grab enough pax from the others and go for rational fares, the others would match and they'd all go bankrupt (see AMR's fare experiment in the early 90s). Basically, there'd be too many fighting for too few passengers because it wouldn't stimulate enough new traffic to make up for the "lost" revenue.

That's why it was such a great move on AWA's part. They weren't risking a lot, and the big boys' ability to retaliate was limited. They simply could not match AWA systemwide.

And it all comes down to cost structures. AWA's is low (almost as low as LUV's now), and the others are quite a bit to dramatically higher.

 

[Rhino]

Motnot, SWA'a CASM is 7.48, AWA's is 9.46 according to the most current info I could look up (SWA current Q, AWA last Q).

Please provide your source for stating that LUV/AWA CASMs are so close. I thing AWA's CASMs are about 25% higher.

 

[motnot]

Rhino, according to AWA's Q2 results (form 10-Q filed with the SEC), CASM was 7.8 cents in that quarter, which comes out to about 4 percent higher than LUV. Your number was from Q1, and it included one-time charges and was before all the effects of the restructuring were working.

And management has said non-fuel CASM should be lower in Q3 than in Q2.

As for high-fare travelers, a couple years ago, CAL used to brag that business travelers made up about 50 percent of its passenger mix. Who exactly those were we don't konw, probably all tickets sold on less than 14 days' notice, or maybe 7 days. As for full fares, no one knows, but I'd guess CAL and DAL probably get about as much as UAL and AMR, in terms of percentages.

 

[TomBascom]

That 10% number has been tossed around a lot. Is it reliably documented somewhere? Someone over on FlyerTalk claims that as of 1999 the real numbers were 3% - 9% depending on carrier. And I've got to believe that it has gone in a well understood direction since then.

I can believe that AA & UA have numbers above 5%. I seriously doubt that CO, NW, DL & US are anywhere near that number. But that's just my gut -- where would one find real data on the subject?

 

[Rhino]

Thanks, Motnot. You are correct.

 

[Rhino]

Tom, the #s you seek are not public. They are very closely held by each carrier's yield managemnt departments.

 

[TomBascom]

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On 9/2/2002 11:59:02 PM
As for high-fare travelers, a couple years ago, CAL used to brag that business travelers made up about 50 percent of its passenger mix. Who exactly those were we don't know,

I'd agree that about 50% of pax are traveling on business. Just look around the gate area it's fairly obvious.

But guys like Baldanza seem to think that the "business traveler" label only applies to the ones who pay "full fares". No way that is more than a tiny % in most markets.

Anyhow -- I'm glad that it's working for AWA. Maybe HP can pick up some of the pieces of U when it finally implodes []