revenue dilution

[legacy-to-LCC]

over the past week, i have encountered the term "revenue dilution" in many different corporate communications. while it is clear to me what is implied in this mba term, it has become ubiquitous, really. we cannot do this! why? revenue dilution. we can no longer offer this! why? revenue dilution. seems rather hollow to me...
of course i understand and appreciate the fragility of our financial situation, but...any thoughts?

 

[flyingcat]

Revenue dilution means giving a chance to make money. We could give all employees space positive business class tickets to Paris but it would prevent the company from selling those seats to a revenue customer. This is why the program for people working on flights on New Year's eve can no longer bring a friend or loved one positive space for free. The company would lose the opportunity to sell that seat for some money instead. Its sad but in this business climate we must be practical. As an east employee I have lost some benefits but gained some. For example mileage based pricing on comp passes and two positive space round trips a year.

 

[SilentWarrior]

I'll take a stab at this, and if I am wrong I hope wiser minds correct me. I have seen the term used in the non-rev discussions, so I will attempt to use that as a model.

None of the following is factual, but used to only stress the term “Revenue Dilutionâ€￾.

Say you have an aircraft that can hold 220 passengers. The company sells 200 tickets at $250 per seat, and there are 5 non-revs that want to travel on this flight as well. That is $50,000 the company has for that flight. Now the the flight is 1200 nM at $.10/mile, so it cost the company $120 per seat to run that flight ($26,400). The revenue from that flight is roughly $23,600.

Now add the 5 non-revs whom are traveling on the same $120 seat, but not paying anything toward the overall revenue (hence the term). That is $600 the company will not get, and referred to as Revenue Dilution. The overall revenue from this flight is $23,000.

Now, before I get flamed to death for the numbers. I know the numbers are skewed, but this was used as an example only to define the term. If someone has a better example by all means please post it.

 

[Barbell]

For the most part, that's it in a nutshell, and it's a little bit of the post above.

 

[BoeingBoy]

SilentWarrior,

Not flaming at all, but just an observation....

Your example assumes that the $120 per seat cost of operating that hypothetical flight is lost because there's a non-rev sitting in an otherwise empty seat. While I'd certainly agree that there's a minor cost to carrying each additional passenger - revenue or non-rev - it's certainly a lot less than that. Probably on the order of $10 on average considering extra fuel burn from the extra weight, beverage (free only) and snacks (again, free only).

The revenue derived from that flight is $50,000 (200 X $250). The cost is still very close to $26,400 (220 X $120). So the profit is still very close to $23,600.

Where the non-revs would dilute revenue is if they displaced paying passengers - the company could sell seats that the non-revs occupied. Of course, by definition, the non-revs don't get on if there are passengers who have paid for those seats. So in the non-rev context, revenue dilution is all but impossible.

Jim

 

[EricLv2Fish]

To my understanding the only non-rev personnel who could potentially cause a dilution in revenue are the executive non-revs who can bump paying passengers. That being said, the amount of them is relatively insignificant and how much that privelege is used is questionable.

 

[BoeingBoy]

Thanks, Eric. I forgot the execs and their space positive non-rev. Now that you've jogged my memory, there's two other groups that could cause revenue dilution - deadheading crew members and company busness travel. Of course, they're not included in the "non-rev" travel policy.

Jim

 

[SilentWarrior]

Good points Jim. As I said, wiser heads were needed.

I absolutely agree with EricLv2Fish. Not only does the bump damage future revenue with that passenger, but it also adds inefficiencies to the cost (baggage retrieval, and any delays, plus possible accommodation). Revenue dilution definitely, Revenue dis-illusion possibly.

 

[PITbull]

Revenue dilution means giving a chance to make money. We could give all employees space positive business class tickets to Paris but it would prevent the company from selling those seats to a revenue customer. This is why the program for people working on flights on New Year's eve can no longer bring a friend or loved one positive space for free. The company would lose the opportunity to sell that seat for some money instead. Its sad but in this business climate we must be practical. As an east employee I have lost some benefits but gained some. For example mileage based pricing on comp passes and two positive space round trips a year.

Revenue dilution?????? Please explain your logic with regard to the "perk" given to the senior execs and their families for NONbusiness travel, space positive, FIRST CLASS to anywhere FOR LIFE!????

Where is the 2 space positive round trip per year for all employees written???

 

[ClearedToPush]

I would think that revenue dilution would not only include the extra cost from carrying those non-rev passengers but includes the fact that those 5 non-rev passengers would have most likely purchased a "full-fare" ticket instead of the reduced rate/free ticket.

 

[legacy-to-LCC]

Revenue dilution?????? Please explain your logic with regard to the "perk" given to the senior execs and their families for NONbusiness travel, space positive, FIRST CLASS to anywhere FOR LIFE!????

it is only "revenue dilution" when non-execs exercise their benefits...
in my opinion, executive raises is just one example of a manifestation of "revenue dilution"...no. i am wrong: that is "talent retention".
and so, the paradox of this selectively applied term begins to emerge...

 

[tadjr]

includes the fact that those 5 non-rev passengers would have most likely purchased a "full-fare" ticket instead of the reduced rate/free ticket.

Not likely in most cases. If I have the flying bennies and a seat is open, I might go to Europe for a couple of days. Otherwise, I'm not going to pay for a weekend trip over the pond. Same applies to a great many people I work with who travel to see relatives/friends, etc because they can. Otherwise, they wouldnt be flying as much as they do, guaranteed.

 

[flyingcat]

Revenue dilution?????? Please explain your logic with regard to the "perk" given to the senior execs and their families for NONbusiness travel, space positive, FIRST CLASS to anywhere FOR LIFE!????

Where is the 2 spacke positive round trip per year for all employees written???

As stated in the hub:

Boarding Priorities

SA1 – Vacation pass electronically credited in travel profile. Allows employee and all accompanying family members one round trip per pass. 2 per year per active employee and 1 per year per retired employee.

As to the dilution for executive space positive travel there is a definite dilution. Ultimately that perk is competitive with benefits offered by other airlines. If other airlines did not offer it we would probably not give it. Just as much as our reduced pay is a trend for most carriers in our industry.

 

[PITbull]

$550,000 for a CEO is NOT reduced pay.

This is a LCC and the salary of both CEO and Senior Execs should be reduced to where it sits today.

Again, selective revenue dilution, blah, blah, blah...

 

[UWCactus]

When they use the term "revenue dilution" they are referring to the flexi pass program that US West currently has. Under this program, US West employees are given up to 10 flexi passes per quarter, based on attendance. It takes 1 pass for a rt buddy pass (this is the revenue dilution, more later). 2 passes to pay for parent travel round trip. 2 passes for companion travel, etc. 1 pass for a one way upgrade. These passes have expiration dates, but if ticketed prior to the expiration date, the buddy pass ticket is then good for one year from date of issue.

Flexi passes are so widespread and quite expensive to use. For example a round trip fare on a flexi (buddy) pass is near $200.00 rt PHX-PHL. Because it's expensive, and because employees receive such large amounts of them, they are given to just about anybody that will take them (unlike the newer pass, where the employee will have to be far more selective as to receives them). With this said, the company believes that many people that ended up with a flexi in their possesion, use it for the flexibility of the standby travel and not the need for discount travel, therefore they are often times a full fare passenger except when they think they would rather have flexibility. So in a nutshell, many of these people could essentially pay another 75.00 for a confirmed seat, but choose flexiblity over confirmed.