Value Pricing

Aug 20, 2002
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KCFlyer on other threads makes a good argument for an overhaul of the fare structure. What are the opinions out there? Should this or should this not happen? Why isn/t AMR going ahead with this if it is beneficial?
I have to admit that I have no experience actually shopping around and/or paying for an airline ticket, so I can/t comment with any knowledge about fares.
 

RV4

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Only those that signed the "confidentiality agreements" know for sure. And I suspect that even some of the nuts and bolts of plans that will appear post concessions have been witheld from even them.

Look for heavy profits to return in the years 2005 and 2006.
 

KCFlyer

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The standard answer is "We have to get costs under control first". Maybe so. But IMHO, getting back to profitability is a two step process, and the best way is to implement both steps simultaneously. Start by looking at cost cutting measures. Cuts in labor rates alone won't cure the problems. Implement a true value pricing system to increase revenue at the same time you are looking for cost cutting measures in ALL areas (not just labor contracts) and it seems to me that profitablity will occur sooner that it will by leaving revenue well enough alone until costs are "under control".
 

SANman

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Feb 3, 2003
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There are a number of pricing tests going on all over the place. There were a flurry of press releases about 2 months ago I think when AA overhauled pricing in about 40 markets, then UA followed on a broader scale. I haven't seen any followup on any successes though.

From what I recall, there were a number of markets out of DFW that full fare was slashed like 40%, and the bottom fares were brought up slightly (which sounds exactly like I remembered value pricing). Take a look at DFW to LAX or SAN... the LAX walkup for tomorrow is about $650, while it's still the astronomical $1000+ to get to SAN.
 

Tango-Bravo

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[blockquote]
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On 3/3/2003 6:55:53 PM will fix for food wrote:

KCFlyer on other threads makes a good argument for an overhaul of the fare structure. What are the opinions out there? Should this or should this not happen? Why isn/t AMR going ahead with this if it is beneficial?


I have to admit that I have no experience actually shopping around and/or paying for an airline ticket, so I can/t comment with any knowledge about fares.
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[/blockquote]


The bottom line issue, plain and simple, is the need for airlines' revenues to exceed costs. On the revenue side, the average fare paid will need to increase for there to be any prospect of meaningful recovery for the likes of AA, UA and DL.

That is where the basic premise behind Value Pricing comes into the picture. It's all about Equitable Pricing -- where all pax, regardless of their reasons for flying pay their fair share of what it costs the airlines to provide the service from which they benefit.

Value pricing does not, for example, single out business travelers to pay outrageous fares to make up for the revenue shortfall incurred by packing the same flights with VFRs and vacationers traveling on below-cost fares. That scheme has failed to the point where airlines practicing such folly have put their futures in jeopardy.

On the other hand, business travelers, and some leisure pax, are willing to pay more for more flexible, fully refundable, fares -- but not 5-10 times more than others on the same flight paid for their restricted fares. And VFRs and vacationers are willing to take the risks inherent in purchasing lower fares because flexibility isn't an issue; their plans are more set.

It costs more for airlines to be flexible with pax, so pax expecting such service should also expect--within reason--to pay more. Five to 10 times more is not within reason; 1.5-2 times more is.

The crisis in yields for the airlines is the predictable consequence of the unconscionable inequities of their pricing. Walk-up fares reached a point where they became a deterrent to flying while the loss-leader fares the airlines offered in their myopic pursuit of packing their planes have conditioned customers to expect fares that come nowhere near covering costs.

Value pricing addresses both issues by making walk-up fares justifiable to those who value the flexibility while increasing discounted fares to a level where others are paying their fair share of what it costs the airlines to provide the service from which they too are benefitting.

Also, with Value Pricing, you don't have 25 plus different coach fares that customers on the same flight may have paid. Instead there are no more than 4-6 different coach fares with the ratio between highest and lowest at no more than 2:1.

Customers would be willing to pay more at the lower end of the fare spectrum IMO -- IF there were any semblence of simplicity, consistency and fairness in the pricing model. And busness travelers actually would purchase "business fares" (instead of figuring out to beat the airlines at their own pricing games) if others on the same flights were paying their fair share albeit at lower fares for less flexibility.

Another tenet of Value Pricing IMO is that First/business class should also be a profit center, made available only to customers paying first/business class fares (at realistic pricing levels -- $50-200 above walk-up coach fares). Upgrades should be offered solely on the basis of availability at check-in for a mileage-based fee with pax holding walk-up fares given priority status.
 

Resman1

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Aug 29, 2002
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I agree that this is desperately needed. The customers have spoken, particularly business travelers. The days of being able to stick it to a business customer 12 to 13 times the cost of a leisure passenger will never return. Dan Garton at the agents interaction meeting said so far the reductions in those 40 markets had not stimulated enough additional traffic to see any benefit. I think that management must realize that total numbers of passengers will remain flat until the Iraq war is over. Remember how critical the Big Six were at America West last year for cutting the business fares? Their performance has been much better since they did the cuts. Southwest for crying out loud now has a better RPM number than AA or UA, and their top full fare Y is 299.00. According to Joe Brancatelli, who is a USA Today travel columnist, Southwest has over 30 percent of their passengers paying their Y fare. What does AA carry in Y? I'll give you an actual phone call I received from an Executive Platinum who wanted a oneway ticket DFW-DTW. This was 9 days in advance, of course we had a one way B fare which was very high, around 800.00. He then asks me to check the fare to Toledo, it's about 500.00 one way.
He then asks me to check a roundtrip to Toledo, as he "may" return. The fare roundtrip was 258.00. So he advises me to book a return a week later and he will rent a car in Toledo and drive. If we had a logical one way fare we would have seen this guy one time, DFW-DTW, let's say if the fare was 400.00. Now this guy is going to connect through Chicago, so we have to handle him twice.
It was obvious to me also that he was never going to use the return ticket, so that's two seats on two segments of spoiled revenue. We got all of that for 258.00, wouldn't be better to have a 400.00 one way?
 

Connected1

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Aug 20, 2002
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There are two problems with Value Pricing:

1) Nobody searches the web for a "fair" price - they search for the lowest price. This is also known as the "Nice Guys Finish Last Theory."

2) You don't double cigarrette sales when you cut cigarrette prices in half. People either smoke or they don't.

Granted, my comments are a bit obscure, but you wouldn't read a longer post, anyway.
 

KCFlyer

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YOu're partly right...the guy who has the luxury of planning 21 days in advance...of flying on a Tuesday and staying over a Saturday will most certainly shop by price. On the other hand, the traveller who needs a trip within seven days sees a fare of a couple of thousand dollars and they decide to drive or do a teleconference. That's called the "I'm bleeding cash and I don't know why" theory.
 

Connected1

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Aug 20, 2002
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[blockquote]
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On 3/5/2003 6:41:15 PM KCFlyer wrote:

On the other hand, the traveller who needs a trip within seven days sees a fare of a couple of thousand dollars and they decide to drive or do a teleconference.
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When did we all become convinced that business passengers are primarily price sensitive, 9/11/01? Isn't it remotely possible that people stopped flying after 9/11 because they were scared and then learned that they could do without flying altogether?

The problem with business traffic is volume - not yield. Yes, our yield is down, but that is because we are filling holes left behind by our business passengers with trash leisure fares. Yields are not down because business passengers have demanded lower fares.

Like cigarettes, business flying is a go or no-go proposition. Decisions like that are made by company policies and not by the all-new, frugal business traveler. If it were the latter, then we would have seen more promising results in the markets where we tested lower business fares.

I'm all for pricing reform, but I think that value pricing has become the only other solution in some people's minds. Isn't there something a bit more earth-shattering out there that hasn't been tried yet?
 

KCFlyer

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[blockquote]
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On 3/6/2003 1:38:13 PM Connected1 wrote:

When did we all become convinced that business passengers are primarily price sensitive, 9/11/01?

9/11 sort of marked a big downturn in the economy - not just the airlines - as a result, yes, many companies have become VERY price sensitive.

Isn't it remotely possible that people stopped flying after 9/11 because they were scared and then learned that they could do without flying altogether?

Not if they had a job that involved travel - but you have a point - many businesses have found alternatives to flying - that becomes the airline's problem.

The problem with business traffic is volume - not yield. Yes, our yield is down, but that is because we are filling holes left behind by our business passengers with trash leisure fares. Yields are not down because business passengers have demanded lower fares.

For grins - see how many business folks are using those "trash leisure fares". Considering that Southwest lowered their fully refundable fare to a maximum of $299 and saw their average fare increase, are you implying that this increase is attributed primarily to leisure flyers?

Like cigarettes, business flying is a go or no-go proposition. Decisions like that are made by company policies and not by the all-new, frugal business traveler. If it were the latter, then we would have seen more promising results in the markets where we tested lower business fares.

Business has found alternatives, including booking advance purchase fares whenever possible. FWIW, every company I worked for had a "policy" that we would fly the lowest price ticket.

I'm all for pricing reform, but I think that value pricing has become the only other solution in some people's minds. Isn't there something a bit more earth-shattering out there that hasn't been tried yet?

How about mileage based fares? Right now it's cheaper ($275 cheaper) for me to fly from KC to LA than it is to fly from KC to Dallas. And it's $457 cheaper for a person flying from KC to LA that it is for the guy from Dallas sitting next to him on the DFW-LAX leg. I wish I could think of a better word than "value" to describe what needs to be offered by the airlines, but I just can't.
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Connected1

Senior
Aug 20, 2002
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[blockquote]
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On 3/6/2003 2:00:48 PM KCFlyer wrote:

For grins - see how many business folks are using those "trash leisure fares". Considering that Southwest lowered their fully refundable fare to a maximum of $299 and saw their average fare increase, are you implying that this increase is attributed primarily to leisure flyers?
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[/blockquote]

Certainly there is some of that going on. There are business fliers who have not changed their travel practices, those who stopped flying altogether, and those who still really wanted to fly after 9/11 but felt guilty about spending too much money in a down economy. I contend that the second category is our major problem.

How else could you explain the relative success of WN, considering we generally match their fare structure when in head-to-head competition? We had more of the second category of fliers to lose as a proportion. WN had the low fare reputation that helped them out with the third category of fliers. They probably took some market share from us, but was it because they lowered their fares? IMHO, no. It was simply because they were WN.

By the way, it's refreshing to new pricing ideas. I have one of my own that was circulated and eventually turned down. Perhaps I'll post it at a later date. (Doubt anybody would read it, though! Too long!)
 

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