Why LCCs are needed at the majors

N230UA

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Sep 24, 2002
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‘Airline Pizza’ by N230UA
Here’s the problem.
Our product is fresh-baked pepperoni pizza. It can be found nearly anywhere. In 70% of the stores where our product is sold, our product is marginally profitable or breaking even. In the other 30% of stores, our product is unprofitable. We are losing money hand over fist sending pizzas to those stores, and we can’t just start making fewer pepperoni pizzas… because we’ll become terribly unprofitable for a number of reasons.
Unlike a typical, modern firm, our pepperoni pizza production is hamstrung by labor contracts that permit only certain workers to place the pepperoni on the pizza, at a wage premium to other pizza companies. We can’t just start making fewer pizzas because each “pepperoner†has to produce X pizzas under contract. Also, our pizza is perishable, unless bought immediately after production. So it cannot be remarketed. Much pepperoni pizza goes to waste.
A major part of the appeal of our pepperoni pizza product is the fact that a consumer can count on it to be nearly everywhere. The people who buy our pizza most, tend to buy it from many different stores. If we pull our product out of 30% of the stores, our best customers will become disappointed and shop for a pepperoni pizza that can be more available than ours. That means there’s a good chance we would start losing money in the other 70% of stores.
We also differentiate our product through a costly frequent buyer program. We give those who buy the most pepperoni pizza coupons for each incremental pizza they buy. These coupons can be redeemed for two-for-one certificates, or can simply be used to get a discount on our pizzas, at 100% of the stores where they are sold. People will become angry if they cannot get rewarded at 30% of the stores where our pepperoni pizza is currently sold.
We’ve done much research and have determined that the reason why our fresh-baked pepperoni pizzas are lacking in sales at 30% of the stores is that more and more people want fresh-baked cheese pizza instead. People are tired of the pepperoni and want something simpler. Because the pepperoni adds a lot towards the cost of making a fresh-baked pizza, the firms who make cheese pizza can sell their pizzas for a much lower price. Also, cheese pizza bakers are fairly new and operate without burdensome labor contracts, so they are free to make their pizza however they like. Another big plus for new cheese pizza makers is that they use hip new packaging.
Since cheese pizza is what consumers want, and it is more affordable, more and more people prefer cheese pizza. And because demand is growing, fresh-baked cheese pizza is becoming almost as widely available as our pepperoni pizza product.
How do we stop losing money in 30% of the stores our pepperoni pizza is sold at while still pleasing our existing customers in the remaining 70%?
 

KCFlyer

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Aug 20, 2002
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It would seem to me that the problem you all are facing is this – There are two pizzerias…yours, where it costs you $5.00 to make a pizza, and the pizza shop across the street, where it costs them $3.98 to make a pizza. They are selling “phone ahead†pizzas for $4.00. You are selling “phone aheadâ€, take out pizzas at $4.00 to people who call orders into you at least 2 hours in advance. They are asked up front if they’d like bread sticks with the order. They decline, but by the time dinner rolls around, they are a bit hungry, so you tell them that they can only get the breadsticks by paying and “order change fee†of $3.00 plus the extra dollar for the breadsticks. You are hoping to make the enterprise profitable by charging $10.00 to the person who decides to “dine inâ€, or who calls just before leaving home so he can swing by and pick it up on his way home. They also have the “flexibility†of being able to order bread sticks with no penalty. You find that your “dine in†business is dropping, and many of your loyal customers have noticed that the pizza shop across the street is charges $4.00 for their phone ahead pizzas, and they are only charging $7.00 for their last minute pizzas, which, word has it, are every bit as good as yours. What’s more, should their customer decide they would like bread sticks with their phone ahead order, that pizzeria simply charges them the extra dollar without any “order change penaltyâ€. You notice this and decide things must change – so you open ANOTHER pizzeria, where you have told the chef that he must take a massive pay cut to work there…to keep the costs low. You get your costs down to the same level as the guy across the street. Now you find that business is doing much better at this new pizza shop, but your old “mainline†pizza shop still has the same cost structure and pricing plan that it has had before, and rather than stealing business from the pizza shop across the street, you are stealing a lot of your “regular†customer from your “mainline†store. The net result being that while your low cost unit is making a profit, those profits cannot overcome the losses being incurred by the parent company.
 

Busdrvr

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Aug 20, 2002
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"There are two pizzerias…yours, where it costs you $5.00 to make a pizza, and the pizza shop across the street, where it costs them $3.98 to make a pizza. They are selling “phone aheadâ€￾ pizzas for $4.00."

Yeah at the $5.00 place they employ trained cooks while at the $3.98 place they employ HS dropouts. At the $5.00 place, they throw away dough that has been dropped on the floor and actually even wash their hands after using the restroom. as a matter of fact, the $3.98 place contracts out to the state to have developementally disabled folks make all it's dough (unsupervised) to save $0.20 per pizza. but hey, the $3.98 place is just as safe and good right? Nobody has died from eating the butt pizza...yet
 
OP
N230UA

N230UA

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Southwest PIZZA has a good safety record BAR NONE.

You and I both know their 737 COOKS are just as capable as anyone else, they just happen to be as motivated and satisfied with less pay and more productivity, thanks to good management and a great KITCHEN.
 

GEO

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Jan 31, 2003
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Busdrvr,

Just when I thought you coudn't make a bigger Jacka** out of yourself...you sir (ma'am?) are pathetic.
 

Segue

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Oct 31, 2002
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Man, there are only a few of us free market capitalists out there. U230UA I like the way you think!

For all the others out there, don't forget who your boss is.

Its not Glen.

Its the folks who buy the tickets.
 

Segue

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Oct 31, 2002
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[blockquote]
----------------
On 2/20/2003 1:52:49 PM N230UA wrote:

Hi Segue,

I think a lot of our viewpoints are "aligned" too!

How do we "engage" everyone else on this board to understand the fundamentals of TRUE business?!?
----------------
[/blockquote]

I don't know. I think its a lost cause, but I enjoy the debate anyway. Its an interesting insight into what makes this crazy industry consistently "destroy shareholder value" (quote from the Creditor's Committee deck) over the years.

In just about any other industry, its "change or die".

Why are airlines so unable to respond to market forces?

You can bet the UA saga will be a case study for business schools for years to come.
 

kcabpilot

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Aug 22, 2002
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If we are going to use Southwest wages and benefits as a benchmark well - I'm all for it.

When do I get my $2/hr RAISE?
 
Aug 20, 2002
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[blockquote]
----------------
On 2/20/2003 1:52:49 PM N230UA wrote:

Hi Segue,

I think a lot of our viewpoints are "aligned" too!

How do we "engage" everyone else on this board to understand the fundamentals of TRUE business?!?
----------------
[/blockquote]


Truthfulness. That 'airline pizza' bit was posted about a year ago by UAL777flyer. I'm sure others remember the posting.

Where did you lift it from N230UA?
 
OP
N230UA

N230UA

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Hi Segue,

I think a lot of our viewpoints are "aligned" too!

How do we "engage" everyone else on this board to understand the fundamentals of TRUE business?!?
 

rotate

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Sep 2, 2002
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Pizza analogies are all well and good but the bottom line is
"fly 'em for less or don't fly 'em at all".

Make a decision. Accept the LCC or go find a new career.
 

sfb

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Aug 21, 2002
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There's another part or two of this story, too...

Ever since the dot com bust, a lot of folks have decided that they just can't afford our anyway-you-like-it, anytime-you-want-it $10 pizza. Some of them are buying frozen pizzas for $3 at the grocery store, while others are paying $2 to eat at home, while others are going for the $3.98 pizza down the street. And a lot of the people who used to buy our $10 pizza have discovered that the $3.98 one from our competitor is as good as or better than ours.

We also have the problem that our pizza-oven and refrigerator maintenance folks have also gotten the right to walk the pizzas from the kitchen to the counter written into their contract, even though our counter staff, who make 1/3 as much, could do the job just as well. And God help us if one of our delivery staff helps out at the counter when it's busy, because we'd be up to our necks in grievances. Oh, and our contracts with the pizza makers prohibit us from selling too many small pizzas (made by another company which is better at small pizzas) at a higher margin at our smaller stores.
 

autofixer

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Aug 20, 2002
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So now "mainline" pizza has decided to compete with LeftCorner pizza by opening a new lower priced cheese pizza only line in their store. The new line will be cheese only and priced at competetive prices to the LeftCorner shop across the street.

What happens when the lunch crowd comes in on Monday? Do they sit down and enjoy a $10 pizza or do they mozzy over to the cheese only line?

The risk is; if they mozzy over to the cheese only line, the revenue from the "mainline" drops. Thus, "mainline" pizza looses more revenue to themselves.

And another risk is; what if the cheese pizza line is just like LeftCorner's? Then customers may stop at the first pizzaria they come to or whichever offers the best hours of operations. What if the LeftCorner's personel are funny and happy? Do the customers still walk across the street to "mainline" pizza? What if LeftCorner advertises their product as the lowest price pizza in town, even if this is not always the case? The next time you are hungry and you look in your pocket and only have $4, you will go to LeftCorner, even though, "mainline" pizza is 2 cents cheaper. The risk is great and the downside is even greater for "mainline" pizza.

Could there be a paradigm shift in the neighborhood? The folks who used to frequent "mainline" pizza now have a competetive choice. Do they frequent "mainline"--simply because they always have? Or do they get tired of "mainline" taking them for granted and give LeftCorner a try?

It could be a bad day at Blackrock for "mainline" pizza.
 
OP
N230UA

N230UA

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Dude, it is not plagiarized.

I wrote it based on Bethune's 'pizza' metaphor.

You are quick to make allegations.
 

Tango-Bravo

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Aug 29, 2002
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[blockquote]
----------------
On 2/20/2003 11:06:33 AM Busdrvr wrote:

"There are two pizzerias…yours, where it costs you $5.00 to make a pizza, and the pizza shop across the street, where it costs them $3.98 to make a pizza. They are selling “phone aheadâ€￾ pizzas for $4.00."


Yeah at the $5.00 place they employ trained cooks while at the $3.98 place they employ HS dropouts. At the $5.00 place, they throw away dough that has been dropped on the floor and actually even wash their hands after using the restroom. as a matter of fact, the $3.98 place contracts out to the state to have developementally disabled folks make all it's dough (unsupervised) to save $0.20 per pizza. but hey, the $3.98 place is just as safe and good right? Nobody has died from eating the butt pizza...yet
----------------
[/blockquote]


Looks like Busdrvr has been overcome by yet another acute flareup of RDS (Reality Denial Syndrome -- a malady that seems to run rampant in the ranks of the "full-service" airlines among both labor and management).