Originally Posted by
milypan
This reality leads airlines to one of two broad strategies:
- Price F “above cost” (e.g. 5x Y), leaving the majority of F seats unsold, and then give away the unsold inventory to elites as upgrades.
- Price F “at cost” (i.e. 2-3x Y for domestic F, 3-4x Y for lie flat), selling most of the F inventory, and leaving few upgrades for elites.
Historically most airlines used 1, but in the past decade the US3 all moved towards 2 (hence all the complaints about upgrades never clearing in the UA/DL/AA forums), and B6 started Mint with 2. This fact alone suggests that the stated AS strategy of leaving substantial inventory for upgrades is unlikely to be sustainable, or at least profit maximizing.
But when you think about what’s happening in CA, attempting to apply 1 seems borderline absurd. On the one hand, if they’re going to leave significant unsold inventory for upgrades they need to price above cost, i.e. 3-4x Y. But that means they’d be matching their lie-flat competitors, who are pricing at cost. At that point it will just be all unsold inventory for AS. On the other hand, the point of leaving inventory for elite upgrades is to attract price insensitive Y customers typically paying with OPM, i.e. business travelers. But the AS network out of CA, or lack thereof, makes them fundamentally unattractive to business travelers. Hence AS can barely capitalize on its unsold F inventory.
Their only option seems to be to price F closer to cost, hope they sell most of it to travelers that want something wider than Y but don’t care about lie flat, and give up on attracting higher paying Y customers. Maybe that will work, but I’m not optimistic. Certainly I wouldn’t expect a lot of unsold F inventory in the long run, because I don’t see how that can work ex-SFO/LAX at all.
AS has historically used a mixture of 1 and 2. They only sold full F, strategy 1. (No discounted first class sold as such at all until recently.) But elites always had what was in many circumstances effectively discounted F through the time-of-purchase upgrade eligible fares. Essentially AS uses/used the U bucket as the revenue management for your strategy 2, with the discount to get cheaper first class varying by elite status. Then for those elites who don’t buy an instant upgrade fare, there are complimentary upgrades as in strategy 1.
The problem (from AS’s point of view) with this strategy, which you also brought up, is that AS loses much of their ability to price discriminate. The upgradable fares are upgradable whether purchased long in advance (when it’s a buy up) or close-in (when it’s probably cheapest available coach anyway). The big three have been pretty successful in finding ways to price discriminate for the F cabin recently; AS’s upgrade-focused strategy leaves that money on the table unless the upgrades really do drive loyalty (ie customers paying more to fly AS even when they’re in coach than the competition charges for coach).