Originally Posted by
entropy
Ehh, how about no?
20% fuel savings is about 2/3 of the allocated cost of the airframe on the type of segment those planes fly. Fuel is >30% of CASM, and this quarter its going to be even worse. The airframe is 10% of CASM. do the math.
for the 777s:
50k for new seats * 50 seats/ac *20 a/c is $50 million. That's a non-trivial amount of money up front, but if CO can get just another $100/leg out of them, and they fly 1.5 legs a day, that cost is recouped within a year.
CO could charge more for a better business class product. As it is, CO's product is cheaper than United's inferior product. Business Class seats are much more price inelastic than Y. Biz Travelers are often tied to the carrier in many ways: corporate agreements, FFP and network/schedule.
The seat may be ageing but its good enough for now. I don't think they want to introduce a new product and have the 787 be a 'me too', they want to launch it with the 787. They could however, (and I think this may have been implied with the timing of the announcement), install it without fanfare on the 777 fleet so they are ready at the same time as the 787 comes out.
At the same time, CO's inattention to certain parts of the soft product will start to eat away at them. The wine selections are pathetically bad. And the heavily touted concierge product is a joke. And the pclub isn't up to int'l J standards (though I understand that is being looked at). Those are issues that can be fixed QUICKLY.
The concierges should be checking on pax and making sure that their arrangements are fine for the other side, to see if they need transportation or a shower when they arrive. Right now they just seek out the non-OP members and sign them up.
I think any reasonable observer will agree that an improved CO BF (both hard & soft product) would easily net a higher yield, because, as you write, the market is inelastic, and CO BF tends to price at the low end of the market currently.
Regarding your calculations: The 20% increase in fuel efficiency on the 787 would result in a 6% savings on CASM. On the other hand, refurbishing all the 777's with a new BF (assuming the figures are correct) would cost less than acquiring one new 787. If CO can raise its average BF fares more than 6% on average, then refurbishing makes better sense than buying the new planes.
On an average EWR-LGW, if the average fare is about $5,000 rt now, this would mean the new fare average fare would be $5,300, most likely still cheaper than VS or BA.
Of course, the answer is that CO ought to do both, reduce its variable cost and improve its product in the premium class so that it can generate more revenue as well.
I understand why it has to wait 3 years for the new planes (they're not ready yet) but I really don't see the rationale for delaying the implementation of a new BF, unless the plans for this new product are, in fact, not yet finalized.