Segments

How does using fare buckets reduce the complexity versus "simple" revenue? Flyers see ticket cost, but doesn't always see fare bucket.

Wouldn't a straight revenue model make more sense than than trying to find the fare bucket and then having to look up which multiplier applies?

krlcomm

Actually there are quite a few discounted coach fares that only accrue .5 points per mile flown:

G, Q, N, O, S = .5 points per mile flown

H, K, M, L, W, V = 1 point per mile flown

BoeingBoy

Well, I've long been on record as saying that ultimately a profitability model will prevail - it's just too complex to administer with the legacy systems currently in place.

DL/UA are taking a tiny step in that direction with the spend requirement (as is AA with it's points system approach) - the spend requirement is just so low that it's almost impossible for anyone who flies frequently to not meet it. Ten cents a mile is below any legacy carriers cost. Would anyone want to run a business where the best customers cost the business money?

The long-term problem with either revenue or spend is that it eliminates half the profitability equation - cost. The long-term deterrent to implementing a profitability based system is complexity.

Jim

NiceLanding

If we were all computers, straight revenue models would make perfect sense. Being people, our perception of reality is distorted in all sorts of ways that can cause us to respond differently than the objective math would predict. One common example is the way people perceive a $10 item as much more expensive than one priced at $9.99.

Most people seem to avoid complex math (like multiplying numbers with decimal places) in their daily lives, so the fare bucket system provides for only very basic calculations. It doesn't even matter if your customers pay close attention to the details. Once you can show them that the rules are consistent and seem reasonable, then you just want to leave them with the general impression that more premium tickets earn higher rates.

Actually even that may not matter to the airline, but is more a way to naturally group the market into the "big spenders", "average joes", and "cheapskates". In that case, though, you might still want the system to be simple and transparent to retain a general perception that it's fair and reasonable. (For a good example of how not to do it, see how UA is alienating many HVFs with big unexpected gotchas in their rules for crediting elite dollars and miles.)

NiceLanding

I do appreciate where you're coming from as a former pilot. For you the numbers were very important and your calculations needed to be precise and accurate, as a matter of life and death. By contrast, marketing is all about perception, right or wrong. Educating your customers too well to the objective reality of the choices can actually be counterproductive, such as when loyalty to your airline is really providing no more value than they'd otherwise get from Kayak and a generic 2% cash back credit card.

nall

If they credited you for all the taxes and surcharges, perhaps, but we all know they wouldn't.

Alex_I

- While this is good business argument, I don't think it is valid for an airline.
Yes, if you are GM making cars, you sell some at profit and some at loss. Ultimately, you like to sell all cars at profit.
For an airline, the goal is to sell all the seats on the plane and make the profit on that flight. If AA sells 50 seats at $0.20/mile and no other seats on 737 they will not be making money on that flight. So it could be that the last five people who jumped on the last-moment transcon NetsAAver fare at $0.05/mile are the ones who made that specific flight profitable and not the one who paid the most expensive fares.

Dadaluma83

The 10 cpm figure is a bit misleading as well, especially with all the gotcha's United and to a lesser extent Delta seem to have with their PQD/MQD

It is easy enough for the airlines to come up with what they consider a figure to represent how profitable a customer is per mile, but in reality it is not so simple. What about someone who buys a first or business class fare from AMEX travel? Even though AMEX takes a bit of commission, that passenger certainly is profitable to the airline by quite a bit. However buy your First or business fare from Amex and after the fact may find out you get jack squat for PQD because you bought a bulk fare.

NiceLanding

Fly 20k miles on SAA with an S ticket you bought at ua.com that showed 100% mileage credit (used to show 150%!) and discover after the fact that SAA logged it as an L fare and gave you 50% credit. No such surprises with AA-marketed tickets.

BoeingBoy

Oh, it's not simple at all. Every quarter the airlines report average cost per seat mile, but that doesn't say whether a particular passenger is profitable on a given day. You really need to know route/equipment average cost, or better yet route/equipment cost for each day. That's a lot of numbers to be juggling on a daily basis, and it's only the cost side. You need to do the same on the revenue side since a given $ paid for the ticket (or even a specific fare code) isn't specific enough for route/equipment use. One can pay a higher fare but be less profitable for the airline.

In very general terms, shorter routes or using smaller planes makes the cost more expensive while longer routes or bigger planes produce lower cost figures.

Some day the computing power will be so cheap that all the carriers will have it. When that day comes a true profitability based FF program will be possible. Until then there'll just be baby steps in that direction.

Jim

BoeingBoy

Same thing, just more variety in what's sold. GM may sell 20 types of cars in the U.S. for a given model year while little US sells about 3,000 flights on a given day. While that makes the US model much more complicated, the principal is the same.

Besides, we're talking about awarding certain customers more perks than others, not whether an airline makes quarterly or annual profits.

Jim

BoeingBoy

You don't know how much averages play a role, do you...

Oh, I see that every day - how many people will spend $3 in gas to save $1 on the cost of something. Or take WN and "bags fly free" - how many extra tickets does WN sell, each bringing in more revenue than the average bag fee, because of that.

Any company just needs to convince most customers that what it's doing is to their benefit. With only 3 major carriers that will be remaining, that shouldn't be too hard. Sure, there'll be FF's that do the math and figure a new FF program feature isn't to their benefit so they'll leave but chances are that those aren't the FF's the airline really wants to have from a profit/lose basis. And likewise, there'll be other airline's FF's that see the same feature as benefiting them more than airline xyz's program and they'll switch, bringing more profitable flying to the carrier making the change.

Jim

ericcheung

AA's EQP system has been around more than the PQD/MQD requirements of AA and DL. The biggest advantage of using fare buckets over dollars is the ability to record high spend on partners. If a UA flyer books on LH or AC on non-016 stock, it's tough to get spend to count. On AA, i can book J on BA or CX and know i'll get 1.5 EQP per mile flown.

Now.. if only the Citi Executive card will give 10k EQP when they give you 10k EQM...

Efrem

First, that wouldn't be leapfrogging other carriers. It would be copying exactly what DL has announced they will do in 2015.

More importantly, it misses two points:

1. The purpose of an FF program is not to reward past behavior, though that's what they do because that's all they can measure. It is to motivate future behavior.

2. Bargain-hunters are more motivated by FF benefits than are people who pay more. This fact is well documented.

Therefore, a revenue-based program rewards primarily people who are less motivated by rewards. (Not totally unmotivated. Access to the EXP desk, for example, which I enjoyed for many years, can't be obtained any way other than by earning EXP. But a whole lot less motivated. Before you say that it doesn't apply to you, remember that FTers are not typical. Our attitude to status does not apply to the great majority of the traveling public, including the great majority of the people who have it.)

I suspect that Delta will soon find itself with far fewer elites, which is probably OK with it; that those elites will be largely those in captive cities such as Atlanta and Minneapolis; and that passengers who have a choice in places like New York will find that the SkyMiles program is by and large no longer a reason to fly DL. Most of their rewards will go to people who will gladly accept them but would have flown DL anyhow. Their move may be wise in the short run but stupid in the long run. In the long run, AA's program is probably about as effective as it can be.

edgewood49

I have been talking to Air Pass the last couple of months and moving over from AS since they are in a street fight with DL and was told that the "end of summer" looks to be the merger of AirPass and that then the new changes are coming. For me the only issue I have is there is not a hub on the west coast versus moving to UA.