FrancisA

I think not.

There are still plenty of places that restrict airlines, usually to protect the national carrier. For instance, South Africa permits no more UK-SA flights by other airlines than are flown by South African based airlines. There are plenty more and fifth freedom options are actually quite unusual.

As for capital requirements, to lease a fleet of aeroplanes requires financial standing. The idea that anyone (presumably with a plausible business plan) would be permitted to start an LCC is just laughable. What finance house would touch them? How many LCCs have started from scratch without substantial capital being held by the founders? Capital requirements must be a major barrier to new entrants. Yet perfect competition requires such no barriers to new market entrants.

However, if we set aside legislative and financial barriers, why are there so few new entrants in what you perceive to be markets suffering abuse by monopolistic players exploiting their positions to charge excessive prices? Why do LH or AF/KLM use discounted indirect routes rather than compete directly on the world's top route LON-NYC?

Capacity at either LHR or JFK cannot be the sole barrier. LON for instances encompasses a number of international airports with surplus capacity and ability to handle transatlantic traffic.

The simple answer is that many have tried and failed. No-one who understands the market would want to enter it.

The reality is the existing airlines led by the AA/BA JV offer a frequency with which no-one else can compete in terms of added value - viewed as price and convenience combined in this market. AA/BA rely on the hub and spoke model to generate the volume of traffic to maintain their current level of service and it is a very successful model.

In the analysis from which this statement is quoted, I showed that airlines priced at the perceived level that the market would bear rather than marginal cost and that the differences in market willingness to pay higher or lower prices mirrored perceptions of convenience. Since that analysis fully explains the behaviour witnessed in the market being examined, I personally can see no need to introduce further factors into the analysis, when those already identified appear to provide a full and complete explanation for the market's behaviour.

Is there some insight I am missing here?

orbitmic

Beware of certainty! My sense is that so far, this is mostly used for airlines like BA and QR and others to open routes that would not have been sustainable otherwise and now are... as long as they can still rely on a heavy up feeding!

Bear in mind that on transatlantic for instance, there is hardly anything that will be possible with 788s (A350s are a bit bigger I think) that was not possible with 767s, let alone the 757s that US airlines have used for ages across the pond...

FrancisA

I think your analysis is correct and is the reason that airlines are not discouraging ex-EU per se and will never go after every customer who drops a final sector.

However, there are a group of passengers who are clearly and regularly using ex-EU as a way to avoid paying the direct fare in a systematic and abusive way. These are perhaps business travellers who would travel the route and would pay the proper direct fare if this behaviour were prevented.

In the case of these serial abusers, there probably is a loss that action against them would recover, both directly from those targeted and indirectly by discouraging similar behaviour by others in the same position.

The advice on this board has always been, if you drop a final sector once or twice, you won't have any problems; but start doing it very regularly and that might not be the case.

IcHot

Possibly, but many business travellers are captive and unable to seek unusual routes. I would think slapping the hand of so called "abusers" may not add revenue.

I'm also quite doubtful that this is highly contagious behavior. I still get mocked by people for extra flights that save thousands. There are people who do the maths and there are people who do what they think is normal. Those of us on Flyertalk have all had to defend our complicated activities and failed.

percysmith

Anything that stops airlines from segregating markets and practicing price discrimination is good for consumers. Regardless of whether customers are only casually or serially using this routing.

orbitmic

Errr... Can you explain in more detail why you consider that undifferentiated pricing across markets would be good for consumers? Is it not mostly the case that if airlines stopped differentiating pricing between markets there would be some winners and some losers? It's not as if the airline sector made massive profits as it goes and they already operate with extremely high load factors, so in effect, it seems to me that if some people pay less then some others will have to pay more but I am happy to hear where I am thinking wrong...

percysmith

Airlines have fixed capacity in the short-term too.

Let's say a flight only carries 3 passengers who are willing to pay GBP7, 5 and 3 (unitary elasticity demand curve). BA currently charges GBP5 for the first two to fly direct. The third seat will be unfilled at GBP5 but BA is willing to sell the third seat at ex-EU price of GBP3, thus filling the third seat.

As word of the ex-EU fare spreads around (and BA does not succeed in stopping UK passengers from buying these fares) the second passenger may be tempted to buy the GBP3 ex-EU in lieu of the GBP5 direct.

BA will continue to sell the GBP3 ticket unless it does not meet their marginal costs and they withdraw capacity.

dsf

Which consumers benefit if, say, the ex-BGO price of BA to SFO rises to nearer or above the ex-LHR price?

percysmith

If they can sell the seats at ex-LHR price there will be no ex-BGO price in the first place?

dsf

so the customers who live in BGO...?

orbitmic

+1. Not to mention that if they do manage to sell the cheaper seat at £5 instead of £3, they may sell the other two (or at least one of them) at £7 instead of £5, and if they cannot sell that cheaper seat at £5, then one of the three seat will remain unsolved and therefore the other two will have to bear the price of that empty seat collectively by paying more, because the whole point of revenue management is that they know that a certain number of people will need to fly anyway, whatever the cost.

It's not as if BA (or anyone else) had one fare from Dublin, one fare from London, etc. they have a multitude of different fares from all those places which vary a lot, and if they limit differentiation by lowering price differences, they will simply get rid of the cheapest fares. Some people (who could only pay that fare anyway) will stop being able to fly altogether while others (who were willing to pay more) will now be sold "bargain" flights for less than they expected and were willing to pay. They will sure be "winners" but the rest will be losers.

In fact, because you stop being able to attract the customers who could only pay the cheaper fares that had been calculated to attract them, you will end up having empty seats, and as some costs are fixed, you will need to converge towards a standard fare that will be substantively higher than the current average, just as when you and I were kids!

In other words, to get back to your example, the third seat could only be filled at £3. If you standardise fares, that seat won't be sold at all any more, and thus the convergence price will have to be £7.50 which is higher than both previous expensive seats (£5 and £7) were sold, or, if £7.50 is too much for passenger no2 who used to pay £5, then maybe two seats will remain unsolved and the convergence standard price will have to be £15, which is more than double what the most expensive seat was going for before.

Calchas

It is a good point which is why individual flights are often capacity limited based on the network level ("married segment logic") as well as at the fare class level.

It's also why BA is very quietly trying to discourage this behaviour

Jagboi

In Canada, it was almost entirely due to the rise of Westjet. Air Canada was forced to follow.

Everything is priced as one ways now, a return is generally 2X the one way cost, but of course it depends upon which flight of the day is chosen. E.G. the 5am departure is cheaper than noon.

percysmith

Orbitmic I'm not following your extension of my example

My example will originally yield £13 not £15. I'm assuming even in the direct market the market is sufficiently informed (efficient market hypothesis again) that the £7 guy can buy the £5 fare even if he is willing to pay more.

If the second passenger can buy the ex-EU then BA's takings will fall to £11.

BA won't be trying to maintain £13 total revenue, it will try to charge what it can subject to cutting back capacity if revenue doesn't support the costs of running the frequency anymore.

In my example I will believe BA's costs is below £13 to start off with to make it economically worthwhile for BA to offer 3 seats' capacity to start off with.
After the second passenger buys the ex-EU fare, if BA's costs are lower than £11 it will still make a profit, just a lower one. if at £11 it will breakeven and be indifferent to cutting capacity or not.

Only at £12 cost will BA definitely cut capacity. Assuming all costs are variable in the long run then it's new cost after cutting 1 seat capacity is £8 and its takings are £10, resulting in profit of £2.
But I find this scenario very unlikely as I assume BA will have sufficient market knowledge to know that it should have cut the third seat capacity early on and raise its profit from £1 to £2.

In your £7.5 and £15 scenarios the result should be even the £7 passenger will not buy and BA will sell no seats for those flights, eventually leading to the capacity being completely cut back.

percysmith

Well I assumed when BA offers the £3 fare it cannot control whether it's the £3 or the £5 passenger who'll first snap it up so capacity controls don't work. If BA offers to one ex-EU it has to offer to all.

It can elect not to offer ex-EU fares in its entirety.