How can they say fares won't go up?
Mar 1, 2000, 12:06 pm
#1
FlyerTalk Evangelist
Original Poster
Join Date: Nov 1999
Location: FTFOE
Programs: TalkBoard: We discuss / ad nauseum things that mean / so very little
Posts: 10,225
How can they say fares won't go up?
I've been thinking...
How can Mapleflot/Air Milton/whatever-you-call it claim that air fares will not rise? It can, because the duplicitious corporation is telling the truth and lies at the same time. They'll make more money, improve their operating stats, and satisfy the Competition Bureau/Transport Canada/transport minister.
Let's say we have two cities and each day, let's say there are 1000 pax travelling in one direction. For the sake of simplicity, let's assume we have two airlines (no names given or implied http://www.flyertalk.com/forum/wink.gif ) each operating 10 flights a day with airplanes that hold 100 pax. (Thus an averaged load factor of 50%.)
Now, let's say that given the cutthroat domestic competition between these two unnamed airlines http://www.flyertalk.com/forum/smile.gif, on each flight there are 10 fare classes with 10 seats each with prices $10, $20, etc., up to $100 for the full fare (same for both airlines). A fully loaded plane would therefore generate gross revenue of $5500.
Next, assuming that each pax always finds and purchases the lowest fare available, these 1000 passengers a day will settle into the lowest available fares and therefore the two airlines always succeed in selling only the $50, $40, $30, $20, and $10 fares. Each half-full plane generates only $1500 in gross revenue, while the passengers pay an average fare of $30. The two airlines together pull in $30000 gross each day, one direction only.
(To add to the fantasy, let's pretend that one of these two airlines allows its elite frequent fliers upgrades from any class. Whoops, I'm getting sidetracked here http://www.flyertalk.com/forum/smile.gif.)
Recently, one of the unnamed two airlines bought its smaller, and money-losing rival. The combined airline now decides to slash domestic capacity...
Let's say now there are only 16 flights between the two cities. The load factor now improves to 62.5%. On average, each plane load now generates $2275 in gross revenue. Capacity has gone down by 20%, but the airline in one day, one direction pulls in now $2275 * 16 = $36400, making a gross revenue increase of 21.3%.
Now let's say that the airline has gone hog-wild with its capacity slashing and reduces the number of flights to 10 a day. Now the load factor is 100%, the airline execs are cheering, and the angry pax now pay an average fare of $55, leading to daily total, one-way gross revenue of $55000, for a whopping 83% increase in revenue for a meager 50% reduction in capacity. The average fare, in this scenario, has also gone up by 83%.
The transport department now steps in on behalf of disgruntled fliers and approaches the mega-airline. They respond by saying that the fare rules and prices have stayed the same and to prove it, they say "Look here: the proportion of discounted fares is still the same. We're just making more money because we streamlined our operations."
The discounts are just as deep and there's still the same number of $10 fares on each flight. So they are telling the truth.
Or are they?
FewMiles.. (And few Q-miles too.)
How can Mapleflot/Air Milton/whatever-you-call it claim that air fares will not rise? It can, because the duplicitious corporation is telling the truth and lies at the same time. They'll make more money, improve their operating stats, and satisfy the Competition Bureau/Transport Canada/transport minister.
Let's say we have two cities and each day, let's say there are 1000 pax travelling in one direction. For the sake of simplicity, let's assume we have two airlines (no names given or implied http://www.flyertalk.com/forum/wink.gif ) each operating 10 flights a day with airplanes that hold 100 pax. (Thus an averaged load factor of 50%.)
Now, let's say that given the cutthroat domestic competition between these two unnamed airlines http://www.flyertalk.com/forum/smile.gif, on each flight there are 10 fare classes with 10 seats each with prices $10, $20, etc., up to $100 for the full fare (same for both airlines). A fully loaded plane would therefore generate gross revenue of $5500.
Next, assuming that each pax always finds and purchases the lowest fare available, these 1000 passengers a day will settle into the lowest available fares and therefore the two airlines always succeed in selling only the $50, $40, $30, $20, and $10 fares. Each half-full plane generates only $1500 in gross revenue, while the passengers pay an average fare of $30. The two airlines together pull in $30000 gross each day, one direction only.
(To add to the fantasy, let's pretend that one of these two airlines allows its elite frequent fliers upgrades from any class. Whoops, I'm getting sidetracked here http://www.flyertalk.com/forum/smile.gif.)
Recently, one of the unnamed two airlines bought its smaller, and money-losing rival. The combined airline now decides to slash domestic capacity...
Let's say now there are only 16 flights between the two cities. The load factor now improves to 62.5%. On average, each plane load now generates $2275 in gross revenue. Capacity has gone down by 20%, but the airline in one day, one direction pulls in now $2275 * 16 = $36400, making a gross revenue increase of 21.3%.
Now let's say that the airline has gone hog-wild with its capacity slashing and reduces the number of flights to 10 a day. Now the load factor is 100%, the airline execs are cheering, and the angry pax now pay an average fare of $55, leading to daily total, one-way gross revenue of $55000, for a whopping 83% increase in revenue for a meager 50% reduction in capacity. The average fare, in this scenario, has also gone up by 83%.
The transport department now steps in on behalf of disgruntled fliers and approaches the mega-airline. They respond by saying that the fare rules and prices have stayed the same and to prove it, they say "Look here: the proportion of discounted fares is still the same. We're just making more money because we streamlined our operations."
The discounts are just as deep and there's still the same number of $10 fares on each flight. So they are telling the truth.
Or are they?
FewMiles.. (And few Q-miles too.)
Mar 1, 2000, 12:56 pm
#2
Company Representative - Air Canada
Join Date: May 1999
Location: Canada
Posts: 24,215
just like KH told us couple weeks ago.. fares haven't change, it just that the discount have gone down.
They accomplished that by certain methods:
* Change the UPG policies hoping we will buy higher fare just to upgrade FAILED
* Block out discount seat just to make us buy full fare. FAILED, we'll just travel less..
Another good evidence of phantom passenger was discovered last night... YYZ - YEG was full in all classes except Y,B,J, as soon as the web specials became available at about 3 EST yesterday... N class became available this morning sometime between 4am EST and 8am EST. No conincidence.
They accomplished that by certain methods:
* Change the UPG policies hoping we will buy higher fare just to upgrade FAILED
* Block out discount seat just to make us buy full fare. FAILED, we'll just travel less..
Another good evidence of phantom passenger was discovered last night... YYZ - YEG was full in all classes except Y,B,J, as soon as the web specials became available at about 3 EST yesterday... N class became available this morning sometime between 4am EST and 8am EST. No conincidence.
Mar 1, 2000, 2:16 pm
#3
Join Date: Feb 2000
Location: Oakville, Ont, Canada
Posts: 407
Fewmiles, that is an interesting analysis that you did there. It seems clear that you have more time on your hands than I do. http://www.flyertalk.com/forum/smile.gif
A few of the assumptions that you made are of course, as you say, fantasy. Particularly the one where you assume that all pax automatically purchase the lowest fare. Many travellers, not well represented on this bullitin board, do not do this, because they are busy business people who need the flexibility that the full fare offers. Our travel policy states that all restricted, non refundable fares are to be refused. If this is not done, and a change needs to occur, the employee is liable in principle if not in practice. Also, we would refuse to fulfill the Saturday night stay requirement. Hence, we do not book the cheap seats.
The changes in the upgrade policies do not bother me - it just means that I, as a full fare paying passenger, will have more access to the upgrade now I am not competing with those that have the really cheap fares. I do think though, that upgrades at the gate should still be possible from any fare.
It would be an interesting analysis to see who generates more revenue for the airline - an 40,000 Qmile traveller like myself paying full fare, or a 100,000 Qmile traveller who only ever pays a bargain basement fare.
A few of the assumptions that you made are of course, as you say, fantasy. Particularly the one where you assume that all pax automatically purchase the lowest fare. Many travellers, not well represented on this bullitin board, do not do this, because they are busy business people who need the flexibility that the full fare offers. Our travel policy states that all restricted, non refundable fares are to be refused. If this is not done, and a change needs to occur, the employee is liable in principle if not in practice. Also, we would refuse to fulfill the Saturday night stay requirement. Hence, we do not book the cheap seats.
The changes in the upgrade policies do not bother me - it just means that I, as a full fare paying passenger, will have more access to the upgrade now I am not competing with those that have the really cheap fares. I do think though, that upgrades at the gate should still be possible from any fare.
It would be an interesting analysis to see who generates more revenue for the airline - an 40,000 Qmile traveller like myself paying full fare, or a 100,000 Qmile traveller who only ever pays a bargain basement fare.
Mar 1, 2000, 3:27 pm
#4
Join Date: Feb 2000
Posts: 15
MD: According to most airline execs, passengers travelling on discounted fares subsidize those flying on full fare.
Nevertheless, while what you say is true, most travellers do book the lowest fares, including many business travelers. Given that I can change the ticket for about $107, does it make sense to pay $1000-$2000 more for a ticket, just to avoid the change fee? Well, for some people, yes. Then of course, there are those of us who have to travel at the last minute, and don't have a choice.
I think the basic tenents of FewMiles argument still stand. But I'd add that the size of the discounts is also decreasing, as is the number of discount seats.
Nevertheless, while what you say is true, most travellers do book the lowest fares, including many business travelers. Given that I can change the ticket for about $107, does it make sense to pay $1000-$2000 more for a ticket, just to avoid the change fee? Well, for some people, yes. Then of course, there are those of us who have to travel at the last minute, and don't have a choice.
I think the basic tenents of FewMiles argument still stand. But I'd add that the size of the discounts is also decreasing, as is the number of discount seats.
Mar 1, 2000, 3:28 pm
#5
Original Member
Join Date: May 1998
Location: Canada
Programs: AC SE 2MM, HH Dd, SPG; IC Pl/A; AA; DL
Posts: 14,321
The reality is that there are probably few flyers at each end of the spectrum. Those that fly only discount may be as rare as those that always fly full business fares.
Most of us have a mix of pleasure, personal and business travel whereby we mix discount fares and full fares.
The easy route for the airlines has been to calculate based on segments or miles flown without regard to $$$ spent. They have probably figured that the few low fare top tier flyers are counterbalanced by the few top fare top tier flyers with the masses lying somewhere in between. You can bet that if there was a preponderance of top tier flyers "not paying the rent" that eligibility requirements would creep up.
Most of us have a mix of pleasure, personal and business travel whereby we mix discount fares and full fares.
The easy route for the airlines has been to calculate based on segments or miles flown without regard to $$$ spent. They have probably figured that the few low fare top tier flyers are counterbalanced by the few top fare top tier flyers with the masses lying somewhere in between. You can bet that if there was a preponderance of top tier flyers "not paying the rent" that eligibility requirements would creep up.
Mar 1, 2000, 11:30 pm
#6
Company Representative - Air Canada
Join Date: May 1999
Location: Canada
Posts: 24,215
It's very hard to analyse base on $$. That's why most airline base status on miles flown.
In most cases, a 100000 mile low fare flyer would exceed a full fare paying 40000 mile since the extra miles they fly will offset the difference. That usually depends on what kind of flights they are flying. In some cases, if both are flying exclusively domestic canada, then the 40000 mile pax will exceed the revenue generated by the 100000 mile pax. However, overseas travel are the other way around.
In general... the total rev. generated by all the EP members are sure to be a great fraction of lower tier member. They better keep them happy, they be in deep trouble if they lose even a fraction of those EP members which I am sure have already started with a few noticable ones here!!
In most cases, a 100000 mile low fare flyer would exceed a full fare paying 40000 mile since the extra miles they fly will offset the difference. That usually depends on what kind of flights they are flying. In some cases, if both are flying exclusively domestic canada, then the 40000 mile pax will exceed the revenue generated by the 100000 mile pax. However, overseas travel are the other way around.
In general... the total rev. generated by all the EP members are sure to be a great fraction of lower tier member. They better keep them happy, they be in deep trouble if they lose even a fraction of those EP members which I am sure have already started with a few noticable ones here!!