TennisNoob

Spin88 in your formula described when you're referring to "$/Seat" does that include the hefty Fuel Surcharge that ANA add's on top?

I always wonder if that's the reason why ANA put's that fuel surcharge. It's so the JV will not get it? I'm not too familiar with JV's.......

spin88

no idea how certain things like that are addressed. But I don't recall any fuel surcharge on my last few ANA flights, it was just $$$ for the ticket (and ANA was a few hundred more thank taking UA legs would have been).

belfordrocks

Generally all JV members will have identical fuel surcharges on a given route, so that's not the issue.

chinatraderjmr

Some airlines are doing away with the words "FUEL SURCHARGE" & just using "Surcharge" or some other ridiculous made up wording. How Govts still let airlines get away with charging for extra for fuel when it's as cheap as it is is a crime. Why any of us care about these airlines is beyond me. Do they care about us?

Smisek Talks about "illegal" subsidies that the ME3 get, What are these surcharges? Illegal subsidies passengers are forced to pay thanks to greedy congress lining their pockets with airline donations.

TennisNoob

Does anyone know the formula for award tickets?

ANA's IAH-NRT taxes + Surcharges came out to be $156 per PAX for me.

Since I could book NH or UA via award miles.
It makes much more sense to use my NH miles though.

EWR764

Neither the A++ or UA/NH JV share in P&L. That's how the DL/AF/KL/AZ agreement operates, which is why there is much more emphasis on per-segment profitability, because a big loser hurts the entire group with a much smaller pool of money being distributed.

OTOH, the UA joint ventures are top-line oriented, pooling the total revenue and doling it out based on % of contribution (by ASM), irrespective of P&L, with premium cabin adjustments. So the partners have an incentive to broadly match capacity to demand, and then internally ensure that their JV-dedicated operation is meeting profitability metrics based on anticipated revenue.

A good way to illustrate the variation in strategy is a comparison of routes like EWR-IST and JFK-IST. Delta is able to sustain JFK-IST because, at least during the summer season, it is marginally profitable, even with yield pressure from TK, and the entire JV benefits even if the route only turns over $1. Delta, of course, needs to make decisions based on allocation of its own resources, but for the purposes of the DL/AF/KL/AZ, a profitable route is a winner unless the asset can be deployed even more profitably elsewhere within the framework of the JV.

Contrast that with EWR-IST, which, as a new route, probably was unprofitable on an operating basis to UA. For the purposes of discussion, let's just pretend that it made a bit of money. However, we know that average fares to IST are relatively cheap compared to the rest of Europe, so RASM to IST is generally lower than to places like FRA, LHR or ZRH. EWR-IST is a particularly long stage length, so it adds a lot of ASMs, which meaningfully increases UA's capacity share in the JV and entitles UA to a larger cut of the overall revenue pie. Further, it overflies several JV hubs en route, pulling pax to a nonstop that may have already connected via an EU hub, while the competitive landscape precludes a large revenue premium, if any.

So, even if the route were marginally profitable, the ASM share and revenue contribution are not optimized, resulting in UA's capacity share and revenue contribution getting out of whack. This is detrimental to the interests of the other partners and potentially exposes UA to 'true up' payments that we saw early in the entry of CO to *A and A++.

luckypierre

I have a better understanding of fuel surcharges in the AA/BA JV, but I dont believe that all members have identical charges.

EWR764

In A++ they usually do to the extent the fares are filed jointly, e.g. EWR-FRA on UA stock, LH metal will have same YQ as EWR-FRA LH stock, UA metal, or any combination thereof.

spin88

I think the big difference is that Delta's approach to AF/KL and what it does with VS, takes into account the costs to operate a flight, alone with the extra revenue that it generates (P/L per flight) which allows spending on product (in Y) provided it drives incremental revenue. Ditto a long flight, that is higher in CASM, but has a revenue premium. It also incentivizes the partners to do all they can to make each route as profitably as possible, resulting in things like DAL using its 763s on ORD-LHR in the winter (as VS has no planes that small) and running routes from non-hub eastern cities like BOS to AF/KL hubs rather than AF/KL doing so.

The UA/LH/ANA approach really is a strong incentive to treat the product as a commodity. If UAL keeps its costs down for each ASM, but shares in the revenue (including that drawn to those with better product) then it wins. While I think he took it way way too far, to be fair to Jeff (and before him Tilton) the structure of the JV rewards keeping ones costs down by shorting the product as (short term) the revenue you loose for doing so is counter balanced by the revenue others bring in.

What I don't understand though is given an adjustment for premium cabins, what the incentive for UA to have such cheap FC and Biz product.

p.s. put another way, the structure of UAL's JVs reward (short term) a race to the bottom, which over time its partners will have to deal with, perhaps by topping up, or by (see ANA) joining the race to the bottom...

EWR764

By the same logic, wouldn't that model similarly encourage cuts to improve margin performance on a per-flight basis, as lower operating costs presumably could lead to extracting higher profits?

I think the A++ model skews more favorably to more frequent, shorter flights with larger gauge to major hubsites, where pax can be distributed to secondary and tertiary cities through a feeder network. Those 2nd/3rd tier cities that receive nonstop transoceanic service must be able to generate a RASM premium (to the hub) in order to remain viable, or, in the case of UA service to the British Isles, involve significant backtracking to reach a distribution point.

OrlandoFlyer

The talk that JS gave at the Wings Club in NY on July 30 that the OP referred to is now online at https://www.wingsclub.org/photos/spe...-2015-Luncheon.

luckypierre

What safeguards are in place to prevent a single player from rapidly increasing ASM on a route in order to grab revenue from other participants, especially if there is not joint filing of fares and the available fares vary widely among the participants (the large number of participants is probably more appropriate for the Delta collaboration which has addressed the potential gaming by a focus on P&L)? Please refresh my memory regarding the "true up" payments.

spin88

The DL/AF model certainly puts a premium on moving around A/C to match traffic. E.g. If DL/AF/KLM/VS can sell 350 tickets at a decent margin in the summer but only 200 in the winter, well then it makes sense to have VS fly it in the summer and DL fly it in the winter (with a 763). The interesting thing though is that what matters on any route is both costs AND revenue. So certainly you (see DL) would want to minimize costs, but doing so in a way that impacts the revenue premium (having lower OT percentage, cutting soft product, having sub-par hard product) impacts the entire profitability.

But looking at how UA appears to do it, well any incremental revenue UA loses due to sub-par product/operations, are probably balanced out to some extent in the JV by others (LH, ANA) getting that revenue, which is then shared, and UA (short term) would have lower costs, so it makes more money in the short term. Its sort of a tragedy of the commons situation.

I would agree that the A++ formula (as we understanding it) would clearly incentivize the JV participants to add ASM (and gain a larger share of traffic) on routes from hubs-hubs, poaching more of the medium haul traffic to/from hubs. I would have to think about it, but I think there is an argument to be made that the AA/JAL/BA JV has resulted in more new long flights, and less reliance on city-hub-hub-city flights than does the UA JVs, with more international flights to midsized endpoints.

I do wonder though if the UA/LH (A++) formula divides revenues strictly by ASM, my guess is that it does not, but it divides them by revenue in in conjunction with ASM. I checked the regulatory filings and the best I can find is this statement of what they use: "A capacity-based formula that is subject to adjustment on an annual basis is used for the allocation of revenues." The specific formula is not described further as far as I can see.

Other than the reference to adjusting the formula yearly in the regulatory fomula, I can find nothing else. Perhaps someone knows more.

kop84

I think True Up payments kick in when one of the partners costs are far out of line with the rest of the JV and CASM/PRASM numbers aren't at least similar amongst the individual carriers in the JV.


(All numbers completely made up)

If UA's total CASM on their TATL operation is $.10 and LH CASM is $.05 yet each flight generates a similar PRASM eventually UA is going to have to pay LH for subsidizing their CASM.

I believe this is what is meant by true up's but I am by no means positive.

CASM (Cost per Available Seat Mile)
PRASM (Passenger Revenue per Available Seat Mile)

EWR764

The entire point of the relationship is lawfully collude in managing capacity and revenue. There are certainly contractual provisions that penalize (or even boot out, with hefty termination obligations) any player that decides unilaterally to "go rogue" and make outrageous capacity decisions to the detriment of other partners.

Also, since P&L isn't shared in the JV, there is little incentive to dump capacity where demand does not exist because there is a likelihood that the increased revenue will not keep pace with increased costs.

In practice, there is no rationale for a partner to "game" the system since the objective is to reduce competition, not increase it.