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What Revenue Per Mile Does UA Consider Us Worth Incentiving/Keeping?

What Revenue Per Mile Does UA Consider Us Worth Incentiving/Keeping?

Old Oct 22, 19, 10:45 am
  #1  
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What Revenue Per Mile Does UA Consider Us Worth Incentiving/Keeping?

UA must have a clear valuation in mind of revenue per mile that makes us “good” or “not-so-good” customers.
I am one of the long haul K-fare types that has earned gold or higher (even 1k for a couple years) spending just .09 - .10 per mile and know that they are not happy with people like me, thus the changes.
Is there any info/data on what they consider a worthy customer in terms of revenue per mile?
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Old Oct 22, 19, 10:52 am
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Originally Posted by shdflyer View Post
UA must have a clear valuation in mind of revenue per mile that makes us “good” or “not-so-good” customers.
I am one of the long haul K-fare types that has earned gold or higher (even 1k for a couple years) spending just .09 - .10 per mile and know that they are not happy with people like me, thus the changes.
Is there any info/data on what they consider a worthy customer in terms of revenue per mile?
I don't understand what you mean by "they are not happy with people like me". Have they banned you from future UA flights?
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Old Oct 22, 19, 11:06 am
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.000000000000000001
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Old Oct 22, 19, 11:07 am
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Unless you are buying mistake fares, they are very happy to sell tickets to you. But, to them, the profitability of those tickets is not sufficient to justify the cost (both actual and opportunity) of providing additional services.
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Old Oct 22, 19, 11:10 am
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In the [fictitious] words of United:

"None of you are worth two shrimp!"
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Old Oct 22, 19, 11:18 am
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Kind of a bogus question. If UA is selling the fare, UA wants your business. UA provides incentives to some customers with Basic Economy fares. At the other end, they give high $/mile certificates that are sometimes difficult to use.
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Old Oct 22, 19, 11:18 am
  #7  
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While not sure a simple number is the way UA looks at this,

UA's 2019 CASM (GAAP) is about 13.5 cents/mile
UA's 2019 PRASM is about 14 cpm (and DL, in particular, is higher)

And UA uses 18 cpm as the breakeven point for an elite to get the same RDMs as they did prior to the change to using PQDs to determine RDMs.

But would not suggest the UA does not value those below those levels, but it certainity would "value" those with higher numbers more.
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Old Oct 22, 19, 11:19 am
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It's an incredibly complicated question, but as a first approximation you probably want to look at United's operating costs. To fly the average seat one mile last quarter it cost United between 13 and 14 cents. If you are spending less than 15 cents to travel one mile on United**, on average and broadly speaking the airline is losing money by having you as a customer. For premium cabins, you can roughly scale up by the amount of real estate required -- domestic F is between 50% and 2x [1], and a Polaris seat is somewhere between 3x and 4x the floorspace [2]. So if you are flying domestic F at less than 25 cpm or Polaris for less than 45 cpm, again United is losing money by flying you around.

The flip side of that argument, however, is that there are simply not enough "profitable" customers to sustain an airline with United's network and reach. The marginal cost of transporting you versus transporting an empty seat is extremely small, less than 1 cent per mile. So in that sense, if you are occupying a seat that would otherwise have flown empty and paying United pretty much anything, then they are in fact "making money" by selling you a ticket. This is the airline's side of the inventory game -- a major input to available inventory on a flight is the current probability that a marginal seat will fly empty. If it is likely to be empty, they are better off selling it even for a pittance, but if it is likely to be sold they need to charge a profitable amount.

Now, I made tons of simplifying assumptions here, for the sake of "coming up with a number". Shorter flights are more expensive to operate per mile than longer flights. Different aircraft have different economics on the route. Running an airline is obviously a very complex and difficult business or they wouldn't constantly be going bankrupt


But it is worth remembering that practically no one here would consider Economy at 15 cpm a "reasonable price" for airfare anymore (that would be $1,610 for a round-trip SFO to LHR). This gets at what I think is the most disingenuous thing about all the "airlines are monopolies bilking their customers" complaints. Anyone traveling on a deep discount fare is being massively subsidized by the people paying full price, and the entire system would collapse if it weren't for the traditional price-discrimination methods by which airlines make sure price-insensitive customers pay top dollar.

**Rounding up and adding because United needs 13 cents of revenue to cover costs, and you are also paying a good bit of taxes and fees in your ticket.
[1] Estimated as 37/30 * 3/2 for a typical 737 cabin = 85%. Regional jets at 4:3 and MD/220s (not in UA fleet) at 5:4 are more efficient.
[2] Estimated as 80/30 * 10/8 for a typical 777 cabin = 333%, treating Polaris as an 8-across product with a full 80" seat pitch (a rough approximation) - you will lose more on the ends because half a seat is dead space in the bulkhead
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Old Oct 22, 19, 12:07 pm
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Originally Posted by findark View Post
Anyone traveling on a deep discount fare is being massively subsidized by the people paying full price, and the entire system would collapse if it weren't for the traditional price-discrimination methods by which airlines make sure price-insensitive customers pay top dollar.
As has been pointed out whenever this subject comes up, because airlines can't fill all their seats with HVF, those below-cost flyers are providing marginal revenue which ultimately makes it possible for the airline to operate an international network. So they need both. Win-win
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Old Oct 22, 19, 12:14 pm
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Originally Posted by Kacee View Post
As has been pointed out whenever this subject comes up, because airlines can't fill all their seats with HVF, those below-cost flyers are providing marginal revenue which ultimately makes it possible for the airline to operate an international network. So they need both. Win-win
Yes, it's called a waterfall chart of your customers. You can't simply chop off everything below the full-book cost line and think you're going to make more money.
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Old Oct 22, 19, 12:34 pm
  #11  
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As I understand the question, it isn't a matter of whether the ticket UA sells to a customer increases or decreases UA's profit but rather whether the elite customer generates enough profit to cover the elite benefits they consume.

Previously the minimum for 1K was 100,000 status miles and IIRC $15,000 in "qualified" spend, which would be 15 cents per (status) mile.

Under the new rules, distance flown doesn't matter, only possibly segments and the segment "requirements" are somewhat less than half of what was previously required to be used instead of distance. So we need to impute some distances to get a range of values in terms of cents per mile to attempt a rough answer to the question.

If our hypothetical previous 1K passenger was doing 100,000 miles and not many segments, to continue as 1K, the person would fly 100,000 miles (or maybe decrease this a bit since 100,000 no longer serves as a goal), thus 24 cents per mile or more if distance is reduced. Wow! If the person rearranges travel to do 60 segments, only $18,000 spend is needed, so we would get 18 cents per mile (or slightly more if distance decreases a bit), while is 20% higher than the pervious standard. Yikes.

OTOH, if the person qualifies on segments, previously 120 segments (min 60,000 status miles on UA at 500 miles credit per segment) were needed, and $15,000 spend. Now it's 60 segments (to use round numbers), while could mean only 30,000 status miles (for 1K? Yikes!) with $18,000 spend or 60 cents per mile (versus 25 cents per mile for 60,000 status miles and $15,000 spend before). In cost per segment terms, it was $15,000 for 120 segments and now we have $18,000 for 60 segments, or an increase from $125 to $300 (plus a bit since the requirement is actually 56 rather than 60 segments).

If someone does four segment RTs, previously this was 30 RTs at $500 per ticket but not it would be 15 RTs at $1200 per ticket. If the person silll does 30 RTs per year, they would need to pay $600 per ticket on average, a 20% increase.

Of course these numbers don't take account of the changes in how UA defines "qualified" spend, which would tend to lower the extent of the increases.
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Old Oct 22, 19, 12:41 pm
  #12  
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Originally Posted by Kacee View Post
As has been pointed out whenever this subject comes up, because airlines can't fill all their seats with HVF, those below-cost flyers are providing marginal revenue which ultimately makes it possible for the airline to operate an international network. So they need both. Win-win
UA has clearly made the calculation that they don't need to do anything special to woo low-margin / negative-margin customers. How accurate this is remains to be seen, but it's a product of 85-90%+ load factors. When there aren't enough seats to go around, it is entirely possible that you can make more money by chasing off some of your least-profitable customers and waiting or them to be replaced.
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Old Oct 22, 19, 12:41 pm
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Originally Posted by Kacee View Post
As has been pointed out whenever this subject comes up, because airlines can't fill all their seats with HVF, those below-cost flyers are providing marginal revenue which ultimately makes it possible for the airline to operate an international network. So they need both. Win-win
I think it's even more complicated than everything already brought up. For example, I highly doubt that any of their Hawaii to mainland US routes are actually profitable, due to very high award ticket redemptions, lots of non elites seeking the best deals on everything, lack of business travelers and HVF, etc. But they absolutely need to run those routes to be taken seriously as an airline. And, many folks connect to HNL at other hubs on routes that are profitable, and wouldn't be flying UA at all if not for those routes. There's a sort of "network effect" where dropping a route, even an unprofitable one, could hurt business overall because there's no use flying an airline that doesn't get you where you want to go. Very few people will fly more than one airline on the same trip and make a connection by picking up their bags and carrying them over to the counter for the second airline.
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Old Oct 22, 19, 12:43 pm
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Originally Posted by STS-134 View Post
I think it's even more complicated than everything already brought up. For example, I highly doubt that any of their Hawaii to mainland US routes are actually profitable, due to very high award ticket redemptions, lots of non elites seeking the best deals on everything, lack of business travelers and HVF, etc.
I understand cargo plays an important role in the economics of the Hawaii flights. As it does on many other routes.
Originally Posted by jsloan View Post
UA has clearly made the calculation that they don't need to do anything special to woo low-margin / negative-margin customers.
Sure. The basic concept of UA's domestic BE product is "buy our cheapest fare, and we will treat you like dirt."
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Old Oct 23, 19, 2:55 am
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Originally Posted by findark View Post
But it is worth remembering that practically no one here would consider Economy at 15 cpm a "reasonable price" for airfare anymore (that would be $1,610 for a round-trip SFO to LHR). This gets at what I think is the most disingenuous thing about all the "airlines are monopolies bilking their customers" complaints. Anyone traveling on a deep discount fare is being massively subsidized by the people paying full price, and the entire system would collapse if it weren't for the traditional price-discrimination methods by which airlines make sure price-insensitive customers pay top dollar.
This is very good info, but I would argue that nobody is really making the "monopolies" argument currently outside of hub-captive passengers due to the massive increase is economy airline options. If most or all of the LCCs go under, then that argument may return to relevancy.
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