Cledaybuck

How is that different from UA? Look at the amount they took in last year in fees. That doesn’t even include people who paid more for regular economy to be able to carry on a bag or select a seat.

ReinaDeLaSelva

Muchachos I cannot understand why the economic modeling and simulation here is being conducted using such simplicity when revenue and cost components cannot be broken out of the system independently in this way. Many are covariant.

Overall, in snapshot for this day, airline does not make money on many individual Y pax. Airline makes some money on individual J pax. Buut... there are certain fixed costs and many semifixed costs. Airline flys 772 to LHR. Economy is good load factor is 95 percent. OK. But then demand falls, now 100 less Y pax but same of J. Cannot profit overall on 772. Next month, sub 763. Loss of numerous seats plus, increase in CASM for ALL SEATS because of less efficiency 763 vs 772.

Example Y paxs who fly 772 on UA4. Today only 100, so each pax accounts for "cost" because this specific flight is not revenue-positive or neutral. Divide loss for flight by pax numbers. All paxs "unprofitable" today. But tomorrow, 225 in Y. Strong per-flight profit. All paxs deliver per-pax profit even in snapshot. Buut, if 1 extra pax flys today i.e. 101 instead of 100 then the company revenue delta is positive it is the price of her ticket minus marginal cost of carriage which is very low for this case, 772 with +1 pax. Model 1: she reduced the LOSS of this flight by (individual marginal revenue-marginal cost) probably several hundred $ on this Y ticket especially if walk-up Y or B. But she - like all other paxs including J on this flight - is revenue-negative with respect to the specific flight. So we can think (Model 1) that her loss-reducing capacity = 00s of$$ but at the same moment her revenue is measured as -45$ using the simplistic metric of net profit per pax for the flight (Model 2). If she does not fly, model 1 says, company loses $500. Model 2 says, company "saves" $45!!!

The fact that UA can buy, lease and operate large and expensive frames like 772/773 with very low CASM for high load factors is exactly because they sell hundreds of Y seats on all flights. The fact that UA operates 772 on UA4 both today and tomorrow is because of the need to plan in this way. Y pax numbers over time allow the provision of nice 772 on this route.

We know well the ultimate logical extension of the fractional or component passenger costing model does not work. Finally 100percent business class seating should eliminate all loss because all J paxs make per-pax profit and using this (100 percent J fleetwide) as our management and economic philosophy maximizes all individual flight profit at all times?! Correct?! But no! Airlines with 100percent business class and limited airframe substitution capacity have a poor longterm solvency record even with good product e.g. Silver, Max.

So if you do not believe then por favor try it yourself, become the airline entrepreneur and lease this nice 772 OK now remove Y and install with 120 J only Polaris at $3k per return and see how you can make money... I think even with your slot LHR to EWR or LAX you lasts one week before BK, LOL! I will put this same concept in another way by looking at the behavior of airline. UA does not return leased 772 because of one unprofitable flight - like today's UA4, LOL!!

This is why revenue-optimization strategies that work are based on the principle that both J and Y paxs are necessary. It is also more effective when airline possesses variety of airframes to allocate dynamically as well as product strategies to upfeed Y to J with upsell mechanisms etc. This philosophy of operation is like the robustness delivered by higher genetic diversity but applied in the world of airline economics. Systematically this approach generates stronger long-term results than specific optimization for one class of service, revenue analysis based on single flight snapshots etc even if at any one moment it does not appear so.

Observed behaviors and both success and failure outcomes in this sector corroborate the principle even if paxs are not privy to specific cost and revenue data and models.

Buut if you do not believe and want to buy such 772, then por favor offer me Polaris service mas barato I will try first! LOL!

JimInOhio

Spirit's CASM is certainly less than UA's but UA's is an average across all cabins/services. I don't think we have the Y vs Y data but it must be closer.

The ancillary charges from Spirit is really part of their air fare, the base is never more than UA's BE fares.

jsloan

Unless you think that UA is going to start flying all-Y flights overseas, it doesn't matter. The cost is still the cost. Yes, you can allocate the costs differently to different cabins, which makes for a neat accounting trick, but isn't really relevant to whether or not the airline is making money on a given flight. If UA doesn't sell any J seats, but fills Y, it's not like they can decide not to bring the J cabin along for the ride.

UA relies upon a mix of high-fare and low-fare customers. They think that the low-fare customers are fungible, and that they can reduce benefits to them without hurting their top line. Only time will tell whether or not they are correct.

JimInOhio

I'm not following you so please forgive me for that. How does mean UA doesn't make money on Y passengers?

jsloan

They do not make money on most Y passengers individually. They do make money on Y passengers, in aggregate. This is exactly the same thing that I have been saying the entire time.

The question that prompted this discussion was whether or not a *G Y passenger is profitable. The answer is, individually, probably not. UA is betting that he can be replaced easily by another passenger without status.

Artpen100

I agree. In this economy, they may well believe they can sell every seat without offering incentives based on loyalty. Or much in the way of quality, either, other than the seat. But that may not continue to be the case. (I assume China travel is already affecting them. I haven't looked, but guess there may be more PZ on the Asia flights now.) And it also ignores the matter of the brand. With a poor brand, and mediocre quality compared to most of your competitors, you may still sell every seat, but you can't charge any premium where any of the other major airlines fly. I know I will buy UA international J when it is significantly cheaper, but am happy to buy another airline when it is not. Particularly since I know I am likely to get a better soft product.

VegasGambler

This is an incredibly confusing statement. The most obvious way to determine the individual profit from 100 identical customers is to take the aggregate profit from them and divide by 100.

JimInOhio

I'm not an accountant but I think where you're going with this is the distinction between variable contribution and gross contribution. When I think of it this way, it seems to me your statement of individual vs aggregate is backward. Can you give an example of what you're saying?

spin88

With due respect, this is entirely wrong. The BE passenger is valuable, because if UA did not fill up the plane (because that base load went to OALs) then they would not fill up the plane and would have far less reveue. If revenue management does it's job, each set of passengers (discount Y, close in Y, discount PE, close in PE, discount J, close in J) is profitable. If you miss on any of these groups at a set price point you either have to keep prices lower close in (losing out on revenue from those who would have paid you more) or go out with empty seats. Set your prices too high and you end up with empty seats.

The only difference is that the "discount" passengers are to some extent fungible, including in PE and J. If you set your prices low enough you will fill those seats, including with non-elites. (.e.g. all of my recent family trips in BE have been like this, we were not elites of that airline).

The valuable passengers are those who will elect to fly that airline at a higher fare, or even the same fare, which allows the airline to get to a higher fare bucket quicker, and those who are even more valuable are those who are usually flying last minute, and as such are paying higher fares overall. Both sets are almost always elite passengers.

I see this all the time on SFO-SEA, which is flown by AS, UA, and DL. I am happy to pay my first choice airline (Delta) more, but at times Delta will be a lot more and then I might take UA or AS when both work. E.g. recently the 5 pm flight back from SEA on Delta was $150 more, I took UA. But that I looked first at Delta, and as such fill their planes on a regular basis - including at high fare points near in to departure - is what makes me a valuable customer, and sense much of my travel is close in a very valuable customer.

Am I a whale? Some guy who buys full fare close in J tickets (at $10-12K). No. But these travelers are exceedingly rare.

jsloan

Suppose you have a flight that costs $10K to operate empty, plus $100 for each passenger, and there are 100 seats.

If the plane flies empty, UA loses $10K.
If the plane flies with one passenger, UA loses money unless the passenger paid $10,100 or more.

Now, suppose there are 90 passengers -- the flight now costs $19K to operate. Suppose 10 are J passengers who paid $1K each, and 80 are Y passengers who paid $125 each.

If UA only has J passengers, they lose money: 10*$1K = $10K, but the plane costs $11K to operate with 10 pax.
If UA only has Y passengers, they lose money: 80*$125 = $10K, but the plane costs $18K to operate with 80 pax.
The average per-person cost to operate the flight, with 90 passengers, is $211. Each individual Y passenger is unprofitable -- UA loses an average of $86 on each

Overall, this flight is profitable. 10*$1K + 80 * $125 = $20K, vs $19K in costs: $1K profit. That's because, in aggregate, the Y passengers are profitable, as the fare is higher than the marginal cost to carry the passenger.

See above. Individually, unprofitable. Profitable in aggregate.

spin88

Way to simple, and misses a lot via the simplicity. Lets assume a UA 789 which costs $15,000/hour to operate (UA's cost when they first flew them, just going with it...). 12 hour flight. So Operating costs are $180,000. 48 J, 204 Y.

Assume the following:

Discount J 30 x $2000
non-discount J 12 x $5000
TOD upgrades 3 x $500

discount Y 154 x $500
non-discount Y 50 x $800
Total = $238,500 this is enough to be profitable.

But assume, less "discount" J demand (10 less seats) and less discount Y demand (30 less seats) then the math is:

Discount J 20 x $2000
non-discount J 12 x $5000
TOD upgrades 6 x $500
Discount Y 124 x $500
Non-discount Y 50 x $500
Total = $205,000. This is probably no profit, even a loss given overhead.

Now this does not assume that UA discounted yet further (which would cut into this even more) or they held open the discount prices for longer (which would cut into the non-discounted fares) and assumes that the "non-discount" travel - much of which is elite travel - stays the same.

Again, every part of the plane contributes, and the key passengers are those who will pay more than the average price (i.e. non-discount, usually later purchase business travelers) in all cabins. BUT, and this is what this example is designed to show, even the discount traveler is important. Have too bad of a rep, have some of this traffic skip you, and it will kill the bottom line just as easily.

This is why Elite programs have been so important in the past, and why United is so stupid to be shafting the middle ranks of it's elites with such high (actually punitive) levels of spending to qualify for elite status.

JimInOhio

Thank you... that's helpful to understand where you're coming from. What I'm failing to understand, though, is the $125 Y fare. In reality, that Y fare probably varies from $80 to $750 depending on how much each passenger paid as an individual. There's no way that $750 passenger (and many more) are individually unprofitable.

jsloan

You just proved the same thing that I did.

Did I say otherwise?

Why is this so controversial? Most (not all) individual Y passengers are unprofitable, but they make it up in volume. We're saying the same thing.

UA is betting that they can continue to attract the same amount of traffic, at roughly the same price points, with the revamped MileagePlus program. You disagree. I neither agree nor disagree. Time will tell if they are correct.

Honestly, the basic premise of this question seems flawed to me. I don't want to be United's best customer, at least as far as the Revenue Management people are concerned. I'd prefer to be their worst.

Correct; I kept it simple for the purpose of illustration. Yes, people who are purchasing expensive Y fares -- which are often pricier than discount J -- are individually profitable. But that's a very small number of passengers. That's why I've been trying to say "most Y" passengers are individually unprofitable. Some are, but you can't build an airline around serving only them.

spin88

I actually think we are saying something very different. Every passenger individually is unprofitable. United can't fly a 789 with just a full J cabin, even at full fares, which it is almost never going to get for any flight.
The theory that United has opperated under since 2011 is that some customers are valuable and everything should be directed at them, and that elites are a waste of time, numbers/benefits need to be cut down, sell those seats to someone else. Yet, there is no one else to sell them too at higher fares. That has been United's problem.

Delta has fewer J seats than does UA, slightly less Y+ seats on most planes, and gives better Y and J service, with better Y product overall. If having more J seats meant more profit, UA - with hubs in the main business markets - would be outperforming Delta. IT IS NOT. Delta is between 2x and 1 1/2x as profitable as is United. Why is this so? I would argue it is because a lot of the middle of the pack travelers are electing to fly Delta. The folks who are paying $800 not $500 are graviting to Delta, not United, and that is where Delta's extra profit is coming from. Delta is not "winning" by focusing on the passanger who is paying $24K in travel, but on those elites who fly day in and day out for work, giving Delta a steady stream of higher PRASM traffic.