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Topic: How (Un)Profitable Really Is Economy Class?
Username: RussianJet
Posted 2013-02-07 09:36:01 and read 16601 times.

Over the years I have read quite a lot of comments along the lines of how first and business is where the real money is made by many carriers, and yet of course most of the plane tends to be devoted to economy. Is it really the case that economy makes so little money? Of course some airlines take it to the other extreme such as a Ryanair, making large profits from a super-economy type service.

Are there any large carriers who literally make almost no profit from economy? Which airlines make the most from this class?

Grateful for any view and info.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: phxa340
Posted 2013-02-07 10:13:48 and read 16500 times.

I think WN and FR would strongly disagree with this notion  

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LAXintl
Posted 2013-02-07 10:16:39 and read 16468 times.

If you look at the average economy fare numbers, one can see that such passengers are indeed on the face value carried at a loss, while things like the premium passenger and cargo are needed to help close the gap and reach profitability.

For example I just had someone return to LA from DC with a round trip fare of $278. That is significantly below the airlines cost of providing that seat. The revenue on that ticket is barely 6 cents/mile, while US airlines seat mile cost are closer to 11-12 cents/mile range, and higher when fuel rises.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: sweair
Posted 2013-02-07 10:20:43 and read 16429 times.

I often go with Norwegian, 186 seats all economy, for a 4 hour flight people do shop inboard, food, drinks, snacks and later some other items. This sale must bring a good part of the profit?

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: jonathanxxxx
Posted 2013-02-07 10:23:17 and read 16408 times.

There has to be a balance.

Contrary to what many people on this forum believe, economy class can be very profitable with the right cost structure or the right fare paid. WN, FR, U2 (and others) make money from economy due to their cost structure. They have less things to pay for on the flight. Now another example would be AA for example charging $600 for an economy ticket on MIA-SFO. That seat definitely generates profit for the airline and if enough seats are sold for a higher price that covers its cost it can be profitable. Obviously of course selling one seat for $600 and the rest for $300 isn't the same but if the route has a high average fare in economy, it probably generates a profit.

The problem is that full service airlines charge below what is needed to make economy profitable when they compete with each other. So in this case economy becomes less profitable. Business class and first class don't see this because they usually don't get to a level where their fare becomes unprofitable.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LAXintl
Posted 2013-02-07 10:41:06 and read 16270 times.

Quoting jonathanxxxx (Reply 4):
economy class can be very profitable with the right cost structure

Its the simple yet elusive RASM versus CASM mix.

With the right cost, in theory any fare can be profitable.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: RussianJet
Posted 2013-02-07 10:54:05 and read 16155 times.

Quoting LAXintl (Reply 5):
RASM

What is that?

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: slcdeltarumd11
Posted 2013-02-07 10:54:55 and read 16153 times.

Clealy airlines fly all coach layouts and are some of the most consistantly profitable so i wouldnt say coach is unprofitable as a statement. It is just unprofitable on certain routes and for certain airlines i think aka like JFK-LHR for a few airlines or JFK-LAX for a few airlines like United P.S.maybe where the coach seats just fill space and allow more frequenecy etc etc but in theory coach should be profitable on most routes and most airlines

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LAXintl
Posted 2013-02-07 11:00:31 and read 16106 times.

Quoting RussianJet (Reply 6):
What is that?

RASM = Revenue per Available Seat Mile

CASM = Cost per Available Seat Mile

American Airlines has a summary of basic industry measurements on their website which might be usefull.

http://www.aa.com/i18n/amrcorp/corpo...Information/facts/measurements.jsp

=

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: DTW2HYD
Posted 2013-02-07 11:03:57 and read 16089 times.

This is an excellent topic. KLM used to operate a MD-11 between AMS-HYD. Economy class was always full. Cancelled flight because not much business class load. LH used to operate a A332 between FRA-HYD. Same scenario economy full, not much business class. Flight gets cancelled.

Is it impossible for a legacy carrier to a route with predominently economy seats. They can have reasonable ticket price rather than cutting the route.

Never understood the logic behind dependency on premium traffic.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LJ
Posted 2013-02-07 11:17:23 and read 15993 times.

Quoting LAXintl (Reply 2):
If you look at the average economy fare numbers, one can see that such passengers are indeed on the face value carried at a loss, while things like the premium passenger and cargo are needed to help close the gap and reach profitability.

Yet, premium travel does not mean C/J as these fares are heavily discounted as well (and sometimes the Y-class fares are higher than C/J-class fares). My opinion is that premium traveler shouldn't be equal to F, C or J class pax but also to the full fare paying Y class and exclude those heavily discounted C/J class pax.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: RussianJet
Posted 2013-02-07 11:21:05 and read 15950 times.

Quoting phxa340 (Reply 1):
I think WN and FR would strongly disagree with this notion

I mentioned FR and the like, and really my focus here is on the legacies and more traditional airlines, who have traditionally been the subject of the comments I referred to.

Quoting LAXintl (Reply 8):

RASM = Revenue per Available Seat Mile

CASM = Cost per Available Seat Mile

Thanks. CASM I knew, but RASM I suppose I should have guessed if I'd thought about it a bit longer.

Quoting DTW2HYD (Reply 9):
Never understood the logic behind dependency on premium traffic.

Exactly, me neither.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: lightsaber
Posted 2013-02-07 11:53:17 and read 15799 times.

Quoting LAXintl (Reply 2):
If you look at the average economy fare numbers, one can see that such passengers are indeed on the face value carried at a loss, while things like the premium passenger and cargo are needed to help close the gap and reach profitability.

Naturally the 'teaser fares' are loss leaders. But as others have noted, full fare Y is at a profit!

Quoting DTW2HYD (Reply 9):
This is an excellent topic. KLM used to operate a MD-11 between AMS-HYD. Economy class was always full. Cancelled flight because not much business class load.

But the cost of accommodating the passengers... That would be a tough call as HYD is notoriously low premium as are many other Indian cities.

Quoting DTW2HYD (Reply 9):
Never understood the logic behind dependency on premium traffic.

Its simple. A well rested employee is far more productive. Often the cost of business class is nothing versus a day (or so) of lost productivity. So companies pay. The big seats have a lower load factor (fraction of seats sold) usually so the price per square meter of floor space must be higher as well as a premium for profit. The difference in sleep quality is night and day.

This is why shorter routes often have fewer premium seats and longer more. If one won't pay... connect. But those people are quite willing to do odd itineraries. (A friend did LAX-JFK-CDG-DXB-HYD and back as that routing saved him significant cash in February 2007.)

Lightsaber

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: cmf
Posted 2013-02-07 12:04:48 and read 15720 times.

Quoting LAXintl (Reply 2):
If you look at the average economy fare numbers, one can see that such passengers are indeed on the face value carried at a loss, while things like the premium passenger and cargo are needed to help close the gap and reach profitability.

If this is true, why do we not see airlines dropping economy? Why do we see so few business only flights. We certainly shouldn't see airlines ordering larger and larger planes.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LAXintl
Posted 2013-02-07 12:17:37 and read 15628 times.

Quoting lightsaber (Reply 12):
Naturally the 'teaser fares' are loss leaders. But as others have noted, full fare Y is at a profit!

Sure but from things like DOT/IATA/BSP statistics you can derive out the average fares and see they are still often way below cost.

Legacy carriers with higher cost bases often no matter what will simply not earn a profit on the economy cabin, and are heavily reliant on the front end.
A good clue to this is the desire by US carries to increase their overseas exposures where premium fares sell. AA, DL and UA have made mention of desire for 50/50 splits in international versus domestic ASM exposure when network adjustments are all said and done. Along with this they are all spending like crazy improving their offerings to chase after that top segment passenger.

Quoting cmf (Reply 13):
If this is true, why do we not see airlines dropping economy? Why do we see so few business only flights. We certainly shouldn't see airlines ordering larger and larger planes.

Very simple, its the math.

For legacy airlines carrying around the economy passenger is a necessary evil. Yes its unlikely they provide any profit, but they are needed to provide the underlying revenue and traffic contribution to justify the existence of the flight to begin with.
Ultimately they essentially help defray (dilute on ASM basis) the cost. We know an all premium product does not work either as there are so few routes that can sustain the volume of premium demand to support such standalone flights.

This math concept is the same by LCCs - they use high density cabins to beat their ASM cost basis down hopefully enough that the low revenue earned per passenger is enough to breakeven.

[Edited 2013-02-07 12:25:54]

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: DTW2HYD
Posted 2013-02-07 14:08:17 and read 15263 times.

Quoting lightsaber (Reply 12):
Its simple. A well rested employee is far more productive. Often the cost of business class is nothing versus a day (or so) of lost productivity. So companies pay. The big seats have a lower load factor (fraction of seats sold) usually so the price per square meter of floor space must be higher as well as a premium for profit. The difference in sleep quality is night and day.

This is why shorter routes often have fewer premium seats and longer more. If one won't pay... connect. But those people are quite willing to do odd itineraries. (A friend did LAX-JFK-CDG-DXB-HYD and back as that routing saved him significant cash in February 2007.)

There is no question about quality of First/Business class. Question is can a airline have a profitable route without depending on a large First/Business passengers.

Here are couple examples of A330-300
Lufthansa 3 class config

8 first class x $5,000 = 40,000
48 business class x $3,000 = 144,000
165 economy class x $1,000 = 165,000
-----------
$349,000

Compare to a 2 class config from QR

30 business class x $3,000 = 90,000
275 economy class x 1$,000 = 275,000
-----------
$365,000

From this actally QR config has more revenue. Cancelling routes quoting low premium traffic sounds like a lame excuse of legacy carriers who choose wrong seat layouts for their equipment.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: Viscount724
Posted 2013-02-07 14:25:40 and read 15193 times.

Quoting phxa340 (Reply 1):
I think WN and FR would strongly disagree with this notion

And WestJet has been very successful with only Y class, although they're introducing a Y+ product with a few rows at increased pitch.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: BD338
Posted 2013-02-07 14:26:05 and read 15184 times.

Quoting LAXintl (Reply 2):
For example I just had someone return to LA from DC with a round trip fare of $278

I can't get from PHX-SLC RT for that price! Either DL or WN usually run around $0.25-$0.30/mile for that run, and that is a WGA, or LUT fare! So Y for that route is probably very profitable but on the other hand I just booked a SLC-AMS trip at less than $0.08/mile (excluding taxes/fees) so that's a money loser right there. But there will likely be people on that same flight paying 3 times my ticket price as they book later. All that proves is that individual route/flights are useless indicators of profitability in Y.....however, airlines need economy, there are just not enough people who can/will pay for premium cabins for an airline to survive. It's probably a reasonable bet that for a carrier with differing cabins that while economy might be break-even or tiny profit at best and the premium cabin has a large profit it is only the combination that makes it work. Obviously it is possible to survive on Y only (FR, EY, WN, B6 etc. etc.) but then they have none of the 'extras' associated with premium cabins to consider either.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: glbltrvlr
Posted 2013-02-07 14:27:23 and read 15184 times.

Arguing about revenue per seat and cost per seat is an interesting academic exercise, but the important number is the revenue per flight. What combination of seats and fares gives you the maximum revenue against the minimum cost? On some routes and in some aircraft, that could be all economy. On others it could involve business and first.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: frmrCapCadet
Posted 2013-02-07 14:31:38 and read 15138 times.

Quoting LAXintl (Reply 14):
For legacy airlines carrying around the economy passenger is a necessary evil. Yes its unlikely they provide any profit, but they are needed to provide the underlying revenue and traffic contribution to justify the existence of the flight to begin with.

And some of us avoid flying on airlines which consider Y passengers as a necessary evil. Even a few posters on this forum have spoken thusly.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: tugger
Posted 2013-02-07 15:12:59 and read 14957 times.

Wow... the level of disdain displayed by some here is just incredible....

Plain and simple, the economy passenger is the core of almost every airlines business and is the key to their survival and profitability.

First, to state it bluntly: Cargo is always one of the most profitable elements for an airline. And economy passengers are the equivalent of human cargo (as close as you can get at least). So apparently some here consider cargo to be a "necessary evil".

Second, economy passengers are tomorrows FF, Business, and F Class passengers and are the future market for any airline that offers higher classes of service. Without the economy passenger flying today, the airline would wither in the future as they have no loyal customers to grow and must rely on poaching other airlines customers and that just lead to downward spiraling wars. Only a few airlines are able to do this.

Third, some seem to think that all economy passengers travel at the lowest fares and that C/J/F class passengers always travel at full fare, when the truth is airlines have in place very good algorithms that limit the number of cheap fares and push economy passengers into higher fares and many higher class passengers are traveling at discounted rates and upgrades (which there is a good value to the airlines to get those passengers to expense those FF miles). Additionally, higher class passenger are a higher cost to the airline to service. From floor space in the aircraft, to the staffing per passenger, to the meals and other amenities required to satisfy these passengers versus the very low levels required for economy passengers.

Quoting DTW2HYD (Reply 9):
This is an excellent topic. KLM used to operate a MD-11 between AMS-HYD. Economy class was always full. Cancelled flight because not much business class load. LH used to operate a A332 between FRA-HYD. Same scenario economy full, not much business class. Flight gets cancelled.

And though probably opposite of what you were trying to demonstrate, this shows the absolute value of the economy passenger. Like freight, the airlines can cancel the flight and the passenger just goes to the next available flight, they have very little recourse (especially if they have a bargain fare).

Economy passenger are among the most important passengers to an airline that serves them, at the very least they are equal in value to the higher service class passengers. Especially when you factor in their future value

Tugg

[Edited 2013-02-07 15:18:05]

[Edited 2013-02-07 15:18:30]

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: irelayer
Posted 2013-02-07 17:17:13 and read 13959 times.

Quoting LAXintl (Reply 14):

For legacy airlines carrying around the economy passenger is a necessary evil. Yes its unlikely they provide any profit, but they are needed to provide the underlying revenue and traffic contribution to justify the existence of the flight to begin with.
Ultimately they essentially help defray (dilute on ASM basis) the cost. We know an all premium product does not work either as there are so few routes that can sustain the volume of premium demand to support such standalone flights.

This math concept is the same by LCCs - they use high density cabins to beat their ASM cost basis down hopefully enough that the low revenue earned per passenger is enough to breakeven.

Then why gear your entire operation to carrying around (making up the percentages here) 80% of passengers at a loss and 20% of passengers for profit. Why not just get smaller planes with the same range and just fly that 20% around? In fact your profit is being cut into by the losses you are taking on the economy pax. With a smaller plane you have lower fixed cost, lower landing fees, less exposure to fuel prices (b/c you are buying less fuel) etc etc.

Let me put it another way. I know what the reasoning is, but it never makes any sense to me. If economy is only there to defray the cost of the people up front, then why do airlines not ask for small planes with long ranges and why do aircraft manufacturers build large planes that are designed to carry around a majority of their capacities at a loss?

-IR

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: davidho1985
Posted 2013-02-07 17:48:33 and read 13605 times.

I heard that for legacy carrier, Y is used to cover the cost of the flught,
while cargo, J & F are where the profits come from.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: DTW2HYD
Posted 2013-02-07 18:14:16 and read 13318 times.

Quoting tugger (Reply 20):
And though probably opposite of what you were trying to demonstrate, this shows the absolute value of the economy passenger. Like freight, the airlines can cancel the flight and the passenger just goes to the next available flight, they have very little recourse (especially if they have a bargain fare).

I meant to say the route was cancelled not flight.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: JHwk
Posted 2013-02-07 18:32:57 and read 13121 times.

Quoting irelayer (Reply 21):

It is a profit optimization game-- parametric equations get reduced to average cost per flight and average revenue per flight. If you just wanted to fly the "profitable" passengers on a 777 then you would be able to fit them in a Dash-8... and have much lower costs too! I doubt the revenue side of the equation would be the same though.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: koruman
Posted 2013-02-07 18:40:48 and read 13987 times.

Quoting DTW2HYD (Reply 15):
Here are couple examples of A330-300
Lufthansa 3 class config

8 first class x $5,000 = 40,000
48 business class x $3,000 = 144,000
165 economy class x $1,000 = 165,000
-----------
$349,000

Compare to a 2 class config from QR

30 business class x $3,000 = 90,000
275 economy class x 1$,000 = 275,000
-----------
$365,000

From this actally QR config has more revenue. Cancelling routes quoting low premium traffic sounds like a lame excuse of legacy carriers who choose wrong seat layouts for their equipment.

Sorry, but that is a lousy comparison.

Try this one for size:

Air New Zealand can fly one of two aircraft from Auckland to Los Angeles or hypothetically Las Vegas.

They have a 777-300ER configured 44 Business Class / 44 Premium Economy / 244 Economy.

Or they have a 777-200ER configured 26 Business Class / 36 Premium Economy / 242 Economy.

Los Angeles services can reasonably sell as follows:

40 Business @ $8,000 roundtrip = $320,000
40 Premium Economy @ $4000 roundtrip = $160,000
240 Economy @ $2,500 roundtrip = $600,000
TOTAL REVENUE = $1,080,000

Las Vegas services could reasonably sell:

5 Business @ $8000 roundtrip = $40,000
20 Premium Economy @ $4000 roundtrip = $80,000
240 Economy @ $2,500 roundtrip = $600,000
TOTAL REVENUE = $720,000

We know that Air NZ finds the 77W costs around 9% more for Air NZ to operate across the Pacific than the 77E.

So in this model that probably means that operating the 77W costs $900,000 and the 77E costs $800,000.

Which means that the LAX service makes a $180,000 profit, and the LAS service makes a $80,000 loss. Yet they carried the same number of Economy passengers - Business Class and Premium Economy made the difference between profit and loss.

So a low-yield destination like LAS pulls in 30% less revenue than a more Premium-heavy one like LAX, even though it costs around 90% of the amount to operate.

In terms of profit margin, the difference is huge.

[Edited 2013-02-07 18:45:16]

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: AeroWesty
Posted 2013-02-07 18:45:16 and read 13699 times.

Quoting tugger (Reply 20):
Plain and simple, the economy passenger is the core of almost every airlines business and is the key to their survival and profitability.

   The last ticket my employer bought for me was over 20¢ per mile, a midcon round-trip from PDX purchased two days ahead of travel, with no Saturday night stay. I sat in Coach.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: FURUREFA
Posted 2013-02-07 20:00:09 and read 13243 times.

Again, it really depends on the yield mix.

Quoting AeroWesty (Reply 26):
The last ticket my employer bought for me was over 20¢ per mile, a midcon round-trip from PDX purchased two days ahead of travel, with no Saturday night stay. I sat in Coach.

I just went on a day-trip (BOS-LGA) for a recruiting event, and the poor company paid over $800 for my 368 mile roundtrip flight. That's over $4/mile. I'm pretty sure DL made a pretty penny on my coach ticket...

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: MD-90
Posted 2013-02-07 20:29:35 and read 13005 times.

Clearly economy is unprofitable. That's why we see so many airlines flying BBJs of only premium passengers with the occasional 757/767 thrown in there.   

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LHCVG
Posted 2013-02-07 21:55:23 and read 12271 times.

Quoting RussianJet (Reply 11):
Quoting phxa340 (Reply 1):I think WN and FR would strongly disagree with this notion
I mentioned FR and the like, and really my focus here is on the legacies and more traditional airlines, who have traditionally been the subject of the comments I referred to.
Quoting Viscount724 (Reply 16):
And WestJet has been very successful with only Y class, although they're introducing a Y+ product with a few rows at increased pitch.

It's also in their operations and equipment. For WN at least, even though they have started going to the big airports like BOS and LGA over the outlying ones, they still don't fly to Podunk and Hole-in-the-Wall using RJs like the legacies do. They legacies have to factor in the huge number of flights that go to secondary markets across the system, not to mention the much larger variation in their fleet composition. Sure WN may well serve 6-8 destinations several times a day from a spoke all on "mainline" 737s, while a legacy may only fly a few times each on RJs to 3-4 hubs. But OTOH, the legacies can take you MANY more places throughout the system than WN ever can.

That doesn't mean either business model is necessarily better. But it does mean that their systemwide cost curves will be vastly different.

Quoting DTW2HYD (Reply 15):
From this actally QR config has more revenue. Cancelling routes quoting low premium traffic sounds like a lame excuse of legacy carriers who choose wrong seat layouts for their equipment.

I think this is a resource issue - you can't have too many equipment variations. Sure there will be more premium and less premium markets, say those that can support 3-class and those that can only support J and Y. You might even have small J/large Y cabin planes for a few routes. But they can't tailor planes to every single route. QR has the advantage of flying the VAST majority of longhaul flights from/to DOH, but a Lufthansa, AC, or a U.S. carrier has multiple hubs to connect to the globe. And there is a lot more variation in that model that isn't necessarily economical to customize equipment for -- sometimes a route just doesn't work for your setup.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: CARST
Posted 2013-02-07 22:57:38 and read 11793 times.

I think these topics regarding profitability of Y class miss one important point every time they come up here on a.net.

All LCCs with their Y-only cost-structure aside, even all non-LCC/major airlines could not make money without Y class. Not counting some special routes will all J-configured aircraft.

It is correct, that an discounted Y ticket (which most are) is not profitable regarding the average ticket price which is needed to cover the operating costs of an airliner. But as long as the ticket pays for more than the costs which can be directly associated with the single pax it adds a small part to the overall-revenue of that flight.

Imagine the operating costs of the flight as barrel, the barrel holds 1000 L. There are 550 seats on this aircraft, 500Y, 40J, 10F. Every Y pax fills the barrel with an equivalent of 1.5 L (that is his/her ticket price), every J pax fill in 7 L and every F pax 12 L. All seats taken that would generate an revenue of (1,5*500+6*40+12*10=) 1150 L or an profit of 150 L EBIT.

What this discussion is based on is that the average ticket price required to reach break-even, which is at (1000/550=) 1.8 L and all Y pax just pay 1.5 L. But if you don't have the 1.5L each Y pax fills into the barrel you are loosing some 750 L from the overall revenue missing break-even by 600 L!!!


That was a very simple explanation, in layman-terms, not regarding cargo, the specifics of airline operating costs (IOC, DOC), the much higher associated costs with J and F seats and the service these passengers get.


And to add, you could play this game with real numbers, too: Assume the operating costs of a (not too long) long-haul round-trip flight around 500000 Euro.
550 Seats, same config, 500/40/10. Ticket prices r/t: Y=800 Euro, J=4500 Euro, F=8500 Euro. Revenue full plane: 665000 Euro. Profit EBIT: 65000 Euro (or 32500 per flight).

Quoting tugger (Reply 20):
Plain and simple, the economy passenger is the core of almost every airlines business and is the key to their survival and profitability.

  

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: UALWN
Posted 2013-02-07 23:44:54 and read 11343 times.

It is a fact that while there are many examples of successful all-economy airlines, there isn't a single one of a successful all-business airline...

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: DTW2HYD
Posted 2013-02-08 04:12:56 and read 9491 times.

Quoting LHCVG (Reply 29):
I think this is a resource issue.

You are 100% correct. Rather than saying we don't have equipment to run a profitable route, legacy carriers keep saying route doesn't have enough premium traffic. In case of AMS-HYD or FRA-HYD, total number of seat restriction by the govt could be another reason.

Quoting koruman (Reply 25):
Sorry, but that is a lousy comparison.

I showed A333 with two different seat configurations. How is that lousy, and how is comparing 777-300ER with 777-200ER is better.

Also in my example Business 3 times of Economy and First is 5 times of economy.

In your example Premium is 1.6 times of Economy and Business is 3.5 times of Economy.

My model assumes lot more revenue from Business/First classes.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: web500sjc
Posted 2013-02-08 04:59:47 and read 9043 times.

Quoting JHwk (Reply 24):
Quoting UALWN (Reply 31):

All buisness or first flights on the other hand are successfully...I wonder why.


(Concorde, BA1, SQ21/22? Privatair?)

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: EL-AL
Posted 2013-02-08 05:33:45 and read 8665 times.

Quoting RussianJet (Thread starter):
How (Un)Profitable Really Is Economy Class?

Well, why is the configuration in each and every airline is that the economy class is substantially bigger - has more seats - then all other classes, by far?

If YCL seats were indeed a "necessary evil" there were not so many of them, airlines would use most cabin space for F & C class. As airlines still make at least 70% of their seats YCL seats, it's because those seats make profit, otherwise it would be gone for huge first and business class cabins.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: yellowtail
Posted 2013-02-08 05:41:47 and read 8562 times.

It is truly about finding the right mix of revenue vs aircraft size for the route, and that is a real tough job.....is some cases the Y yields are very high, so you need less F&J....in some cases, cargo is very strong (LIM-ATL for example) so any pax tickets sold are basically money in the bank...in some cases the flight succeed only on cargo and F&J (IAH-DME-SIN for example) so any Y pax are basically a bonus....or you can have a flight like BZE-MIA where the Y yields are very strong, and that is where the money is.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: bond007
Posted 2013-02-08 06:14:28 and read 8229 times.

Quoting LHCVG (Reply 29):
That doesn't mean either business model is necessarily better

Well, except history shows that the WN business model was/is 'better'.

Quoting LHCVG (Reply 29):
It's also in their operations and equipment

Of course, but it still comes down to simple RASM vs CASM. In theory anyway, legacies have higher costs and therefore need an overall higher revenue to make a profit.

IMO, legacy airline pricing is one of the reasons for their continued downfall. Their structure simply must cost a fortune just to maintain and is way over-complex. You can be sitting on a flight where pax have paid 20 different prices for their seats, ranging from $49 to $4900.

My personal opinion on how airlines should price seats, is simply to charge what the seat costs + margin (with limited variability) ...amazingly it's how most other industries work! Historically fares have been too low, and costs have been too high.

I'm flying to BOS on JetBlue and STL on WN, and both fares, a few weeks out, are around 40-45 cents/mile - way above the CASM for that flight I assume.


Jimbo

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: DTW2HYD
Posted 2013-02-08 06:23:24 and read 8162 times.

Quoting web500sjc (Reply 33):
Privatair

Are you sure Privatair is All Business, They have 62Y-82Y seats on their BBJ2s. Here is an example of allowing Y to keep the route alive. In 2008, FRA-PNQ started with a A319LR with 48C. In 2010 it was changed to BBJ with 56C. Now it is a BBJ2 with 32C+62Y.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: UALWN
Posted 2013-02-08 07:10:48 and read 7739 times.

Quoting web500sjc (Reply 33):
(Concorde, BA1, SQ21/22? Privatair?)

I don't think Concorde ever made any money for BA or AF. SQ21/22 will cease operations later this year, not a great example. Some Privatair flights have now a Y section, as mentioned above. Then, we are left with BA 1: one flight in one airline...

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: UAL747DEN
Posted 2013-02-08 07:28:40 and read 7530 times.

It really all depends. I've worked in revenue management for some time and at my current airline we will look at the premium cabins and cargo before economy. Now you have to consider EVERYTHING but that is where we USUALLY start.

I would love to post a screen shot of a program we use but I think ill need to wait for my last day in the industry to do that!

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: Fabo
Posted 2013-02-08 07:49:22 and read 7298 times.

Quoting web500sjc (Reply 33):
All buisness or first flights on the other hand are successfully...I wonder why.

Because people need to go to places that are smaller premium markets then whole aircraft. For example lets take PAR-LON, if it were a bit further, it would definitely be one of those markets that can support an all-business flight.

However, if I were a City banker, I would need to go to more places, than just PAR. I would want to go to NYC, TYO, MOW, Milan, ZRH, GVA.... Or maybe DUB, NCL, GLA, EDI...

There is not enough premium demand to warrant a premium flight to GLA, but there is enough to warrant a premium section of a BA flight. So now I have to fly BA (or AF, LH etc) at least some places, I will not fly a completely different airline to PAR. Even less so, if I need to fly GLA-LON-PAR or GVA-PAR-LON.

I will, however, fly an all-biz flight if integrated into BA system.

Quoting EL-AL (Reply 34):
If YCL seats were indeed a "necessary evil" there were not so many of them, airlines would use most cabin space for F & C class. As airlines still make at least 70% of their seats YCL seats, it's because those seats make profit, otherwise it would be gone for huge first and business class cabins.

Unprofitable, necessary evil, loss-making... these are not singledimensional characteristics.

Premise A:
-There is only so much premium traffic.
Premise B:
-A part of cost base is fixed. Pilots, reservation costs, so on.
Premise C:
-A part of cost base is fixed-ish. Plane cost, fuel cost (you can tailor them a bit, but not indefinitely)
Premise D:
-A part of cost base is variable. Service, staffing, etc.


Now, if you have say 20C200Y market, you could say that every single Y ticket costs less than 1/220th of fixed cost (plus variable). And that every single C ticket costs more than 1/220th of fixed cost (plus variable).
As such, C tickets are profitable, Y tickets are "lossmaking".

However, you cannot take smaller airplane and just take 20C, because by then fixed costs per seat will be too high even for C ticket price.

In other example, if Y ticket costs variable cost plus half the fixed cost, it is in itself unprofitable, but if it were not sold, C ticket would have to cover complete fixed cost, not just the half left.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LHCVG
Posted 2013-02-08 08:48:40 and read 6674 times.

Quoting bond007 (Reply 36):
Well, except history shows that the WN business model was/is 'better'.

That was my point though - depending on your POV as a business, maybe/maybe not. I'm not just trying to argue here, but what I am saying is that economically speaking, the WN model leaves a TON of extra revenue and potential profits on the table because of their relatively limited coverage compared to the legacies. Sure they were the largest domestic airline by pax or some such a year or two ago, but their bread and butter is still the routes everybody uses and those where the local market supports O&D, not connecting every possible xxx to yyy. Those are two very different business models. So in fact history has not demonstrated that the WN model is overall superior, just that it has found a niche that it has adapted to very well. How would WN or B6 handle premium TATL or TPAC flying, assuming they were to get wb aircraft? Both are well regarded for their service, but that type of flying is way different than what they currently do in any capacity. Again, that's not to merely argue the point, but each model has advantages and disadvantages that make such a flat statement misleading.

Quoting bond007 (Reply 36):
Of course, but it still comes down to simple RASM vs CASM. In theory anyway, legacies have higher costs and therefore need an overall higher revenue to make a profit.

Yes in theory - but that's a very complex equation these days that needs to include things like WN's top pilot salaries for 737s and their increasing overall costs across the board. That cost advantage is not as large or as clear-cut as it once was.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: frmrCapCadet
Posted 2013-02-08 10:00:50 and read 6123 times.

WN, my airline of choice, does cherry pick which routes are sufficiently profitable. And are not shy about dropping routes which aren't. It does not generally use unprofitable feeder routes. It has a fairly simple (but obviously sophisticated) fare structure. IIRC its CASM is not the lowest anymore. While most legacies have routes to most every state (often expensive but there) WN does not -entire banks of states it does not serve.

My point is neither to praise nor condemn their model, just to note that the WN model is different than legacies. The later attempts to cover the nation, and connect to the world. The WN model connects most US population centers fairly well, their recent purchase seemed to be to strengthen that. I suspect someone else can state this better than me - but I am roughly right. The current model is notably different that it was 25 years ago, but the evolution can be traced.

The kicker in all of this is that different models likely change the dynamic on how Y fares work. WN has moderately different prices for the same seats, kinda. While legacies sharply differentiate service and seats.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: Aesma
Posted 2013-02-08 10:25:26 and read 6073 times.

Quoting glbltrvlr (Reply 18):
Arguing about revenue per seat and cost per seat is an interesting academic exercise, but the important number is the revenue per flight.

The average revenue per flight, aka the revenue per route. On some routes I'm sure many flights aren't profitable (every time you see a plane with less than 50% of seats taken) so the profitable ones have to compensate. Then again some routes are entirely unprofitable in themselves but help fill other profitable routes.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: JAGflyer
Posted 2013-02-08 11:00:19 and read 6025 times.

I have to question how J and F can bring in such significant revenue. It is very hard to believe the majority of people in premium classes will pay the fares that are charged. My bet would be the majority are either frequent flyers who upgrade with credits/points/certificates or operational upgrades (due to oversold Y cabins). Don't even get me started on Emirates A380 suites. You're very naive if you think people regularly spend $18,000+ for a ticket. Despite the media's conception, majority of Dubai's population is not Sheiks with gold plated cars and diamond encrusted shoes.

[Edited 2013-02-08 11:13:08]

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: glbltrvlr
Posted 2013-02-08 11:15:51 and read 5979 times.

Quoting Aesma (Reply 43):
The average revenue per flight, aka the revenue per route.

Agreed.

Quoting Aesma (Reply 43):
On some routes I'm sure many flights aren't profitable (every time you see a plane with less than 50% of seats taken) so the profitable ones have to compensate. Then again some routes are entirely unprofitable in themselves but help fill other profitable routes.

Agreed in theory, but not in practice. At least lately I think there is very little tolerance for routes that don't stand alone. I don't ever see flights that less than 80% these days, and those are usually only the first or last flight of the day. The exception I can recall were mainline carrier flights to Hawaii. Somewhere I read those weren't covering their costs but were still flown because of the FF demand.

Quoting Fabo (Reply 40):
Premise A:
-There is only so much premium traffic.
Premise B:
-A part of cost base is fixed. Pilots, reservation costs, so on.
Premise C:
-A part of cost base is fixed-ish. Plane cost, fuel cost (you can tailor them a bit, but not indefinitely)
Premise D:
-A part of cost base is variable. Service, staffing, etc.

Well stated.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LHCVG
Posted 2013-02-08 11:25:34 and read 5962 times.

Quoting JAGflyer (Reply 44):
I have to question how J and F can bring in such significant revenue. It is very hard to believe the majority of people in premium classes will pay the fares that are charged. My bet would be the majority are either frequent flyers who upgrade with credits/points/certificates or operational upgrades (due to oversold Y cabins). Don't even get me started on Emirates A380 suites. You're very naive if you think people regularly spend $18,000+ for a ticket. Despite the media's conception, Dubai is not populated by Sheiks with gold plated cars and diamond encrusted shoes.

        

Very true - the number of people who pay retail list prices for J and F is very small, especially those who do so out of their own pocket at their own discretion. It was mentioned earlier but the real big fish are full-fare fliers in general, whether those be F, C, or Y/B/M fares. As you point out, someone on a Y fare is probably still not bringing in near a full-on C fare, but they'll still bring in more than some uber-cheap J fares and definitely more than cheap coach tix.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: AA94
Posted 2013-02-08 14:32:21 and read 5673 times.

Quoting web500sjc (Reply 33):
(Concorde, BA1, SQ21/22? Privatair?)

None of these are really good examples, for reasons noted above. Services like BA1 are niche markets, places where there is enough demand on both ends to make the flight work, and a plane with the right economics to profitably carry passengers. But this isn't always hard and fast. You can't just deploy a Privatair 737 on any route worldwide.

Some all-premium flights are successful. But there's a reason why the vast majority of worldwide flights include economy, and why LCCs are so successful.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: Viscount724
Posted 2013-02-08 15:05:48 and read 5588 times.

Quoting DTW2HYD (Reply 37):
Quoting web500sjc (Reply 33):
Privatair

Are you sure Privatair is All Business,

There are no remaining Privatair all-business operations. The last 2 were for LX ZRH-EWR and for KL AMS-IAH and those ended last year. All services currently operated by Privatair for LH are 2-class (32J/60Y).
http://www.lufthansa.com/mediapool/p...ness%20Jet%29%20%2832C%20%2F%2060M

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: bond007
Posted 2013-02-08 16:47:18 and read 5443 times.

Quoting LHCVG (Reply 41):
but each model has advantages and disadvantages that make such a flat statement misleading.

Not really. A business exists to make a profit. If they have high-costs, poor pricing structures, poor aircraft fleet choice, terrible customer service, fly international, AND lose millions of dollars year after year - maybe they're doing something wrong. it's a bad business model however you look at it.

WN's business model is no less 'superior' just because they don't do this, and don't do that, and do this better .... that's what a business model is.

Jimbo

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: cloudboy
Posted 2013-02-08 18:14:30 and read 5342 times.

Part of the problem is that we try to arrive at the cost of a seat by dividing the overall cost of that flight by the shear number of seats on the plane. But, that really doesn't accurately reflect the true costs - what additional cost is there for the services in first? What about space utilization - domestic first takes up less than two seats space. International first can take up to 7 or 8. Then there are costs at the airport and how much fuel costs to purchase at that airport. Not to mention marketing and business overhead. So by dividing the flight cost simply by the number of seats, you end up apportioning costs to the economy passenger that really belong to the first class passenger.

But you also have to remember many, perhaps most - costs are really fixed. Some are only marginally variable. Fuel for instance is highly influenced by the number of passengers, but not completely. It still takes so much fuel just to get the plane off the ground and move it through the air. And even then fuel burn is highest at Takeoff and landing, thus shorter flights aren't completely proportional in fuel burn to longer flights.

The WN model was pretty good. But it is not the ONLY model. That is a problem airlines wrestle with - they have a hard time trying new things out. It seems they think either: All economy, Most Economy with a small amount of high priced first, or All high price business. The only airline I know of that broke this rule was Midwest which offered an all mid priced business product. And they did great until 9/11 and their sudden switch to a half high price business/half low cost economy model.

Quoting UALWN (Reply 31):
It is a fact that while there are many examples of successful all-economy airlines, there isn't a single one of a successful all-business airline...

But, is that a function of results or simply that there really hasn't been an all-business airline that offered more than a few trans-Atlantic flights, or a limited domestic route structure with poorly placed hubs, or charged astronomical fares?

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: rwessel
Posted 2013-02-08 23:56:59 and read 5098 times.

Quoting bond007 (Reply 36):
My personal opinion on how airlines should price seats, is simply to charge what the seat costs + margin (with limited variability) ...amazingly it's how most other industries work! Historically fares have been too low, and costs have been too high.

Supply and demand is a pesky thing. And given how price sensitive consumers are, it's hard to charge even a tiny bit more than your competitors without cratering your load factors.

That's not really possible to do except on a fairly long term basis. If you're running the flight, the choice between leaving a seat empty at a large loss, and filling it for a small loss, is no choice at all.

And outside of government contracting, what business gets to set prices at cost-plus?

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: cmf
Posted 2013-02-09 03:31:48 and read 4875 times.

Quoting LAXintl (Reply 14):
For legacy airlines carrying around the economy passenger is a necessary evil. Yes its unlikely they provide any profit, but they are needed to provide the underlying revenue and traffic contribution to justify the existence of the flight to begin with.

Sorry, but that does not foot. Premium demand does not exist because of economy. If only premium generate return then only offer premium. Simple as that.

Quoting tugger (Reply 20):
Plain and simple, the economy passenger is the core of almost every airlines business and is the key to their survival and profitability.

  

Quoting bond007 (Reply 36):
My personal opinion on how airlines should price seats, is simply to charge what the seat costs + margin (with limited variability) ...amazingly it's how most other industries work

What industries use cost plus? I have seen it in defense and I have seen it in a few cases where a company have outsourced a function. Where are the ones making it most?

More importantly, what reasoning is there for a company to leave money on the table by using cost plus instead of market price?

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: bond007
Posted 2013-02-09 13:57:17 and read 4351 times.

Quoting rwessel (Reply 51):
what business gets to set prices at cost-plus?
Quoting cmf (Reply 52):
What industries use cost plus?

OK, then let me rephrase it .... Set a price that at least covers cost and a margin.

Quoting cmf (Reply 52):
instead of market price?

...as long as market price covers your cost and provides a suitable profit. Selling seats at $49 each way, assuming that a few might be sold at $750 to cover your overall costs, has evidently not worked historically for most airlines. ...and if market price cannot make you a profit, then are probably in the wrong business - as I believe many airlines were/are.

The domestic airline industry has reported negative net income for 24 years (or more?) since deregulation.

The 'real' price of an average airline ticket has decreased 40% since 1979.


Jimbo

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: rwessel
Posted 2013-02-09 15:06:34 and read 4265 times.

Quoting bond007 (Reply 53):
OK, then let me rephrase it .... Set a price that at least covers cost and a margin.
Quoting bond007 (Reply 53):
...as long as market price covers your cost and provides a suitable profit. Selling seats at $49 each way, assuming that a few might be sold at $750 to cover your overall costs, has evidently not worked historically for most airlines. ...and if market price cannot make you a profit, then are probably in the wrong business - as I believe many airlines were/are.

The domestic airline industry has reported negative net income for 24 years (or more?) since deregulation.

The 'real' price of an average airline ticket has decreased 40% since 1979.

Again, what happens when your "minimum" price ends up $10 more than one of your competitors, and you are suddenly flying empty airplanes around? The problem is that the airlines cannot adjust their capacity in a short timeframe. So the choice is often between selling the seat at a small loss, or not selling a seat for a big loss.

It’s clearly a major issue in the business model, but not one that has an obvious solution. Or at least a *palatable* obvious solution – reregulation would fix it, but I really don’t think most of us are interested.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: FlyingAY
Posted 2013-02-09 23:23:27 and read 3941 times.

Quoting glbltrvlr (Reply 45):
Agreed in theory, but not in practice. At least lately I think there is very little tolerance for routes that don't stand alone. I don't ever see flights that less than 80% these days, and those are usually only the first or last flight of the day.

However there other concerns than just route profitability of a single city pair. Take AY as an example: they lose money on most of the European routes, but they couldn't make any money on the Asian routes if the European routes were cut.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: LJ
Posted 2013-02-10 06:11:47 and read 3742 times.

Quoting LHCVG (Reply 46):

Very true - the number of people who pay retail list prices for J and F is very small, especially those who do so out of their own pocket at their own discretion

100% correct. Apart from the corporate contracts the offers you get for F or J are sometimes realy good. EK is running a promotion in The Netherlands whereby you can fly J to BKK for 1,860 (F for approx 3,750). OK space is always limited for these kind of promotions but I've seen the lowest Y class fare lower than a J class fare (happens often in the Summer holiday season).

BTW how much floor space compared to Y takes an average J class seat? Looking at some seatplans I get the feeling that it's around 1:2 (At BA they have a spece which either has 18J or 36Y+, whioch means that if you compare normal Y the ratio would be higher, however is BA representative?).

Quoting FlyingAY (Reply 55):
However there other concerns than just route profitability of a single city pair. Take AY as an example: they lose money on most of the European routes, but they couldn't make any money on the Asian routes if the European routes were cut.

However, if you're discussing the revenue of a flight when a passenger travels multiple legs (one way) on a single ticket, you also get into the dicsussion about how airlines attribute revenue to a specific flight. Though your point remains valid (you need a loss making flight to make a profit), it's always difficult to assess whether the long haul flight is profitable or the European short haul.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: cmf
Posted 2013-02-10 07:13:26 and read 3646 times.

Quoting bond007 (Reply 53):
...as long as market price covers your cost and provides a suitable profit. Selling seats at $49 each way, assuming that a few might be sold at $750 to cover your overall costs, has evidently not worked historically for most airlines. ...and if market price cannot make you a profit, then are probably in the wrong business - as I believe many airlines were/are.

Not a reason for cost plus pricing.

I have said before that I think airlines, in general because there are exemptions, do a very poor job in maintaining profitability. That doesn't mean we should make it worse by implementing cost plus pricing.

All that would do is benefit the company having the lowest cost. It would constantly be able to reduce cost as it gains more customers while everyone else will increase their cost. All while no new companies will be able to start up. A horrible situation.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: frmrCapCadet
Posted 2013-02-10 08:58:34 and read 3505 times.

A Seattle paper decades ago had a story on airline pricing. The lead paragraph IIRC regarded the original United/Boeing mail flights , Seattle to Los Angeles. There was room for several passengers, and the fare was 'below' cost but enough to improve profitability of flights.

It or another story remarked that after deregulation competition seemed to dictate that airline prices tended to $15 per seat below costs. That empty seat earns a tempting amount of money otherwise lost, but when there is competition the dynamic becomes disastrous.

Legacies, for good and for bad, had with government assistance pricing control until deregulation. At that point LCCs arrived and they lost most of their pricing control. The rest is history - as were many of the legacies.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: bond007
Posted 2013-02-10 11:15:00 and read 3372 times.

Quoting rwessel (Reply 54):
Again, what happens when your "minimum" price ends up $10 more than one of your competitors, and you are suddenly flying empty airplanes around? The problem is that the airlines cannot adjust their capacity in a short timeframe. So the choice is often between selling the seat at a small loss, or not selling a seat for a big loss.

Well if you do not provide a better service, and your minimum price ends up $10 more than your competitor, then your business model is wrong - your costs are too high, your margin is too high, and/or you are in the wrong business. See the past 30 years of the domestic airline industry for more details  
Quoting cmf (Reply 57):
Not a reason for cost plus pricing.
Quoting cmf (Reply 57):
do a very poor job in maintaining profitability. That doesn't mean we should make it worse by implementing cost plus pricing.

No, my point is, as I clarified from my initial cost-plus statement, is that it's simply business 101. You charge a price where you cover your costs and make a suitable profit ... if you don't do that then you make a loss. They have done 'a very poor job in maintaining profitability' because they have not done that. If they did - they would have made a profit.

The price should of course be whatever the market will bear (not necessarily cost-plus, but it cannot be cost-minus!!) - but not to the extent where you do not make a profit.

Jimbo

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: cmf
Posted 2013-02-10 11:27:01 and read 3343 times.

Quoting bond007 (Reply 59):
No, my point is, as I clarified from my initial cost-plus statement, is that it's simply business 101. You charge a price where you cover your costs and make a suitable profit ... if you don't do that then you make a loss. They have done 'a very poor job in maintaining profitability' because they have not done that. If they did - they would have made a profit.

The price should of course be whatever the market will bear (not necessarily cost-plus, but it cannot be cost-minus!!) - but not to the extent where you do not make a profit.

Glad we agree that price is not set based on cost. Of course you need to understand your costs so you do not sell at loss.

That said, there are reasons to sell below cost, for individual items. Better to lose a little than a lot. It is only a problem when it becomes the norm instead of the exemption. And that is where I feel a lot of airlines are. They have gone so overboard with it that passengers expect the loss making price to be the normal price.

Topic: RE: How (Un)Profitable Really Is Economy Class?
Username: rwessel
Posted 2013-02-10 13:55:58 and read 3198 times.

Quoting bond007 (Reply 59):
Well if you do not provide a better service, and your minimum price ends up $10 more than your competitor, then your business model is wrong - your costs are too high, your margin is too high, and/or you are in the wrong business. See the past 30 years of the domestic airline industry for more details

The problem is that under the best of circumstances airlines cannot react quickly to changes in demand. They’re largely stuck with the equipment they have on hand. Sure, over the long term it can change, but not quickly.

So let's say there's a market for 1000 seats between A and B. Two airlines each fly a pair of 250 seaters between those points. Everyone is happy and profitable. Now something happens, and demand drops to 800 seats, and suddenly the load factor has dropped from 100% to 80%. Each airline can continue there, and now be making about 80% revenue, while still having approximately the same costs. IOW, both are now operating at a significant loss. Alternatively, one airline can drop their ticket prices 10%, go back to filling the plane, but a 90% of the original revenue, which at least will be a much smaller loss (and maybe even a tiny profit). Unfortunately the other airline is now bleeding money by the bucket with 60% loads on that route, and will be desperate to do *anything* to make that better. And so it goes.

So long as capacity remains significantly higher than demand, the airlines will pretty much either have to drop the route completely (and then what are you going to do with that very expensive equipment you're paying for anyway, gates you're renting anyway, employees you're paying anyway, etc.), or try to maximize the amount of revenue you can make, if nothing else to minimize your losses.

It's fundamentally a problem of commodity products - margins at best are very, very, low when there isn't a shortage. And worse these are totally perishable commodity products. Someone making office supplies can usually just warehouse some extra supply. The folks making food have to sell it, or throw it away. And unsold airline seats "go bad" the instant the door closes. That's why traveling standby used to (sometimes) be a good deal. If you were willing to hang around an airport, an empty seat would likely show up, and the airline would be hawking it for cheap.

It's even worse because the investments are so very high, and significantly inflexible. Capacity is inherently something requiring long term planning, but demand is a very short term thing. There's speculation that much of the semiconductor industry may be heading in a similar direction. You're selling inexpensive (and somewhat commodity) products, built in enormously expensive facilities, which largely need to be running all the time.

And for airlines it gets worse still. Let's say capacity gets cut to demand, prices are rationalized, and a lot of planes end up in the desert. But now the lessors who own the things are bleeding money, and will be willing to rent them out for extra cheap (anything to slow down the bleeding). Perfect opportunity for someone to pick up some cheap capacity, and give themselves some room for cutting prices, and away we go again.


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