UA744Flagship
Topic Author
Posts: 1433
Joined: Tue Jul 13, 1999 1:55 pm

Drastic Changes To US Legacy Business Models?

Sat May 07, 2005 12:26 am

Just some thoughts on how to simplify the legacy business model. I'd like to see one of AA/UA/DL/NW/CO/US transform themselves a la HP, more than just simplifying fares. Simplifying fares is just one piece of the puzzle that should be part of a dramatic transformation from old to new practices. This post is meant for the b-school crowd.

I think simple/low fares, aka Everyday Low Prices, require changes to the whole business model to become effective.

Make 90% of tickets sold non-refundable...
  • Most tickets sold these days are... however, nowhere near 90% are non-refundable at the legacies
  • Loads will become more predictable
  • There will be less of a need to overbook to compensate for no-shows... if a passenger doesn't show up - so what? You've got their money already.
  • There will be less layers of Yield Management required

    Really try to have most bookings occur online or through your own res center
  • This makes it easier to track customer buying behavior
  • Most legacy carriers still rely chiefly on travel agencies... it is hard to pull data from them
  • This is embracing the "direct" model rather than going through a middleman that might influence customer purchase

    Get rid of huge sales forces and corporate discounts
  • An everyday low fare environment negates the need for
    excessive corporate discounts and more unecessary layers of management
  • It is hard to truly know what you are taking in in revenue when you have to account for the sales cost, plus take into account discounts... imagine accounting for thousands of corproate accounts and millions of discounted tickets each year... again, very complex

    Move away from mileage based, no expiration loyalty programs
  • So what if these are supposedly profitable? They are still very complex.
  • Miles that never expire (as long as you fly once in a while) are a continuous liability, and there are costs to managing all the countless mileage agreements and maintaining a "bank" for the mile transactions
  • Go all electronic and have miles expire, like WN/B6/DH. It's simpler and points don't become a long-term liability. And much less administrative costs of mgmt required.

    I think the next step in making legacy carriers leaner revolves on simplifying everything as much as possible. And as you can see, distribution, pricing, and loyalty programs are inextricably linked to each other.
  • no wire hangers!
     
    burnsie28
    Posts: 5042
    Joined: Mon Aug 02, 2004 1:49 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 12:32 am

    Quoting UA744Flagship (Thread starter):
    # It is hard to truly know what you are taking in in revenue when you have to account for the sales cost, plus take into account discounts... imagine accounting for thousands of corproate accounts and millions of discounted tickets each year... again, very complex

    If the did that, the would lose those profitable business accounts  Wink
     
    MaverickM11
    Posts: 15455
    Joined: Thu Apr 06, 2000 1:59 pm

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 12:36 am

    "Move away from mileage based, no expiration loyalty programs"

    I've always wondered why these are always based on miles traveled, and not dollars spent. It would make so much more sense for airlines to grant points based on the dollars you spend on the fare.
    E pur si muove -Galileo
     
    burnsie28
    Posts: 5042
    Joined: Mon Aug 02, 2004 1:49 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 12:54 am

    Quoting MaverickM11 (Reply 2):


    "Move away from mileage based, no expiration loyalty programs"

    I've always wondered why these are always based on miles traveled, and not dollars spent. It would make so much more sense for airlines to grant points based on the dollars you spend on the fare.

    First off, you can get a mile for how much you spend on most credit cards.

    Second, this idea would lose more lucrative passengers, for instance, a fare maybe $500.00 but the miles traveled is 4,000, so instead of getting 4,000 miles, one is only getting $500. So now passengers are getting less, and people always want more  Wink
     
    JGPH1A
    Posts: 15080
    Joined: Thu Aug 14, 2003 4:36 pm

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 1:04 am

    Quoting UA744Flagship (Thread starter):
    Most legacy carriers still rely chiefly on travel agencies... it is hard to pull data from them

    Not true - all GDS's provide standardised booking activity data to their participating airlines, that allows the airline to assess down to individual agency level the booking behavious and cost of distribution of every segment sold.

    Quoting UA744Flagship (Thread starter):
    This is embracing the "direct" model rather than going through a middleman that might influence customer purchase

    The 'direct' model may work for simple out-and-back journeys involving simple fares and non-refundable/non-exchangeable tickets. The minute the trip gets any more complicated than that, or the minute a ticket needs to be changed or refunded, the direct model becomes less and less useful. Travel Agents (especially corporate implant offices) provide valuable travel management service for corporate customers in addition to in-depth knowledge of fares, ticketing and other arcane travel-related information. Plus if your airline distributes via GDS's, you have an automatic 1,000,000 extra points of sale at your disposal, in every country in the world, able to sell your products at a fraction of the cost that it would take to install one thousandth as many direct channels. There is a cost for this, of course, but airlines consider the added value as being worth the cost. Even LCC's are reaching the limits of what the direct model can offer them, and are looking to the reach of the GDS to expand further.
    Young and beautiful and thin and gorgeous AND BANNED ! Cya at airspaceonline.com, losers
     
    padcrasher
    Posts: 1815
    Joined: Tue Aug 10, 2004 6:17 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 1:05 am

    Look at Delta's Transformation plan as a great indicator of where much of this industry is heading.

    1) Increased daily utilization rates. Shorter turn times
    2) Fleet simplification.
    3) Wage/benefit cuts
    4) Increased internet ticketing cutting distribution costs.
    5) Single class configuration allowing more seats per aircraft
    6) Increased use of outside maintenance vendors.

    That in a nutshell is 90% of WN's success. Once the major get their costs inline they will concentrate on debt reduction.
     
    whiskeyhotel
    Posts: 291
    Joined: Sun Aug 15, 2004 5:46 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:17 am

    Quoting UA744Flagship (Thread starter):
    Make 90% of tickets sold non-refundable..

    If an airline restricted the availability of non-refundable fares, it would cut into business pax who need flexibility in their travel plans. Those pax would simply fly another airline if availability of full Y fares were a problem. Also, if an airline raised the prices of refundable fares comparable to those of other airlines, those same business pax constrained by their corporate travel policies would fly the airlines offering the cheaper refundable/changeable fares. These pax are airlines' bread and butter...biting the hand that feeds you generally isn't a good strategy.

    Quoting UA744Flagship (Thread starter):
    Really try to have most bookings occur online or through your own res center

    Most of the majors are already aggressively pursuing this strategy. They encourage booking through their websites by charging service fees for bookings made through call-centers and travel agents. It would be interesting to see the % increases in online bookings for the majors since the service fees were introduced last year.

    Quoting UA744Flagship (Thread starter):
    An everyday low fare environment negates the need for
    excessive corporate discounts and more unecessary layers of management

    The simplified fare structure shakeout is in the works via simplifares. The trick will be to set those rationalized fare structures to levels that generate profit for the airlines. The market appears to be supporting the recent spate of fare increases. Most of the majors are reporting record loads, and this is despite several fare increases over the past few months.

    As for moving to a revenue-generation based loyalty program, I think this is a brilliant idea. Reward the customers who actually add the most to your bottom line. Now, this could lead to a FFP where some leisure flyer (with no particular airline/brand loyalty) who books a one-off transpac flight in paid J or F ends up getting top-tier elite status after just one flight. However, that same one-off passenger won't be a regular customer, so the cost of giving him elite privileges such as upgrages, mileage bonuses, etc would be negligible. The biz pax who fly 75-100K miles per year will be spending enough on tix to maintain top-tier status. Rewards/Points/Bonuses would have to be recalculated. Under current systems, a plat getting a 125% mileage bonus would only have to fly two IAH-AMS roundtrips to rack up enough miles for a US-Europe standard coach award (50,000 miles). The revenue-based rewards systems would have to be geared to provide similar results for elite and non-elite tier levels to remain competitive with airlines offering traditional mileage-based programs.
     
    avek00
    Posts: 3168
    Joined: Mon Oct 25, 2004 5:56 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:22 am

    SimpliFares is revenue negative - why would airlines want to INCREASE their losses?
    Live life to the fullest.
     
    slider
    Posts: 6817
    Joined: Wed Feb 25, 2004 11:42 pm

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:32 am

    First, there doesn't need to be a "wholesale" revamping of the business model. It works fine.

    Secondly, a lot of carriers already HAVE pushed toward more direct bookings, and do in fact have Reward programs that combine not only the MILES you fly but also take into account your VALUE in terms of revenue to the carrier.

    And ditto the value havnig refundable fares.

    Sorry but the premise of this thread is pretty byzantine and misdirected.
     
    whiskeyhotel
    Posts: 291
    Joined: Sun Aug 15, 2004 5:46 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:33 am

    Simplifares would work if the fares were set at profitable levels. That's the problem. A less complicated fare structure set at profitable levels will earn you more money than an overly complicated fare structure (and all the revenue-management overhead required to support it) at the same profitable levels. The problem isn't simplified fare structures (B6 seems to do just fine with a simple system). The problem is fares so low that the majors can't profit from them. Either the majors will slowly die off because they're trying to offer LCC prices with a higher operating cost than their LCC competition, or they'll figure out a way to raise fares to profitable levels. However, it's hard to justify higher fares if the service is no-frills (or even inferior to that offered by LCCs). Would be interesting to see if simplifares have reduced the revenue premium CO was once able to command over the other majors, as they're the only true full-service (domestic ops) major left. I would agree that any fare system that isn't generating a profit is SimpliStupid...but the old system didn't exactly have the majors swimming in cash either.
     
    padcrasher
    Posts: 1815
    Joined: Tue Aug 10, 2004 6:17 am

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:36 am

    Quoting Avek00 (Reply 7):
    SimpliFares is revenue negative

    Almost all the majors have seen RASM increases since Simplifares went nation wide. Delta being the exception, when asked about this the CFO said the yield did not go down as much as expected, but demand increased more than expected so it was a wash. He went on to explain that DL's RASM decrease had to do with capacity increases in new markets.

    I think WN's and Airtran's load factor drop had to do with them abandoning deeper discounting in the wake of Delta's simplifares. So we just may see further RASM increases for the majors.
     
    MaverickM11
    Posts: 15455
    Joined: Thu Apr 06, 2000 1:59 pm

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:49 am

    "First off, you can get a mile for how much you spend on most credit cards.
    "

    Right, which makes a lot of people put more on their credit card to get those miles. If airlines gave a certain number of miles for every dollar spent, there would be an incentive to choose a higher fare--not a strong incentive, but an incentive nonetheless.

    "Second, this idea would lose more lucrative passengers, for instance, a fare maybe $500.00 but the miles traveled is 4,000, so instead of getting 4,000 miles, one is only getting $500. "

    I don't know that that's true. First of all you could give 8 miles for every dollar spent and end up with 4000 miles either way. As average ticket prices go down, the airlines' mileage liability would go down as well, which is a good thing. If average ticket prices go up, so does the liability; you wouldnt have the current issue where a $100 cross country one way fare gets you triple miles that the airline can't possibly ever fund.
    E pur si muove -Galileo
     
    UA744Flagship
    Topic Author
    Posts: 1433
    Joined: Tue Jul 13, 1999 1:55 pm

    RE: Drastic Changes To US Legacy Business Models?

    Sat May 07, 2005 2:55 am

    You guys would be surprised at how conservative the legacies plans are for online/lower cost distribution.

    Going forward, most (if not all) still foresee the lion's share of bookings coming from GDSs.

    JGH1A, thanks for clearing my misconceptions up.
    no wire hangers!

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