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Faro
Posts: 1505
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LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 9:51 am

Do LCC's sometimes price their tickets so low that they don't cover their direct operating costs? Assuming 100% load factor, are ticket prices sometimes so low that they don't cover the aggregate of things like:

- Trip fuel consumption;
- Trip flight crew & F/A payroll;
- Pro-rata aircraft depreciation & interest/leasing expense;
- Pro-rata MX expense/consumables/spare parts; and
- Trip ancillary expenses (overflight & airport charges, ATC, etc).

Is the conservation of market share the only rationale for such pricing or are there other relevant considerations?


Faro
The chalice not my son
 
mandala499
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 10:05 am

Quoting faro (Thread starter):
Do LCC's sometimes price their tickets so low that they don't cover their direct operating costs? Assuming 100% load factor, are ticket prices sometimes so low that they don't cover the aggregate of things like:

Yes and no.

Yes, in that what you see for a flight, is the last fare.
No, in that what matters is the TOTAL REVENUE for a flight.

LCCs usually start off selling dirt cheap very early on for a flight at a certain date. As time nears the actual flight, the price goes up.

The early bird tickets are put into a yield management model, which adjusts the anticipated time yield demand curve. If the early bird gets "more popular than anticipated", then expect the later tickets to go on to the higher price buckets faster... the progress along the yield curve is also monitored, ie. constant refinements.

And then the fare itself is just one component of what the customer pays out in the end. Some LCCs even put in anticipated sales on board into the anticipated total revenue model.

For yield management, the idea for the variable pricing is that you fill all but the last seat (theoretically, the last seat would sell at an infinite price)... because seats on a given flight is inventory, and that inventory vaporizes into thin air once the door is closed.

Mandala499
When losing situational awareness, pray Cumulus Granitus isn't nearby !
 
signol
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 10:14 am

Yes of course sometimes they do. I've bought several tickets on Ryanair for 1p all in including all taxes, £1 all in. I've even bought British Airways tickets for £39, of which £38 is taxes. Yield management is one thing, also the concept of a loss leader - eg supermarket Tesco has tins of baked beans at 9p per tin. This will entice you into the store, and unless you're very disciplined, you'll end up buying other, full-priced items as well. The same goes for the flight - you can then add on luggage, insurance, maybe buy a drink on board, or some perfume or a plane model...

signol
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kl911
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 10:35 am

Ryanair for example only gets 33% of its revenue out of ticketsales. The rest is all either commission on car and hotel rentals, or BOB, luggage fees, priority checkin, etc etc.

I often spend more on BOB then the ticketfare I paid.  
 
JRadier
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 11:31 am

Quoting kl911 (Reply 3):
Ryanair for example only gets 33% of its revenue out of ticketsales. The rest is all either commission on car and hotel rentals, or BOB, luggage fees, priority checkin, etc etc.

Do you have a source for that? I recall it the other way round, that Ryanair topped out at 29% last year, with several other carriers in the same ballpark. Can't recall the source though.
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kl911
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 11:47 am

Quoting JRadier (Reply 4):
Do you have a source for that? I recall it the other way round, that Ryanair topped out at 29% last year, with several other carriers in the same ballpark. Can't recall the source though.

Yes, you are right. Its the other way around.
 
rutankrd
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 11:54 am

Quoting signol (Reply 2):

Yes of course sometimes they do. I've bought several tickets on Ryanair for 1p all in including all taxes, £1 all in. I've even bought British Airways tickets for £39, of which £38 is taxes. Yield management is one thing, also the concept of a loss leader - eg supermarket Tesco has tins of baked beans at 9p per tin. This will entice you into the store, and unless you're very disciplined, you'll end up buying other, full-priced items as well. The same goes for the flight - you can then add on luggage, insurance, maybe buy a drink on board, or some perfume or a plane model...

Yield management by the COMPLEX FARES operators (mistakenly and constantly confused with the term Low Cost Carriers -LCC which is a business model not a fares/pricing system) is a science.

Ryanair and Easyjet especially know to the penny what their break even revenue forecasts for a specific flight are.
They also know historical data booking patterns,buy on board ratios, research local events calendars and adjust the pricing accordingly.

Booking early does NOT get you the lowest fare and nether does booking today traveling within 24 hours, and ideed the very complex computer algorithms employed allow ticket prices (and overall yield per passenger) to change by the minute.

By the way those 1p 5€ plus taxes fares are almost extinct (The way of the DoDo bird) these days, and also those Taxes and charges also include revenue recovery way above what Ryanair and EasyJet and others actually pay out - More to the yield.
 
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Faro
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Sun Oct 23, 2011 11:58 am

Quoting kl911 (Reply 3):

Ryanair for example only gets 33% of its revenue out of ticketsales. The rest is all either commission on car and hotel rentals, or BOB, luggage fees, priority checkin, etc etc.

I often spend more on BOB then the ticketfare I paid.

That is quite amazing...never thought it would have been so low. I wonder what the correlation of these non-flight revenues are with ticket sales. They should be quite close to 100% for the business model to enjoy some measure of stability in time.

Faro
The chalice not my son
 
hal9213
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RE: LCC Ticket Pricing Less Than Direct Operating Cost

Wed Oct 26, 2011 3:41 pm

Quoting faro (Thread starter):
Do LCC's sometimes price their tickets so low that they don't cover their direct operating costs?

Ehm, definately, and not only LCCs. You do not even have to think about that question, when you are constantly bombarded with 1 Euro or 5 Euro fares from Ryanair!! (at least during the recession). For 1 Euro, they cant even finance the fuel to start the engine    Easyjet throws 15-25 Euro fares at you too.
Ryanair once published figures, and they said, the average cost per passenger for an average flight at their average load factor is around 40 Euro.

Lufthansa continuously sells 99 Euro round trip european / domestic tickets, and I believe their average figures for a single flight to be profitable was above than 100 Euro per passenger.

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