Ok... there's something in these numbers that doesn't quite pan out for me. I'm hoping that some of the more financially knowledgeable on here can shed some light on this. Every media outlet in the country is talking doom and gloom about how oil prices are killing this industry. I ran some rough numbers in my head yesterday while sitting half way through a trans-con. Looking at the fuel flow I'm seeing a burn rate of about 5000 pph, give or take. That's about 750 gal/hour. The last report I read was that UAL was paying about $3.22/gal for jet fuel at the moment. Ok... now if jet fuel were to go up $1/gal, then the price to operate that aircraft just went up $750/hr right? Now assuming an A319/320 has anywhere from 120 to 154 seats... and assuming an average load factor of just over 80% let's conservatively assume at least 100 pax for the sake of nice round numbers.

So... I'm seeing an additional $7.50 per passenger, per hour in fuel expense, for every dollar increase in jet fuel. This is assuming an Airbus, as I don't know the specifics on the other fleets, but I assume the economies of scale would improve on this as the A/C gets bigger.

My point is that $7.50 per person, per hour is not much! That's less than 50 bucks a ticket on a trans-con! And that's considering 31% increase in the cost of jet fuel. Now granted... as fares go up, some people will elect not to fly. But I can't see that an additional $50 bucks on a cross-country flight is going to scare away that many folks. I think flying is still VERY cheap considering the cost of living has pretty much been marching forward at 3%/year... and people are still paying the same or less to fly that they were 15 or 20 years ago.

Ok beancounters... am I missing something????

 

It is when SWA can charge about 20 dollars per hr less.
In actuality the loss per ticket is about 50-60 bucks. Not much when you think about it. It is the law of compounding that adds up to these losses.
I am not saying we cannot charge more, but these economists that the airlines let set ticket prices are telling them that there is no way to do it.

 

There's also the "overall" economic factor to consider. Although $7.50 per person (or even $25 per person) might not seem like a lot (after all, that's a case of beer right?), remember- not only the airlines are feeling the pinch.

Let's think about a typical family of 4 going to Orlando for vacation. A $10 increase per ticket equates to $40 more. Add in a rental car that might cost 5% more because of softer rental business. Now add in two $50 tanks of gas for that car. Combine that with higher hotel costs, higher food costs and higher general costs of living back home (on a day to day basis).

Before you know it, the family of 4 that wanted to go to Disney, is now driving 20 miles to the local state park for a week of free camping.

The unknown factor is how does raising the price of tickets to a so called "profitable" level affect load factor?

 

If you raise a $250 price by $50, that's a 20% increase, which is significant. To the peolpe who are flying these days, it's a lot of money, especially for a family who buys tickets for the whole family.

When I was in college, the origional Frontier started $29 fares between SLC and DEN on weekends. I was all over those, thought it was great. Then they started raising them a month at a time to $39, then $49, $59, etc. I thought that $ucked, it pi$$ed me off, etc, because I had gotten used to that ridiculously low initial fare. It's all about conditioning, expectations, what you're used to. That's where this whole low ticket price thing has gone wrong. It would be like going to the bus station for a ticket to the next town a 100 miles away and being told, "OK, that'll be $125." "***? $125? Last month it was $75!"

Here's the thing. Everyone...you, me, them, us, whoever, we all want a "good deal" on whatever it is we're trying to get. Car, house, ticket, gas, food. We all do it, look for the lowest price, then think about other considerations. Color, quality, convienence, comfort, etc. Squabbling at yard sales, you want a buck fifty for that lamp? I'll give you a buck. Sold. But it's fun because it doesn't really matter. Contract time at your airline? That matters, and we still want that "good deal" for us. $95 bucks an hour left seat CRJ-900? I want $105. Company stalls, not fun, because it matters. On and on...

 

The way the public buys tickets also is an impediment to a fare raise. These websites rank order flights by price. A single dollar increase could put your airline two or three pages down. Gone are the days of Sabre accessed only by travel agents.

 

I was talking to a friend who recently flew from IAH to London. He was upset that he had to pay $1000 rather than his usual deal of $900. Here is the conversation from that point...
Me: How did you get to the airport?
Him: By cab, about $50 each way.
Me: Soooo, you were willing to pay $100 for a cab to take you a total of 50 miles, but $1000 to take you 9000 (statute) miles was too high?

Now, he is a smart guy (actually works for a UK oil company) and got the point right away..... but he was still annoyed. Imagine how unhappy the average person is to pay an extra 50 bucks to fly to Wally WOrld.

 

You can easily determine what the impact of a price increase will have on load factors based on past fare increases and their affect. They teach it in any MBA program as a way to figure optimum pricing. My guess is the price sensitivity is strong, which is why they don't raise fares but add on luggage charges, etc., that don't show up on the www.cheaptickets.com search.

Two things to consider: One is belly cargo; the second is that fuel really isn't a variable cost - how much does the fuel load change for 1-2 people on a flight? Not much...so you're paying the majority of the fuel costs simply by flying the plane whether it's full or not. This is the reasoning behind the super-cheap fares 1-2 days before a flight with open seats - they want to recover some of the costs, not generate a profit.

HTH
Spongebob

 

It called Elasticity of Demand. If the the price goes up, the number of passengers goes down.

Raising prices will cause an overall DECREASE in revenue because there will be fewer customers.

Let me say that again: Raising prices will cause an overall DECREASE in revenue because there will be fewer customers.

(The same is true of taxes, but that's another forum...)

If the goal is to maximize revenue, then you price the tickets at the point where the two are maximized. If we could make more by simply raising prices, we would have done so already.

 

It is an interesting point. And, I am an -ex bean counter, but have no specialization in the airline biz (iow, your opinion is as good as mine on this one).

I fly the Jungle Jet at present. At cruise it burns about 3,000lbs/hr, lets just say 3,500/hr average for the whole profile, which for most of our hops is above average. So with fuel weighing 6.767 lbs/gal, we have 517 gals/hr. Assuming an 80% load factor for us (50 seat jet), 40 people. That is 12 gallons per person to fly for an hour and cover approx 420 miles or so. 420 miles/ 12 gallons gives 35 miles per gallon per seat. Thar rivals any car out there right now, save for a geo or something.

Speaking of money, that is $38.64 in fuel.

Assuming the airplane is full, that turns into 10.3 gals/hour or $33.29/hour or almost 41 miles per gallon per seat.

This is all based on a fifty seater with bad fuel burn.

I believe a 747-400 burns about 19,800lbs/hr in cruise. So, that is 2,926 gallons per hour. Cost of that is $9,422 per hour. Assuming a cabin cfg of 350 people, that is $26.92 per person per hour. Assuming 450 miles per hour, that is 8.36 gallons per hour or 54 miles per gallon!!

In terms of time that means every pax is paying about 6 cents per mile.

To drive my Jeep Wrangler right now costs me almost 22 cents per mile in fuel.

 

This is true to a point. But, you are looking at it from a revenue viewpoint only, not a total profit viewpoint. If I ran a limo company, as an example....

I can charge x price and have 2 drives per night at $500 bucks each. That is $1000 per evening in revenue. Well, I could do that with one limo. So the fixed cost is y.

I decide to lower the price to $300 for each drive. I now get 4 customers per evening. This time I need 2 limos and another driver.

Revenue is now $1200 bucks, but my fixed costs have doubled. Revenue has gone up by only 20%, but fixed costs have doubled.

Lets say y is 100 bucks (cleaning the nasties out of the back seats, tires, wax, uniforms for the drivers, maintenance, etc) per ride. You were making a profit of $800 per evening. With the price drop and increased revenue, you are still making $800 bucks. Was it really worth it?

Increase fixed costs to $120 per ride. You were making $760, you are now only making, $720. You lose!

Lets say you break even as in the first example, there are other issues than just costs. Lets say every one gets new limos, you have to also to stay competitive. You've now got 2 limos to doff and replace instead of one. What if that second limo doesn't have bookings on that particular evening, your fixed costs stay the same (more or less - I mean tires won't wear and stuff like that), but there is no revenue. You might lose even more money from having it just parked for the evening than if you didn't have it at all.

This is a crude example, but you get the point. And the airline business is WAY more complex than this meager example.