Delta made 75% of their profit from premium cabins. American makes almost all their money from credit card and frequent flier programs. We have non of those things.

 

I believe you do have a FF program no? As for the premium cabin, that is indeed a difference in the business model and target customer.

As for Delta making 75% from premium cabins, they most likely aren't losing money in the main cabin.

NK was profitable in the past, without premium cabins. Something has changed fundamentally.

I don't mean any of that as a dig on NK crews. JB has its own challenges to work through... I believe they are fundamentally different, but challenges nonetheless. I still think the two airlines coming together will help address each airlines challenges simultaneously. Just need to make it through the crap-storm and come out the other side.

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[QUOTE=Bluedriver;3716980]It doesn't work that way, at all.

Once the airline sets it's flight schedule for the quarter, it's variable costs largely become fixed costs, which gets added to traditional fixed costs. The main costs that are still variable are unexpected mx events and IROPs.

That's one side of the equation. On the revenue side, ticket prices can vary wildly depending on demand. It's the main reason that some quarters are traditionally higher margin quarters than others. But even beyond seasonality of demand, demand itself isn't fixed. If demand for your product is lower than expected either due to reputational stress from past IROPs, or poor customer service, or stress on the socioeconomic class your airline caters to, or even just the general economic cycle of the nation, the airline has to discount tickets to fill the seats. The average fare one month could be $140, the average fare in another month could be $90, even for the same flight schedule. In those two examples the fixed and variable costs remain very similar, but the revenue (money from fares and ancillaries) are dramatically different. So even if the load factors were the same ("my flights were full"), the difference is profitable or not profitable.

Spirit and Frontier have both made public statements recently about "heavy promotional activity and discounts" to fill the seats. That is why full flights aren't guaranteed to be profitable.

https://www.marketwatch.com/story/sp...ivity-123dd758[/QUOTE]

This is actually a good explanation. I do remember reading an article a couple years back saying that ULCCs main catalyst for profits are ancillaries. Those full flight had quite a bit of bags, but no one has insider knowledge of the books. It just feels wrong to have that many pax and bags and not turn a profit.

 

I believe Spirit reports it's ancillary revenue. But ultimately total revenue is what's important, and you can consider the example above to be total revenue, fare+ancillary, all-inclusive in the average fare. The numbers aren't meant to be taken literally, just to show they can vary significantly.

When demand is low, as has been reported by both NK and F9, the airline can either sell less tickets at their normal fare, or sell more tickets but at a discounted rate. Either way the result is less revenue. Generally they would discount the fare to try and fill more seats, and hope that it's more opportunities at up selling ancillary revenue.

But it's clear that fare revenue is down significantly, and ancillary revenue hasn't been enough to make up the deficit.

F9 reports total revenue for the 3rd quarter 2023 as being down 3% from the same quarter in 2022. That doesn't sound like much, but that total revenue was on TWENTY PERCENT HIGHER capacity vs Q3 2022. So they flew 20% more seats than a year ago, but took in less total revenue than the same quarter a year ago! Their load factor was only down slightly, so that means the tickets are selling at a big discount.

 

This is actually a good explanation. I do remember reading an article a couple years back saying that ULCCs main catalyst for profits are ancillaries. Those full flight had quite a bit of bags, but no one has insider knowledge of the books. It just feels wrong to have that many pax and bags and not turn a profit.[/QUOTE]

Again and again, “turning a profit” is not the main goal of a growth company like Spirit. And everyone has insider knowledge of the books, it’s a publicly traded company.

There are other key financial metrics to focus on. With the parked aircraft this year, our Q3 fleet size is nearly identical to the fleet size in Q3 of 2022. The total operating revenue for Q3 was just under $1.3 billion which is down 6.7% from the revenue in Q3 last year. That difference represents the softening demand this year.

When you look at that revenue per passenger, it shows we made 13% less per passenger this year vs last. Translation: we flew more people but didn’t charge them as much money.

The other interesting thing is that when you further break down that average revenue per passenger, the seat fare portion was down, but the ancillary revenue went up slightly, and accounts for 58% of our revenue per passenger. We are making money on bags/etc, but aren’t able to charge as much for the seats in order to compete in this time of lower domestic demand.

Aircraft utilization was actually slightly higher than it was a year ago, but not by much.

Operating costs were also higher than they were last year, and yes we lost money this quarter, but pilot “feelings” about profitability are certainly not what determines the viability of the ULCC model.

 

Spirit was solidly profitable prior to COVID, and that was while Spirit was a "growth" company. F9 is CLEARLY a "growth" company, yet it's stock has been beaten down to almost nothing because it isn't reporting meaningful profits. And even during the post -COVID strong domestic demand, the ULCCs and LCCs recovered the worst. So I don't think it's anyone's "feelings" that the ULCC model isn't scaling in the US, it is becoming evident.

 

Yes. 100%. It’s evident among investors, executives, as well as pilots that the ULCC model is not working like it has in the past. This has nothing to do with “feelings”.

It may be temporary, something might change down the road and tilt the scales back in favor of ULCC’s. But certainly, as it stands, this is a troubling trend,

 

Flying was risky in 2022 for all carriers. Many people were cancelled on and left stranded. So much so it finally seeped into public consciousness of the concerns on being stranded. Perhaps the perception that if that happens to you on an infrequent ulcc city pair you are more screwed than if it happens to you on a legacy.

If the ulccs can operate reliably for a dedicated period perhaps they can overcome that public perception.

 

Actually mortgaged our FF program to the hilt during CovID. I imagine we can’t borrow on it anymore. What’s left for collateral to borrow more money if the merger gets scuttled. I don’t see much.

 

And no one steps back to look at macroeconomic data to explain what’s going on. The well of free Covid money has run dry for the lower economic class, real wages have not increased, and the inflationary effects of printing another 4 trillion and Fed’s QT monetary policy is impacting them first. The trips to Orlando and NY and pairs of Jordan’s on extended unemployment are done. Meanwhile on the other end of the spectrum, some 3.5 million business owners have been filing amended tax returns to claim several hundred billion in Employee Retention Tax Credits over the last year, which the IRS has already flagged with massive fraud. This money wasn’t used to retain employees, but the program is still touted on late night infomercials and millions raked off the top by tax prep companies that will file on your small businesses behalf. This has been a massive windfall to the upper quintile of income earners, which account for over 40% of consumer spending, which account for 70% of GDP… which coincidentally is way up largely due to all the government spending. That boost in high income earner spending accounts for the premium cabin and international ticket boon the legacies have enjoyed this past year.

This is not about a flawed ULCC model or premium cabin superiority, this is about some pretty egregious government spending and subsequent Fed actions that’s about to bite the economy pretty hard.