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Give them an inch and they take $773 million

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Re: Give them an inch and they take $773 million

#41

Post by lancedouglas »

AJ007 wrote: post #14
verroq wrote: post #2

>implying the flights stayed 80% full after new seats were added >implying decreased customer satisfaction didn't hurt their revenue >implying their systems didn't need to scale because of increased customers >implying their R&D on smaller legroom didn't cost anything >implying upgrading planes didn't cost anything >implying more customers on planes didn't have an impact on maintenance costs >implying revenue means a…

Ah, faulty assumptions (and in this case a mathematical equation leaving out a critical piece) leading to surprising numbers. Why stop at 1" and not take all 31? Unlimited money.

Awesome... lol

Re: Give them an inch and they take $773 million

#42

Post by mistercow »

I feel like saying "a single inch" like it's a pittance when we're talking about airplane legroom is a bit silly. Sure, it seems small compared to the other 31 inches, but that's not a fair comparison, because most of those 31 inches are non negotiable.

Realistically, we're talking about at least a 5% reduction in leg room, and that's nothing to sneeze at.

Re: Give them an inch and they take $773 million

#43

Post by lifeisstillgood »

patio11 wrote: post #8
verroq wrote: post #2

>implying the flights stayed 80% full after new seats were added >implying decreased customer satisfaction didn't hurt their revenue >implying their systems didn't need to scale because of increased customers >implying their R&D on smaller legroom didn't cost anything >implying upgrading planes didn't cost anything >implying more customers on planes didn't have an impact on maintenance costs >implying revenue means a…

The prevailing theory among air carriers is that demand for flights is totally exogenous to the industry and allocation of flights between carriers in the industry is, for most customers (e.g. not frequent business travelers, who are price insensitive and care about mileage), dependent pretty much solely on price. Accordingly, minor decreases in comfort which add capacity are pretty much an auto-win. Many people disl…

I recently bought an uncomfortable flight - mostly because there was no information on legroom on the purchasing system (designed in '70s and wrapped in web goodness)

Ultimately until the information to differentiate between flights is provided at POS all anyone can judge on is price.

A poster below has enough flight experience to know that United has less legroom and he is willing to pay a premium to avoid that. However that is only because he has external to the transaction knowledge.

If airlines want to differentiate their products they need to differentiate from POS backwards. That is a reworking of a vast network of affiliate sales. Maybe they could do it (anyone can book online) but I doubt anyone will take the risk

Re: Give them an inch and they take $773 million

#44

Post by tiredofcareer »

mehwoot wrote: post #38
tiredofcareer wrote: post #21

Earlier quoted context omitted.

For most customers, maybe, but I suspect there's a pretty sizable portion of the population (myself included) that will happily pay more for an airline that treats me extraordinarily well, considers my comfort while on board, and gives me reasons to shout their name down the street. For example, Virgin America is one of those airlines for me, and I will happily pay a premium to fly one of their tragically few routes…

For most customers, maybe, but I suspect there's a pretty sizable portion of the population Yup, and for those two things you mention that you are willing to pay more for, there are probably 98 other things you aren't. Each person will have the things they are willing to pay more for, and most will be different, so for most services, 98% of people are going to choose the cheaper option. Hence most companies won't giv…

I wouldn't be so sure. I pay a rent premium for a view.

Re: Give them an inch and they take $773 million

#45

Post by ojbyrne »

lifeisstillgood wrote: post #43
patio11 wrote: post #8

Earlier quoted context omitted.

The prevailing theory among air carriers is that demand for flights is totally exogenous to the industry and allocation of flights between carriers in the industry is, for most customers (e.g. not frequent business travelers, who are price insensitive and care about mileage), dependent pretty much solely on price. Accordingly, minor decreases in comfort which add capacity are pretty much an auto-win. Many people disl…

I recently bought an uncomfortable flight - mostly because there was no information on legroom on the purchasing system (designed in '70s and wrapped in web goodness) Ultimately until the information to differentiate between flights is provided at POS all anyone can judge on is price. A poster below has enough flight experience to know that United has less legroom and he is willing to pay a premium to avoid that. How…

http://www.seatguru.com/

Re: Give them an inch and they take $773 million

#46

Post by conjecTech »

dangrossman wrote: post #4

I've been underestimating the size of the airline industry. I have a hard time reconciling the fact that the airlines always seem to be on the verge of bankruptcy with numbers this big -- $90+ billion a year in just passenger revenue.

Running an airline is an enormously fixed cost business. At 75% occupancy, you are barely covering the costs of renting airplanes and terminals, paying personnel, etc. Once you are clearing enough to pay all of that, your marginal profit margin jumps tremendously because all those costs don't increase with the number of passengers you have, so the only thing you have to pay for that extra person is gas, which is about 20% of the ticket price. That necessarily leads to a boom-bust type industry. Southwest has been consistently profitable to the extent that they have tried to actively undo that. They do so by flying out of airports with cheaper terminal rents, reducing the size of their maintenance crews by only flying 1 or 2 models of aircraft, etc. A professor at NYU posts lectures from his corporate finance classes online and actually goes through a thorough analysis of the industry in one of the lectures. Link: http://pages.stern.nyu.edu/~adamodar/

Re: Give them an inch and they take $773 million

#47

Post by jcampbell1 »

jdoliner wrote: post #34
endtwist wrote: post #12

Earlier quoted context omitted.

While these numbers will never be perfect, per se, RITA[1] shows that in 2011, Southwest's loadfactor was 80.8% while in 2012, loadfactor was 80.4%. So, the flights remained around 80% full on average. I took this into account in my calculation and assumed roughly 4.8 more seats were filled on average per flight, not a full 6. [1] http://www.transtats.bts.gov/carriers.asp?pn=1

I think the key question then is why it was that 4.8 more seats were filled on average per flight. If we had data the showed that the distribution of plane occupancy were the same year over year save for a few occasions where last year the plane had been at capacity but this year those extra 6 seats had been put to use then the conclusion could be valid. However with the data I've seen so far it seems spurious to con…

Assume the pricing for seats is as follows:

$100 for first 50% of capacity

$120 for next 20%

$170 for next 20%

$300 for next 5%

$600 for final 5%

What is the revenue impact of expanding capacity? The solution is not obvious, but the author's approximation is more accuare than you suggest. You obviously can't solve this without a stochastic ticket demand model, but 4.8 is much closer to the right answer than 0.

Re: Give them an inch and they take $773 million

#48

Post by zackzackzack »

mistercow wrote: post #42

I feel like saying "a single inch" like it's a pittance when we're talking about airplane legroom is a bit silly. Sure, it seems small compared to the other 31 inches, but that's not a fair comparison, because most of those 31 inches are non negotiable. Realistically, we're talking about at least a 5% reduction in leg room, and that's nothing to sneeze at.

You obviously are not above average in terms of height. I'm 6'5" and planes are a nightmare of cramps and bruised knees. A single inch can mean the difference between being able to sleep comfortably on a long flight and staying awake while stiffening up for eight hours.

Re: Give them an inch and they take $773 million

#49

Post by URSpider94 »

tiredofcareer wrote: post #44
mehwoot wrote: post #38

Earlier quoted context omitted.

For most customers, maybe, but I suspect there's a pretty sizable portion of the population Yup, and for those two things you mention that you are willing to pay more for, there are probably 98 other things you aren't. Each person will have the things they are willing to pay more for, and most will be different, so for most services, 98% of people are going to choose the cheaper option. Hence most companies won't giv…

I wouldn't be so sure. I pay a rent premium for a view.

Yes, but presumably you looked at the apartment first.

Unless airline search sites start listing seat pitch, amenities, seat recline, in-flight entertainment quality, etc. next to the ticket price when selecting a fare, it's hard to see how these factors would play into a purchase decision.

Even if the data were there, I'm wagering that the lions share of customers would keep $20 in their pocket at the cost of some minor discomfort.

Re: Give them an inch and they take $773 million

#50

Post by kayoone »

UKs Ryan Air was even proposing ideas of having people stand during flights (yep, its really that ridicolous) and letting people pay to use the lavatories...

Not that they would get through with that but still, they are searching for every inch to make more money.

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