Archive for November 21st, 2007

Two Small Planes Collided In Air Over Tacoma, WA

Tuesday afternoon two unknown type small planes collided in the air over Commencment Bay near Tacoma, WA.

Seattle’s KIRO-7 reports the two aircraft, types unknown, collided at around 1240 PST over Commencement Bay. One of the aircraft crashed in the Bay, near Tacoma; the second aircraft landed safely at Thun Field in Puyallup, reports Tacoma police spokesman Thomas Williams, with damage to its landing gear.

Boaters were able to rescue two people from the water, said Coast Guard Petty Officer Tara Molle. Both were transported to a local hospital.

Their condition was not immediately known, nor is it clear whether they were the only two people onboard the submerged aircraft. Coast Guard personnel continue to search the water for the crashed plane.

Source Planenews.com

By Szafi
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Airline Economics – Revenue Management

Earlier we wrote a post about airline ticket prices. In this post we will take a look at the background of this airline pricing model, why it works like that and why it is a misunderstanding that the EU commissioner wants to crack down on airline websites for “unfair airline prices”.

The product

Let’s take a look at an example product, thus it will be easier to understand the theory. There is an airline that operates flights between Istanbul (IST) and Frankfurt (FRA). Its hub is Frankfurt, so it has connecting flights to the New York Kennedy Airport (JFK) US and Toronto (YYZ) Canada departing from Frankfurt. The core product we are going to talk about is the IST-FRA flight.

Costs and break even

As a profit oriented airline we would like to sell all our tickets and gain the highest revenue possible. Profitability means that the result of our operation is positive, so we have more income than cost on a certain product. So first we have to take a look at all our costs. It is not a simple process to calculate all the fixed (FC) and variable costs (VC) projected on a certain route, there are many airline who have never been able to do that, but without that it is impossible to calculate the profitability of a product. So let’s say that our total cost – FC+VC – in our case equals $50 per seat. So the break even is at $50 and if we would like to have a profit on the flight, we should sell seats for an average price that is higher than $50.

Customers

Now let’s take a look at the market. What do we know about the potential customers? We know that there are many-many Turkish people working and living in Germany. We know that their family often travels there to visit them. We also know that many of them go back to Turkey to open a business there, but they still keep on living in Germany. There is another segment: German businesses in Turkey, but also Istanbul is a fun leisure destination as well, with good weather and many things to see, so there will be Germans tourists travelling there. There are some Turkish families travelling to visit friends and family members also in the US and Canada.

Segmentation

The above mentioned types of passengers are our market segments. We have to examine them and find out more about their needs.

  • Family visitors will travel more around the holidays, so we can use higher prices then. They ususally stay more than a week, they have many baggages, they are sometimes elderly people not speaking langauges, so they might need some help around the airport.
  • Businessmen need higher level services, flexibility regarding refundability or changability of the ticket as their agenda might change during their journey.
  • Tourists will be price sensitive. They will easily choose Greece or Cyprus instead of Turkey if they cannot get cheap prices. They do not care about the flexibility of the fare rules.
  • People travelling onward to the US or Canada will buy tickets for the whole journey, so they will not care about the single price of an IST-FRA ticket.

Revenue and capacity management

So now comes the fun part. We have a plane we have to fill with people coming from our different  segments. We have to do it in a way to gain maximum profit possible from these people. For that we have to know how many people will potentially buy our tickets. We have historical data from previous years, so we have a forecast about that. And now have to start to play with the numbers.

The following picture shows a virtual plane with virtual capacity and virtual prices.

Virtual capacity of a flight

The orange numbers show an imagined price for a certain number of seats to be sold for our virtual flight. As you can see, we will sell more seats for a higher price than our $50 breakeven. If we are lucky enough and we can sell 100% of the seats, our flight will be profitable.

  • we will sell the lowest price tickets to tourists, but we will not allow then to refund or modify the ticket, this way we will make sure this income is there.
  • the middle range prices will be offered for family visitors and people travelling to JFK or YYZ. The higher middle prices like$99 or $120 will be applied in the case of passengers who would like to stay more than 2 weeks, they need flexibility on refunds and modification.
  • The highest price and a special service in the separate cabin classes will be used for business and first class travellers.

Of course real life always brings suprises and it might happen that we won’t be able to sell all the tickets. Therefore to keep revenue as high as possible, if we see that higher priced tickets are not selling, we simply close down the lower classes until we are sure, we will have enough income.

Summary

Naturally these are just the basics of revenue and capacity management and in real life there are many other circumstances to consider (e.g. competitors’ prices, seasinality of the travel industry, cultural or sport events, etc). But at least this short introduction gives you an insight why it is not easy to comply with the “Availability” rule of the EU as it is not just the lowest price that cannot be always available at an airline, it can be any of the classes that is closed and sold out.  Last week I saw a commercial abou a very cheap home beer tapping machine, so I thought it would be a nice Xmas gift to my brother, but by the time I called around all the shops, it was sold out. So shall I run to the EU commissioner about it?

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By Szafi

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