Archive for the 'economy' Category

Ryanair’s New Booking Engine – Now What?

The media was loud about Ryanair’s new booking engine to be launched this Monday. I even read it in the news that they managed to migrate and the turned their site back on even before deadline.

I tried to test it yesterday evening, but I ran into errors all the time. Then I gave it up and tried it again this morning.

Ryanair website screenshotI was surprised to find out that nothing has changed. I tried to book a flight between Budapest and Glasgow for 2 persons. First I received a price of HUF 7990 for the outbound flight and the same price for the return flight. Then I selected them and on the next page I found 14 990 for both ways because of the 2 persons. Besides that on both ways they showed me taxes and fees and in the end the total cost was HUF 54 160 (1 Eur = 260 HUF). So nothing is true about showing gross prices. (See screenshot for details)

I am wondering if they failed the upgrade and this is still the old version of their online booking engine or if this is the new engine and the managed to slap the whole worldwide media on the face.

There is only one more thing to mention about the whole story. I tried to find a media contact to them. It is not available on their website or anywhere else. Although I am a kind of a fan of Mr O’Leary, I don’t get this. it is absolutely not professional.

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

Can Airlines Comply With EU Price Regulations At All?

In our earlier article we wrote about the European Comossion’s point of view on airline prices. EU consumer comissioner conducted a survey that included airline websites, online consolidators and online travel agencies. It tunred out that hardly any of the websites show prices in the way EU requires it. What are the rules?

Clear Pricing: A clear indication of the total price should be given in the headline price first advertised on a website i.e additional charges such as taxes, booking or credit card fees should be clearly indicated from the start rather than added at a later stage of the booking
Availability: Any conditions to the offer, particularly limitations on the availability of an offer, should be clearly indicated. Prices and special offers are often used to lure consumers into the process of booking a flight – in reality there are only a very limited number of seats available under the advertised offer
Fair Contract Terms: General Contract Terms must be clearly indicated, easily accessible and fair. Unfair practices include, mandatory insurance attached to an offer, or where consumers have to explicitly opt-out of an insurance clause, rather than opt-in. Contract terms and conditions must be available in the language of the consumer.

Does any airline or online travel site comply with the regulation?

In our short test we found no known airline or consolidator website that would fulfill all these requirements. The reason is: it is not possible under the present business structure and logic of aviation industry to comply with all these rules.

Clear Pricing

In an earlier article we wrote about the pricing logic of both network and low cost carriers. The situation is that this pricing model has been present in this industry at least since the 70s, but maybe earlier. It is not really understandable why it has become disturbing now.

Airlines have to use this pricing model, because airport costs are not fixed and in a few days it can change dramatically in countries where the local currency is not stable. If they have to reload their prices into the GDSs weekly or more frequently, it is not just a huge extra cost for them, but it requires extra human resource as well. For example in the case of Wizzair I took a look at their Hungarian prices and on their main page they advertised a price for HUF 0/ticket + HUF 5990 for the fees. When I tried to book it, the lowest fee I found with a HUF 0 ticket was HUF 6450. This is an 2 euro difference probably due to the exchange rate between EUR and HUF. Do they comply with the regulation?

Availability

Besides that whoever knows the logic of airline revenue management (we will soon write a post about it) also knows that yes, there are only a few seats available on a very low price, otherwise all airlines will turn to charity foundations and go bankrupt within a few months. Why is it different from a mobile company that advertises a brand new Nokia for $10, but only for customers who signs a contract for 2 years and orders high speed internet with it or something like that?

Fair contract terms

We can say that is is necessary to have an airline website translated into several languages. But let us take an example. If I am a Hungarian passenger travelling from London to Dublin buying tickets on Expedia. What is my language?

I have one more thing to mention: as we know airlines use GDSs to sell tickets and distribute their products. Their online booking engines are built on these GDSs and they follow the same business logic. The EU commissioner had problem with their websites. So what about the whole business logic behind it? If you walk into an airline office, the agent sitting on the other side of the desk will go through exactly the same process and will tell you the same information step by step as it appears on airlines’ websites.

So what is fair?

The goal of the EU commissioner remains unclear. So is it unclear for me how could the EU create such rules apparently without inviting airline professionals to discuss the issue. On one hand I understand that passengers would like to see clear prices and clear business rules attached to these prices. But in order to achieve what the EU commissioner pictures is a huge change for the airline business and it requires much more tolerance and patience. Besides that they have to know and see what their benefit will be, otherwise they are not interested in cooperation.

By Szafi

Atlanta Fighting For Delta

Last Friday’s (16NOV2007) edition of The Atlanta Journal-Constitution has published a group of articles related to Delta CEO Richard Anderson denying all the reports from a day earlier which suggested that Delta is in talks with Chicago based United Airlines about a merger.

Delta plane with Downtown Atlanta in the background (c by usatoday.com)

Atlanta is surely interested in the possible merger news as it is the current headquarters for Delta Airlines and according to early reports the new merged airlines would have their HQ in Chicago, rather than in Atlanta. The two cities, which are 700 miles apart, reacted very similarly to the emerging news.We’d fight like hell” said Paul O’Connor, executive director of World Business Chicago. “It’s personal. It’s a matter of pride.” Sam Williams, president of the Metro Atlanta Chamber of Commerce countered: “The commitment of Atlanta to keep Delta is unwavering,” he said. “It always has been and always will be: ‘Keep Delta My Delta.” He also added that the chamber is supportive of Delta merging with another airline “as long as the headquarters stays in Atlanta.

At about the same time Delta CEO Mr. Anderson went through some tough minutes last Thursday in the Congress in Washington, too. He arrived for a hearing about the awaited air traffic congestion over the upcoming Thanksgiving weekend, but ended up protecting himself and Delta against the merger “rumours”. During the hearing Representative Lynn Westmoreland (Republican from the state of Georgia) challenged Mr. Anderson to assure him that Atlanta-based Delta was not involved in merger talks with United Airlines. Mr. Westmoreland said he was “dissapointed to read in the paper” about the talks. He said he had also read a statement Delta released Wednesday denying that such talks were taking place: “I want to look at you eyeball to eyeball” and hear you deny it, too.I was as surprised as you were, ther are no discussions. There have been no discussions” replied Mr. Anderson. The congressman from Newnan recalled that he was a “ramp rat” for Delta, his daughter was a flight attendant for the airline, and his wife worked in marketing with Delta (!). He said Delta is part of the Atlanta family, and “we don’t want the family to move north. I’m asking you to keep the family informed.” If the talks are indeed happening, it puts Mr. Anderson in a very-very hard position, having an alumni Delta family as the Congressman’s own family… This could be very useful in any other ways, but if the talks are true, it is a misfortune for him personally. But it would be a big help for Delta’s more than 26.000 emplyees in the state (of Georgia) which includes 3.365 at the headquarters alone.

Even though I’m staying in Atlanta at the moment for a month and a half, let’s hear the other side, too as Chicago is also a tough contender in keeping an airline HQ within the city-limits. United can trace its roots in Chicago to the 1920s, and the above quoted Paul O’Connor also said “They are us.” The two airports have been in a rivalry for a long time to clinch the busiest airport title, Atlanta hosted the Olympics in 1996, while Chicago is pushing to land the 2016 Olympics and show itself to the world, just like Atlanta did 11 years ago. Not so long ago Chicago officials heard rumblings about United Airlines looking at real estate in Denver (possibly to move their offices), and they replied with USD 6 million of incentives to persuade the airline to stay and to shift executive offices from the suburbs to downtown Chicago. O’Conner said if the merger talks “firm up, we would do what we could do.” United has about 16.000 employees in Illinois, almost all of whom are in the Chicago area.

Despite the two cities and their business communities fighting already (without anybody acknowledging the rumours) some people have a different opinion. A consultant from Chicago interviewed by The Atlanta Journal-Constitution said: “At the end of the day, it wouldn’t matter as long as they were on time. They all at this point aren’t very good.” No further comment is needed on that one, I think, but “The Tale of The Two Cities Keeping An Airline Headquarter” seems to have started…

(based on the 16NOV2007 edition of The Atlanta Journal-Constitution)

by balint01

The Scandalous Road of A380

On 25 October 2007 the first scheduled flight operated by an Airbus A380 takes off from Singapore to Sydney. Tickets for the first flight were sold on e-Bay for USD 1,25 million. The total profit of the first flight will go to charity. Singapore Airlines is a very caring, proud new owner. They took part in the developments from day one. CEO Chew Choon Seng said at the delivery ceremony: “From today there is a new queen of the skies in air travel.”

The Supersize Queen

The Superjumbo is a record from many aspects. The following numbers present how outstanding this giant plane is. It is 73 m long (as a comparison the width of a soccer field is 73 m). Its wingspan is 80 m and its height is 24 m. The operating empty weight is 277 tons, while maximum take off wieght is 560 tons. Usable cabin space: 630 sq m. In the cockpit there are no more rod controls, normal PC joysticks are used isntead. The big lady requires more space on the ground, too. The early studies thought that the A380 will ruin all runways and taxiways, but the first tests show it harms concrete and asphalt less than Boeing 747 as A380 has 22 wheels, while Jumbo has 4 less. It seems that any airport can accept the A380, but still it needs more space on tha apron and during maneuvering in front of the terminal buildings. Bridges designed for double decker planes are also necessary for simultaneous passenger boarding. Naturally the huge engines make bigger turbulance than other frequently used passenger aircrafts, so more space is needed for taking off or landing after an A380.

Airbus A380 nose by Hervé Goussé (from a380delivery.com)

Flying Wonderland

The huge milady is definately luxurious. The new Singapore Airlines fleet member will carry 471 people on board (the plane itself can be seated up to 800, but the standard 3 cabin – economy, business, first – configuration can have 550 seats). The 399 economy seats will feature and a 23 cm widescreen for 100 movies, 180 TV programmes, 700 cd and 22 radio stations to choose from. The 60 business seats on the upper deck will be laid-out in a 1-2-1 formation, with each seat being 86 cm wide. The business seats convert to a fully-flat bed. The First Class Suites look something similar to old classy train cabins rather than airplane seats. They are cabins and not seats with a full size mattress, a wide screen on the wall and they can easily be transformed from a bedroom to a mini restaurant, where first class passengers can invite their first class mates for dinner. First class cabins can be paired up and opened to a bigger suite with a double bed.

A380 Interior as planned by Emirates (Business Class)

It is not just Singapore Airlines that wants to give special services to its high yield passengers. Emirates that has just reseated it 777 fleet with first class cabins resembling the spirit of the old Orient-Express. They are expected to present similar luxury on board their new A380s. They will probably create more social scenes as well, such as a bar or a fitness room at least that is what Virgin Atlantic plans to do, so they must keep themselves competitive. 🙂 Qantas also plans a bar and even their business class seats will have built-in massage function. Lufthansa has just presented the first part of their new First Class concept by opening a new First Class lounge at Frankfurt and Munich.

The long and winding road

Airbus started planning the development of a Megaliner – as they called it at that time. Their goal was to break the dominance of Boeing in the giant planes segment with its very successful 747. Other competitors also tried to enter the market, but they all failed. It was clearly visible that this segment is too small for more than 2 models, therefore Airbus and Boeing joined efforts and wrote a feasibility study of a common plane together. The common development never started, so following the decision of Airbus’ Supervisory Board on 19 december 2000, a EUR 8.8 bllion project was started. The number 8 in the A380 is a symbol of the double deck and in many Far-Eastern cultures it is a lucky number (and as mentioned above, Singapore Airlines took part from the first day). The number was not that lucky in this case though as the project missed its deadline by 1,5 years and overdrafted its budget by EUR 2.2 billion. The first delay was announced in June 2005 blaming the enormous amount (530 km) of cables needed for each oaircraft. The next delay came in June 2006 followed by a 26% drop in the value of Airbus and the owner company EADS shares. At this point there were serious consequences and the CEO of EADS and Airbus and the A380 programme manager had to leave their companies. It was the new CEO who announced the biggest delay in October 2006 and successfully estimating the first delivery to happen a year later. In connection with the delays, a new scandal came into the sight of both the media and the French parliament. It appeared that before the June 2006 delay announcement, EADS and Airbus high level managers sold their shares. They are accused with internal trading and now a legal procedure is on against them.

What is next?

Seventeen airlines have ordered the A380, including an order from aircraft lessor ILFC. Total orders for the A380 stand at 190, of which 165 were firm as of 30 September 2007. Airbus expects to sell a total of 750 aircraft, and estimated break-even at 420 units, increased from 270 due to the delays and the falling exchange rate of the US dollar. In April 2007, Airbus CEO Louis Gallois said that break-even had risen further, but declined to give the new figure. Industry analysts anticipate between 400 and 880 sales by 2025. As of 2006, the list price of an A380 is US$ 296 to 316 million, depending on equipment installed.

CEO’s celebrating the delivery of the first A380 to Singapore Airlines

It is still unprojectable whether the business model of such a huge tin lady will be successful or not. It can be operated profitably by airlines taht have many long haul flights with huge number of passengers on these routes. The number of such airlines is limited and due to travel seasons it is not sure that even on these routes they can always fill this huge bird. Anyway we keep our fingers crossed, because when seeing such scientific development, we can always see our own evolution.

By Szafi and Balint01

Airline Economics – Ticket Prices

We always see fantastic price offers from airlines. But it is never clear if they contain taxes or not? How much is it whith taxes? And what are these taxes anyway? The following article will explain it all to you.

Today I read it in the news, that British Airways will have to pay a penalty of about EUR 20 000 to the Hungarian Competition Committee, because some of their past commercials were misleading for customers. The Committee’s main problem with these commercials were that they did not say taxes were not included in the price. Earlier SkyEurope, Malev, SmartWings, WizzAir and KLM were penalized for the same purpose. Therefore – at least in Hungary – some airlines started to publish their gross prices. However gross prices can be different at the same airline for the same trip bought on the same day. How can it be?

Basic ticket prices

Pricing is a very sophisticated process at airlines. we can say that almost every airline ha s adifferent pricing model. In general we can say that prices can differ:

– by cabin class: economy class tickets are the cheapest, business class ticket prices are higher and first class ticket cost the most

– by the date of departure. The closer we are to the date of departure when buying the ticket, the higher the prices are. It is thought to be the model of low cost airlines, but it is not true. Thishas always been the model of flight ticket pricing.

– by the rules attached. The less flexibility we need, the cheaper the prices are. Cheapest tickets are not refundable, not modifiable, usually a saturday night has to be spent att he destination and the length of the trip may not exceed 2 weeks. If we need a ticket that can be modified later or refunded or has an open segment (for example we do not know the return date) cost more.

(We will explain the reason of this pricing model in a separate article about airline revenue management.)

The basic ticket prices are paid for the airline and in case of a common operated, so called code share flight the operating and the marketing carrier share the money when the ticket is sold by the marketing carrier.

Taxes

Originally taxes were paid only for the airport. The airports publish their handling and other prices in the same reservation systems the airlines use for booking. They publish these prices in their own currency, that is why these amounts differ from day to day, because the currency converting rates change even within days. This minor change is the reason why airlines do not wish to include taxes in the basic price.

It also belongs to the truth that in case of certain currencies this change my reach bigger amounts as airlines publish their prices for 333 days. We could also say – so what? They can change their prices every week if the want to. This is also a possibility, but publishing airline prices is a difficult and expensive procedure as these prices have to be present in all the reservation systems all around the world. Thus it is understandable airlines do not wish to publish gross prices in all markets. However within the EU it is not a risk.

There is a nice trick about taxes airlines happily use. They did not want to increase prices in the same volume as kerozene prices rose in the near past. Therefore they created a so called YQ tax that is basically the fuel surcharge. This way they could keep prices low and include the extra cost into the taxes that are not shown in the comemrcials. Fuel surcharges are not paid to the airports.
“Other fees”

The other fees section of a ticket contains the so called service fee. Service fee came into the picture when airlines stopped paying regular commission to travel agencies a few years ago. (althoguh they still pay super or marketing commission and similar extras to agencies that qualify for these by selling a huge volume of the airline’s tickets) Instead of paying commissions they launched service fees that they also collect and this way they give some space to agencies to collect the missing commission from the clients directly.

At the same time airlines also started to play with this service fee to direct traffic to their more cost efficient sales channels, such as website or call center. It can easily happen that you pay more for the same ticket, same day, same trip in the airline’s airport office than on their website. The most expensive sales channel for an airline is the travel agency (including online agencies), then comes the city or airport office of the airline, then the call center and naturally the cheapest channel is their own website.

So if you would like to get the cheapest price for a certain flight, you should try to book it for yourself on the airline’s own website. Still it is possible that you will find the cheapest price at another website, because when you first look for it on the airline’s website, only a higher class is open, but in the meantime somewhere somebody in the world cacnelled his ticket, a few minutes later a cheaper ticket will be available.

That is the so called revenue management, but we will take a closer look at it in a different post.

By Szafi

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