Hmm - it seems that there is fun in twisting my words around. Did I say anything about having an entire J cabin?
Let me lay it out as I see it, and for those that think they can explain it better, please educate me.
Yield Mangement is simple in principle - it's just complex to implement. By way of analogy: my brother is an actuary. One of their jobs is to provide analysis that shows whether it's possible to have profitable outcomes at what statistical probability. The principle is simple - it's the actual implementation that's complex and hard. Yield Management is about getting the most revenue out of each flight - it's the implementation (e.g. working out how many seats at what prices that's tricky).
In the short run:
- Large capital items (like planes) are relatively fixed. You can't easily swap them around in QF's case (because they aren't on short term lease).
- Each flight has a fixed cost, and a variable cost per passenger. If you can't even cover your fixed costs, you might as well not fly, as each flight is just adding to your loss
- Each pax you put on board should at least cover their variable cost - otherwise each additional pax you are putting on board will add to your loss.
- Each pax that covers their variable cost, provides a "per-pax profit" that can be used to offset the fixed cost of the flight.
- If you get enough "per-pax profit" to cover all your fixed costs for the flight, then you've made a profit
- Fixed costs include flying the plane, plus all the overhead of running an airline (which needs to be apportioned amongst all the flights that the airline has)
Anything wrong with the above analysis?
Next, a $300 fare provides more profit per pax than a $100 fare, all other things being equal (e.g. the class of service). A $300 K class ticket SYD-MEL is much more profitable (the per-pax profit above) than a $100 N class ticket SYD-MEL, because the variable cost in both cases is similar, whilst the revenue is much greater.
In the long run:
- Capital is not fixed. Airlines can buy new planes, get rid of old ones, open new routes, ditch old routes, start up new subsidiaries etc.
- If a route was not profitable using a large aircraft, the airline can sub a smaller one. Or if there is huge demand, they can get a bigger plane
- Unfortunately there isn't a plane that has exactly the number of seats of just J and K class passengers - Boeing hasn't made that model yet, so the airline looks to fill the rest of the seats with cheaper passengers, provided they cover the variable cost of filling those seats.
And in aggregate:
Ultimately how much profit the airline makes is shown in the P&L. Total seats/profit = profit/seat. If total profit is $100m and total seats are 10m, then average profit/seat is $10. That's simple maths. It does mean that the pax on a $300 K class ticket did contribute more to profit than the $100 N class ticket did.
NOTE: I am not saying that QF should give up on the N class tickets. I am saying that the K class ticket is more profitable.
OK: what's wrong with the above? (No responses along the lines of "But what would happen if xyz?" Unless you're prepared to also provide an answer to the question)
