Dave Noble said:
I am not sure exactly how QF operates, however it may be that once they have decided to what level to cater the service to, they restrict J sales based on the catered level rather than the number of seats in the aircraft
Dave you raise an intriguing concept, which I guess none of us know the answer to...just for fun, a bit of parody and absurdist humour (forgive me, I'm a Pommie cough!):
A totally hypothetical question! (perhaps a rhetorical one so we don't end up in tireless debate!): Which airline will make more profit and have more loyal passengers, airline X or airline Z?
Airline X:
Imagine airline X, which runs a 737 service on a 3 hour flight between A and B. Their profit break even point is a loading of 70% and since the average price per economy seat on that route is $300 the real cost of that seat is therefore $210.
Now they run a business class and the cost to the airline of that seat is 30% more than an economy seat, thus $280.
Obviously, since every empty business class seat is costing the airline $280 on every flight flown, whether the seat is taken or empty, the airline has a very strong incentive to either sell those seats or lower its frequent flyer point liability by offering seats for redemption and/or upgrade. The potential revenue is $1250 for a paid seat or a $1,075 lowering in liability for a redemption seat or $300 cash plus a $600 lowering in liability for an upgrade seat.
Now
airline X have a strategy that they minimise the number of empty seats on the aircraft because they know that filling a seat is ultimately the driver to increased revenue and reduced liability. Since they cannot fully accurately predict loadings to achieve this they must introduce some leeway into the system, but this comes with a cost, namely, the cost of over-catering. Since a J class meal costs $10,
but an empty seat costs $280 they are not too concerned about the over-catering costs since they will recoup these costs if their strategy achieves even filling
one seat per 88 over-catered meals in the case of an upgrading passenger (the difference between flying an empty seat of -$280 and flying with an upgrade passenger of +$600 reduced liability, but plus/minus 21 meal equivalents depending whether the vacated Y seat is sold). They also know that they have to surpass their magic loading figure of 70% to even start to accrue profit on each flight. They also know that their loyal customers appreciate them delivering on their brand promise of full flexibility with full service levels on paid flights and the opportunity to upgrade whenever there is an available seat. The overhead of the liability of unused frequent flyer points is also kept under control.
The extra meals are costing $1.46 million per year over the entire network (given one per flight), but an average one upgrade passenger per flight over a year is lowering liability by $86.6 million, whilst enticing one extra paid passenger on average per flight is providing $182.5 million revenue.
Airline Z:
Airline Z has exactly the same basic cost and revenue structure and also flies a 737 from A to B.
Airline Z's strategy is to cut costs wherever possible up to the point before the business model collapses. Airline Z has a coterie of very smart managers and accountants who set out to cut costs by defining the business as a series of sub-businesses, catering, engineering, etc, each accountable for their own financial performance. Everybody knows that this is good business!
So they don't stop there. Marginal routes which cannot regular sustain the 70% loadings are dropped. Parts of the busines are outsourced. The shareholders are happy with the $1 billion plus profit and the executive vote themselves $10 millions in bonuses. The executive are so flushed with self confidence that they even flirt with the idea of a buy out demanding a change from a 10% to a 20%+ profit margin and $100 million plus bonuses for themselves.
Meanwhile, the business model is extended downstream. Now every major cost centre has to be run as an accountable entity in its own right. But the catering cost centre is struggling. For J class customers they have already worked to simplify food offerings, downgraded catering on domestic legs of international flights to domestic catering standards, reduced the time periods for flight departures for flights assigned meals rather than snacks, removed pre-dinner drink runs on some flights that used to have them, removed table clothes from domestic flights, and removed real butter from domestic flights. A few loyal passengers have squealed about declining service levels, but most importantly the shareholders are happy and most regular passengers aren't paying for their own fares, their employers are, so let them take what they are given. Most complaining passengers will give up anyway if you ignore their correspondence for long enough.
Then someone has a bright idea :idea: ! Every meal over-catered for is costing $10 a pop, which over 100s flights per day means that for every one over-catered meal per flight the airline could save $1.46 million per year!
Subsequently, all flights become subject to strict catering limitations based on pre-programmed yield management models. Seats are left empty rather than used when the catering limits are reached. Very loyal pasengers even look over at those empty seats and sagely nod in approval - those people at Airline Z really are very good at their business and thank goodness the cabin isn't being diluted with people who have the temerity to expect delivery of a benefit for their unstinting patronage of the airline.
The Airline is saving $1.46 million per year (one meal per flight), and not at all concerned about lowering its frequent flyer liability by $86.6 milllion per upraded passenger per flight per year.
Answer
Airline X will make more profit and have more loyal passengers, but only in real terms. Airline Z will win on paper. Why? Because Airline Z has a yield management program which does not factor the cost of an empty seat into its calculations and the airline's bean counters are using accouting practices, which result in the liability of unused frequent flyer points
not showing against the bottom line, so
the cost of an unused meal can quite literally become more important than filling a seat or looking after a loyal customer.
NOTE: The above are hypothetical scenarios and not intended to represent any specific or actual organisations or individuals, living or dead...all figures cited are also totally hypothetical and not based on any real data. Any similarity to people or organisations is purely coincidental. The above scenarios have been created for comedy and light relief purposes only and should not be used by any airline employees, managers etc. Always read the instructions provided and consult with your CEO to ensure that you are cost cutting only within your own allocated cost centre.
