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Why do I get wildly different prices when I shop from day to day for my trip?
Why do I get wildly different prices when I shop from day to day for
my trip? I wish there was a pithy one line answer to this question, but alas, there isn?t. With your indulgence, let me boil down a War & Peace sized answer into half a page. Remember, the more you understand how airlines think, the better chance you have of getting the best possible deal. In general, it costs an airline anywhere from 8 to 15 cents a mile per seat to run an airplane. You can see a sample breakdown tracked by the government below: http://www.bts.gov/press_releases/20....html#table_09 What does this mean for the air travel consumer? Let?s use an example from last night?s 8pm U.S. Domestic airfare filing. Northwest Airlines filed an airfare from Ft. Lauderdale, Florida to Portland, Oregon for $160. At 5,386 miles, those seats are selling at 3 cents a mile. It doesn?t take a rocket scientist to figure out they are ?losing? money by selling some seats at that price. Why do they even offer that low price on some seats? The airlines get nothing for an empty seat, so they are willing to sell some seats below cost. The airlines must manage how full they can get a particular plane, and knowing some people will pay more than others, they try to manage right mix of people. The airlines have price points for a particular flight that can range from 3 cents to 2 dollars per mile. In general, business and last minute travelers pay the hefty amounts while many leisure travelers fill up what?s left at below cost. The airlines spend tens of millions of dollars on computer systems to analyze exactly how many seats and at what price they have to sell them to make the most profit. Every time you make a query for a price quote, these computer systems kick into action deciding which price point to release for a given flight. In theory, it should come as no surprise that the quote can differ every time you make it. I apologize for the long-winded answer. But, as one of my favorites, Paul Harvey says, ?Now you have the rest of the story?. |
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Why do I get wildly different prices when I shop from day to day for my trip?
On Apr 7, 4:00 pm, "Ablang" wrote:
Why do I get wildly different prices when I shop from day to day for my trip? Not because of what you wrote - the reason has little to do with average cost and more to do with marginal cost. I wish there was a pithy one line answer to this question, but alas, there isn?t. With your indulgence, let me boil down a War & Peace sized answer into half a page. Remember, the more you understand how airlines think, the better chance you have of getting the best possible deal. Airlines think like any other profit making organization - maximize profit. In general, it costs an airline anywhere from 8 to 15 cents a mile per seat to run an airplane. You can see a sample breakdown tracked by the government below: http://www.bts.gov/press_releases/20...ts060_06.html#... The first set of tables depicts the AVERAGE costs and revenues by available seat miles across all airplanes and all flights. Remember - AVERAGE. That means every single seat is paying its exact share of every cost the airline has - fixed costs as well as variable costs. For example, if there are 100 passengers and a pilot costs $1000, each passenger "pays" $10 for that pilot to fly that plane. The second set of data depicts the average revenues per PASSENGER, not seat. Again, these are averages across all passenger in all seats. What does this mean for the air travel consumer? Opportunity. Let?s use an example from last night?s 8pm U.S. Domestic airfare filing. Northwest Airlines filed an airfare from Ft. Lauderdale, Florida to Portland, Oregon for $160. At 5,386 miles, those seats are selling at 3 cents a mile. You bet they are. It doesn?t take a rocket scientist to figure out they are ?losing? money by selling some seats at that price. Nope - that's where you are wrong. It does take a rocket scientist to figure at that at 3 cents a mile the airline is actually making money on those seats - its to their benefit (profit) to sell those seats at 3 cents a mile rather than fly them empty. Why do they even offer that low price on some seats? It fills airplanes and makes them money. The airlines get nothing for an empty seat, so they are willing to sell some seats below cost. Airlines NEVER purposely sell seats below the marginal cost OTHER than perhpas as a promotion - just like Tide doesn't sell detergent below its marginal cost, either. Every seat sold and every box sold makes a ciontribution to fixed costs and profits - every single one. It HAS to. If it doesn't, its philanthropy. The airlines must manage how full they can get a particular plane, and knowing some people will pay more than others, they try to manage right mix of people. So they aren't selling below cost, now are they. If its cheaper to fly the seat empty than full, they will fly it empty. The airlines have price points for a particular flight that can range from 3 cents to 2 dollars per mile. In general, business and last minute travelers pay the hefty amounts while many leisure travelers fill up what?s left at below cost. NEVER BELOW THE MARGINAL COST! Let me explain. An airline I havs two kinds of costs - fixed and variable. Fixed costs happen every day whether they fly that particular seat or not. The cost of running a reservations center, ticketing, corporate overhead, depreciation/lease fees, baggage handlers, etc. Imagine if in our hypothetical airline that flies 1000 flights per week exactly 1000 miles each in planes that have 200 seats each, these expenses cost $15 million per week. Of course, if I fly the planes full or empty or whether I fly 1000 flights or 999 flights and cancel one, I still will spend 15 million. These are my fixed costs. The other set of costs are called variable costs. Again, imagine a single plane with 200 seats. The variable costs represent the cost of the fuel, airport landing fees, the cost of a crew, wear and tear on the airframe, coffee and drinks served, cleaning, and all the things that happen because I flew the plane. Had the plane stayued on the ground, these costs would not have occured. That is why these costs are called the variable costs for the flight. Imagine that these variable costs are $15,000 to fly it from point A to point B - about 1000 miles apart. That is an average cost of 7.5 cents per seat mile. The actual marginal cost of the passenger mile is less, though since on this flight the only additional cost of a seat full versus empty is the cost of a can of coke and the extra fuel to move 200 pounds of person and 50 pounds of luggage those 1000 miles. Since fuel is about a third of the total variable cost of an airline and a can of coke is $1, the marginal cost per seat mile is 2.6 cents. When the airline sells that seat for 3 cents a mile and the marginal cost is 2.6 cents a mile, it makes money. Can it sell all seats at 3 cents a mile and still make a profit? No. Can it ever sell a seat at less than 2.6 cents a mile and come out ahead of not selling it? NO. And that is why airlines sell some seats at lower prices than others. Because seats with passengers sold at below the AVERAGE cost still make money. The AVERAGE fixed cost is $15,000 per flight. The AVERAGE variable cost is $15,000 sSo, the AVERAGE TOTAL cost of this flight is $30,000, or about 15 cents per seat mile. The marginal cost is 2.6 cents per passenger mile. The airlines spend tens of millions of dollars on computer systems to analyze exactly how many seats and at what price they have to sell them to make the most profit. Every time you make a query for a price quote, these computer systems kick into action deciding which price point to release for a given flight. In theory, it should come as no surprise that the quote can differ every time you make it. I apologize for the long-winded answer. But, as one of my favorites, Paul Harvey says, ?Now you have the rest of the story? Paul Harvey closed with "....and now you KNOW the rest of the story!" My father used to write for Paul so when he's misquoted, you'll understand I take exception. js |
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