Originally Posted by Arnold E
So its better to lose $450M then... pure genius, no wonder your the big cheese and I'm only a LAME
Question comes down to fixed costs per passenger vs variable costs.
If, by charging higher fares, you lose some passengers but keep enough so that the fare increase offsets the loss then you're obviously ahead.
Equally if you lose an additional 1% of your total customers (i.e. 12% of market) then you need to be very careful that the lost revenue is offset by the extra income. Which costs are truly variable (i.e. 1 less passenger means 1 less passenger's worth of cost), which are semi variable (i.e. 1 less passenger equates to a cost saving of a partial share of 1 passenger, I believe fuel would fall into this category for instance) and which are fixed (eg airport handling fees, cost of you MCC, training school etc).
The problem would seem to be that increasing fares will decrease passenger numbers which will mean the semi variable and fixed costs have to be spread across fewer tickets which will then mean you need to increase fares to cover that additional cost per ticket or you make a further loss.
I've had 2 major arguments when consulting to companies who want to kill off what they believe to be non profitable products becasue they have never understood that less products means that the fixed costs allocated to the deleted product(s) must then be spread across the remaining products.
That isn't to say that products should never be deleted, just that all the ramifications need to be explored. As QF have shorn themselves down to 8 international routes that means the entire fixed cost structure burden must be paid for across those 8 routes. No idea how that calculation was undertaken before the routes were deleted but I'd assume a professional organisation like QF would have done so.
Equally if they didn't they wouldn't be the first.