WA Airline price War Tipped

[OverRun]

Stick Pusher

Applied some of the daily grind to this 'potential' price war. Must keep the whole thing generic so as not to upset people. Let's imagine two airlines – call them Virgin Pink with 737-800s and Skyeast with F100s.

And let's assume 0.063 Australian dollars per seat-km for the 737-800 in Virgin Pink service on PER-BME and 0.078 Australian dollars per seat-km for the F100 Skyeast on the same route

That's a big difference, but it understates the enormous impact that the 737–800s have on the market. They are one heck of an aeroplane, and they change the whole economic picture. Watch as I run the above numbers all the way through to hard cash.

Basic numbers first – all dollars are good old Aussy dollars:
Boeing 737-800, 177 seats, 0.063 $A per seat-km
PER-BME-PER is about 3354 kms. That’s costing them $ 37,400 to operate the return flight. Add in 20% for head office and marketing contributions, ticket selling costs, etc, and the flight has to make a contribution of $44,880 before Virgin Pink start making a profit.

Fokker F100, 96 seats, 0.078 $A per seat-km
That’s costing them $25,114 to operate the return flight. Add in 25% for head office and marketing contributions, ticket selling costs, etc, and the flight has to make a contribution of $31,393 before Skyeast start making a profit.

Now turn your attention to the price war. Skyeast see a ripper opportunity and go for the BME market. They're pretty hungry so they set their ticket price to breakeven at 65% load factor (that's high). So 62 seats have to pay for the flight. At a ticket price of $506, that's $31,372 income. Close enough to breakeven.

Virgin Pink come in and counter-attack. They're pretty clever marketing types and realise they need to come in at a lower price. Hey "$495 return fare" sounds good. They sell 90 seats at $495, and get $44,550. Close enough to breakeven.

But Virgin Pink have got a bunch of empty seats on their plane still. And there's always people wanting to fly to Broome. And the white rat is charging $800-1000 for a return ticket. So the NEXT 35 seats get sold at a premium of 15% = $569. [relax dave – I'm not going to tell everyone what your real seat pricing mathematics are]. The next 35 seats get sold at another premium of 15% = $655. Sort of a home-made yield management system kicking in. That takes them to 90% load factor, which is pretty good in anyone's book. But just in case they get lucky and have a full plane (must be everyone flying in the school hols), they'll sell the last 17 seats at yet another 25% premium = $818. That gives them a PROFIT of $56747 PER RETURN FLIGHT if the plane is full. Cream on the top. Real bottom line stuff.

Hey dream on VP – why don't they drop the price of the basic ticket. At 100% load factor VP could sell those first 90 seats for $199 and still make a profit of $22,813. Sorry Skyeast. Meanwhile let's use that money to buy an island somewhere. . . .