Toll grits teeth as VB shares head south
Oracle,
For one who speaks with such authority you dont seem to know all that much
Over half the VB fleet is owned not leased.
A significant portion of the QF fleet is leased not owned
Airline economics 101 says that he who owns too many of his aeroplanes has too much capital tied up in airframes.
The trick is to get the balance right.
As for unit costs, a bigger aeroplane will almost always have a low seat mile cost that a smaller one, however that is only an advantage if you are selling all the seats.
If you are not selling all the seats, the airframe with the number of seats closest to what you are selling is the better choice.
Typically the smaller the aircraft the lower the block cost, so again it is a matter of getting the balance right.
QF run this balancing act by shifting 737-400's, -800's 767's etc onto various city pairs at various times - the 767 for peak operations and the 73's for times when demand is lower.
If they are going to only sell a 737 worth of seats, a 737 is cheaper to run than a 767 - so the advantage of the lower seat mile cost of the 767 is lost.
Yet again there is another balancing act, and that is the number of different aircraft types in your fleet. the more types the more complex and expensive it is to run your airline overall.
By standardising on one type, you save on the complexity cost, but you lose by having markets not available to you - because your aircraft is either too big or too small.
In most cases getting the mix of everything right is more good luck than good management.
As for VB or anyone else going arse up, well there is a lot of water to go under the Australian aviation bridge before that happens. If fuel gets to 200 a barrel, there will be many more issues than just an airline or two going toes up.
Betsy, if you think canning a 3 times a week service is buckling then you need to get out more.
For one who speaks with such authority you dont seem to know all that much
Over half the VB fleet is owned not leased.
A significant portion of the QF fleet is leased not owned
Airline economics 101 says that he who owns too many of his aeroplanes has too much capital tied up in airframes.
The trick is to get the balance right.
As for unit costs, a bigger aeroplane will almost always have a low seat mile cost that a smaller one, however that is only an advantage if you are selling all the seats.
If you are not selling all the seats, the airframe with the number of seats closest to what you are selling is the better choice.
Typically the smaller the aircraft the lower the block cost, so again it is a matter of getting the balance right.
QF run this balancing act by shifting 737-400's, -800's 767's etc onto various city pairs at various times - the 767 for peak operations and the 73's for times when demand is lower.
If they are going to only sell a 737 worth of seats, a 737 is cheaper to run than a 767 - so the advantage of the lower seat mile cost of the 767 is lost.
Yet again there is another balancing act, and that is the number of different aircraft types in your fleet. the more types the more complex and expensive it is to run your airline overall.
By standardising on one type, you save on the complexity cost, but you lose by having markets not available to you - because your aircraft is either too big or too small.
In most cases getting the mix of everything right is more good luck than good management.
As for VB or anyone else going arse up, well there is a lot of water to go under the Australian aviation bridge before that happens. If fuel gets to 200 a barrel, there will be many more issues than just an airline or two going toes up.
Betsy, if you think canning a 3 times a week service is buckling then you need to get out more.
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That would be the $1.5B for the EJets, B777's and some 737's. I understand that some of the 737s VB got on long leases post 9/11 and are quite reasonable.
Most of this comes to that big phrase "break even". How many people on board a plane cover the fixed and variable costs?
From the Embraer website they reckon you only need 62% for a E170 and 61% for a E190 so even if you up that by a few percent for additional costs that would mean you only need say 65% to break even on an E190 so around 68 pax.
A 737-800 would definently not be at break even with 68 pax (more like 136) and a 767 (probably around 175) would be loosing s#$tloads with 68 people on a domestic sector at standard fares. Would seem to me that VB may be able to mix and match for lower volumes in tighter times. Time will tell.
Most of this comes to that big phrase "break even". How many people on board a plane cover the fixed and variable costs?
From the Embraer website they reckon you only need 62% for a E170 and 61% for a E190 so even if you up that by a few percent for additional costs that would mean you only need say 65% to break even on an E190 so around 68 pax.
A 737-800 would definently not be at break even with 68 pax (more like 136) and a 767 (probably around 175) would be loosing s#$tloads with 68 people on a domestic sector at standard fares. Would seem to me that VB may be able to mix and match for lower volumes in tighter times. Time will tell.
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Coaldemon, quite a few of the leased a/c were taken after 9/11, and for very good prices, some of the options for later buys were also just post 9/11, also for very good prices.........
Oracle, If you think that the other airlines won't put their prices up about 10 minutes after VB in the current climate, you're kidding yourself. Where do you get your figures for seats? All the DJ 737's i've been on are either 144, or 177/180.
Oracle, If you think that the other airlines won't put their prices up about 10 minutes after VB in the current climate, you're kidding yourself. Where do you get your figures for seats? All the DJ 737's i've been on are either 144, or 177/180.
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Almost half of the B737s and all the Ejets (currently 7 in service) are owned by Virgin.
All the -700s have 144 seats, only 2 800s have 177 seats with the rest having 180 seats.
Every airline will have to put up airfares, look at Air New Zealand, they've put their's up twice in 2 weeks.
With fuel at it's current price no airline can be making money with airfares at $50 and under.
Hey Betsy,
The same could be said re Tiger pulling out of NTL. Tiger has buckled under pressure from JQ and DJ. At least DJ are still operating to DRW.
There are strong rumours Tiger may pull out of ROK and MKY.
All the -700s have 144 seats, only 2 800s have 177 seats with the rest having 180 seats.
Every airline will have to put up airfares, look at Air New Zealand, they've put their's up twice in 2 weeks.
With fuel at it's current price no airline can be making money with airfares at $50 and under.
Hey Betsy,
The same could be said re Tiger pulling out of NTL. Tiger has buckled under pressure from JQ and DJ. At least DJ are still operating to DRW.
There are strong rumours Tiger may pull out of ROK and MKY.
Maybe Tiger, Virgin and Jetstar could get together and agree a carve up of routes instead of the present blood letting which is costing them all money.
Pity the ACCC wouldn't like it.
Pity the ACCC wouldn't like it.
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Tiger leaving MKY?, it seems that forward bookings are available for the next lot os Schedules.
As Jetstar and Virgin stated a year ago, MKY, ROK just dont have the potential there, but mabye MKY
They should head north to MEL-TSV, or MEL-CNS or even Proserpine ex MEL
As Jetstar and Virgin stated a year ago, MKY, ROK just dont have the potential there, but mabye MKY
They should head north to MEL-TSV, or MEL-CNS or even Proserpine ex MEL
Break even percentage
The use of a percentage figure means nothing without a dollar figure.
It depends on what the punters paid as to whether 65% is break even or not.
I recall Qantas operating 747 services AKL TSV DRW SIN many years back. These services never paid since the break even point, using the average of fares paid over a period, turned out to be 110%. Don't see too many aircraft operating with seat factors of 110%.
When QF withdrew the services "as uneconomic" the locals condemned the operator in much the same way as the CNS locals are reacting currently to reductions of capacity by QF.
So if you say 65% is break even, then you also have to manage your average fare at a value which matches your break even, or you won't break even.
It depends on what the punters paid as to whether 65% is break even or not.
I recall Qantas operating 747 services AKL TSV DRW SIN many years back. These services never paid since the break even point, using the average of fares paid over a period, turned out to be 110%. Don't see too many aircraft operating with seat factors of 110%.
When QF withdrew the services "as uneconomic" the locals condemned the operator in much the same way as the CNS locals are reacting currently to reductions of capacity by QF.
So if you say 65% is break even, then you also have to manage your average fare at a value which matches your break even, or you won't break even.
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Pulling out of MEL-DRW makes complete sense. The planes were only being used instead of sitting on the ground in MEL for the night. The MEL pilots going to DRW were having a great holiday with a 48 hour layover. The CC only operated one sector each so more money there as well. If you can't compete with the competition then you may as well try somewhere/something else.
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The Oracle
You are dreaming....and clearly you know nothing about airline economics. Oracle in your own mind perhaps?
Compass 1 went under not so much because of economic issues but because the PM at the time forced it to, to protect Ansett.
Ansett in turn went tits-up in a large part becuase it had far too diverse a fleet (747's, 767's, 737's, A320's, F28s' F50's etc) for such a small market whereas QF at the time only had 747's, 767's and 737's domestically.
Now QF are stupidly repeating this error. A380's, A330's, A320's, 747-300's, 747-400's, 737's, 767's, 787's and are also talking about A350's and/or 777's. Absolute stupidity. And they are now talking about divesting investments into non-core areas (trucking, freight shipment etc to compete with Toll). This is the very nonsense managers before them spent years untangling themselves from (resorts, television stations etc) as they were deemed to be a drain on the primary business.
So the unit costs for QF (spares, crew utilisation etc) must inevitably be through the roof. That cannot position the airline well when it comes to competing with Virgin or Tiger.
You are dreaming....and clearly you know nothing about airline economics. Oracle in your own mind perhaps?
Compass 1 went under not so much because of economic issues but because the PM at the time forced it to, to protect Ansett.
Ansett in turn went tits-up in a large part becuase it had far too diverse a fleet (747's, 767's, 737's, A320's, F28s' F50's etc) for such a small market whereas QF at the time only had 747's, 767's and 737's domestically.
Now QF are stupidly repeating this error. A380's, A330's, A320's, 747-300's, 747-400's, 737's, 767's, 787's and are also talking about A350's and/or 777's. Absolute stupidity. And they are now talking about divesting investments into non-core areas (trucking, freight shipment etc to compete with Toll). This is the very nonsense managers before them spent years untangling themselves from (resorts, television stations etc) as they were deemed to be a drain on the primary business.
So the unit costs for QF (spares, crew utilisation etc) must inevitably be through the roof. That cannot position the airline well when it comes to competing with Virgin or Tiger.
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Compass went tits up because they were undercapitalised and started a price war they couldn't finish with an aircraft unsuited to their business plan.
It couldn't pay it's bills and as such it's aircraft were "reposessed" by their owners.
It was actually insolvent but kept trading . Some very inventive book keeping made it look otherwise. Hence the criminal charges against it's board members.
A lot of my family were gullible enough to buy shares in them - they , like thousands of others did their money cold.
No conspiracy theories stand up with regard to them , as with the Ansett collapse. Both good airlines but bad businesses and they both paid the ultimate price for it.
The conspiracy theories are just fairy tales.
It couldn't pay it's bills and as such it's aircraft were "reposessed" by their owners.
It was actually insolvent but kept trading . Some very inventive book keeping made it look otherwise. Hence the criminal charges against it's board members.
A lot of my family were gullible enough to buy shares in them - they , like thousands of others did their money cold.
No conspiracy theories stand up with regard to them , as with the Ansett collapse. Both good airlines but bad businesses and they both paid the ultimate price for it.
The conspiracy theories are just fairy tales.
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Just wondering how this new "$50 million package of cost savings and capacity cuts" affects the guys that have recently been through interviews with VB or the ones that have already been successful and waiting to start? Any changes?
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Some of this has been covered before but bears repeating since some posts appear to relish the prospect of the demise of one operator for some perverse reason.
Taken from — CommSec’s analysis of Virgin’s 2007 FY results it refers to Virgin having some fleet flexibility.
Taken from — CommSec’s analysis of Virgin’s 2007 FY results it refers to Virgin having some fleet flexibility.
— VBA leases 46% of its fleet in FY08, and has the option over the next 12 months to exit some of these leases.
— Given capacity constraints and the fact that Boeing has firm orders until 2013, the cost of owning is more economical than leasing. This is particularly so given Virgin still has 23 options on 737s that it negotiated in 2001, and these are available at 2001 prices.
— Virgin will be able to match capacity to routes, eventually utilising the Embraers delivered on 2008 (and as many of the 20 due for delivery in FY ’09 it decides to take) on routes where load factors are relatively lower, (direct services bypassing major hubs) and potentially starting up operations to destinations it does not currently service. For example VBA identified 18% of the Australian market that it does not currently serve.
— Virgin has yet to decide which routes it will service utilizing the Embraers when they come online.
— Given capacity constraints and the fact that Boeing has firm orders until 2013, the cost of owning is more economical than leasing. This is particularly so given Virgin still has 23 options on 737s that it negotiated in 2001, and these are available at 2001 prices.
— Virgin will be able to match capacity to routes, eventually utilising the Embraers delivered on 2008 (and as many of the 20 due for delivery in FY ’09 it decides to take) on routes where load factors are relatively lower, (direct services bypassing major hubs) and potentially starting up operations to destinations it does not currently service. For example VBA identified 18% of the Australian market that it does not currently serve.
— Virgin has yet to decide which routes it will service utilizing the Embraers when they come online.
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I believe there is no hold on recruitment. Courses for both Tech and Cabin crew still running until the end of the year. Virgin still have another 12-14 Ejets arriving this year that require crew.
Last edited by F111; 15th Jun 2008 at 09:05.
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You guys are dreaming....and clearly you know nothing about airline economics. In competitive markets the key to success is having the lowest 'unit costs' and unit costs roughly equate to how many seats you have to sell, the fixed costs per seat (monthly lease rate or not, accruals or not, insurance, etc.) and the direct costs per seat (fuel, crew, maintenance, ramp and enroute charges, etc.). Unit Cost is the basis for the margin you can charge per passenger in order to make a profit and in competitive markets margins are squeezed very tightly through competitive mechanisms.
For airlines pricing is based on studying of short run varaible, medium run variable and fixed costs, the level of competition on a route, as well as segmenting customers with multiple price offers (eg low prices if book in advance) (know as price discrimination in economic literature).
Here short term pricing is done to maximise margin/yield hence many tickets will be profitably sold below the average unit cost, and others sold well above it. This works because its better to sell a seat to someone at a price above the (low) extra costs of carrying the pasenger (even if this is below the averge cost) than to not sell the seat at all. By only offering such cheap seats on selected flights during limited promos etc the airline (or hotel etc) can ensure that other customers who will pay high prices pay a high priceand that there will be seats available at the last minute for people who have to travel no matter what. Hence overall revenue and margin is maximised.
In terms of medium run variable costs the question is more one of choosing the right size aircraft for specific flights. Here the question is NOT average unit cost, but whether the extra cost of upgrading to a larger plane is LESS THAN the extra revenue the extra passengers will pay. The modelling should view the extra passengers as being from the lower revenue ticket classes (the downward sloping demand curve in economics books) since the reduction in capacity will come from reduced seat availability in the cheaper booking classes (ie you keep the remaining seating capacity for those passengers who pay the most).
In the case of a fight for market share the passengers lost from a downgrading of aircraft size are those more likely to move to an ULCC.
In addition an airline could choose to increase its cost base in the epectation that the extra unit cost would lead to increased unit revenues. For example Air NZ's decision to switch some routes from Freedom to AirNZ branding even though the switch incurs the cost of providing pax with food and drink.
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You guys are dreaming....and clearly you know nothing about airline economics. In competitive markets the key to success is having the lowest 'unit costs' and unit costs roughly equate to how many seats you have to sell,
To get the absoute lowest unit costs you have to have a commodity product (ie no frills product): (1) such products tend to aimed at cost sensitive customers and (2) the strategy is easy to replicate (eg Jetstar and Tiger). Hence you are likely to find youself in a price war with several copy cat competitors all fighting for customers who want the lowest price.
One solution is to find a way to add some differentiating attribute to your product so people will pay a little extra for it. You will keeping your underlying costs low, but incur a little extra cost to add that extra something. The trick is to get the mix right (Air NZ Koru Hour) and not find yourself stuck in the middle (Virgin Blue red seats?)
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A distressingly apt analogy, Metro Man. Spot on. ...and if you want fries with that, you'll pay extra again.
Unfortunately, your analogy stretches too to the wages that jobs in that end of the industry pay.
Unfortunately, your analogy stretches too to the wages that jobs in that end of the industry pay.
