WA Airline price War Tipped
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G .T, just let your mate Bill M go. old news that plays like a broken record... could have finished the sentence at 'skill' but had to do the same old same old...
Overrun, where do you, and how do you come up with such figures out of interest????
Overrun, where do you, and how do you come up with such figures out of interest????
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All part of the daily grind. The technically interesting bit had been determining the regression coefficients for the F100 fuel burn.
The challenging bit is getting the true price paid for fuel by each airline because that varies quite a lot.
Other details like cross-correlating the insurance premium between airlines are checked using the well known business formula: the smaller the airline, the bigger the premium. The maintenance cost database is kept up to date from the TV news: falling share price + CEO wearing expensive trendy suit, platinum AMEX card and cheesey accountant smile = maintenance cost trending down.
All part of the daily grind. The technically interesting bit had been determining the regression coefficients for the F100 fuel burn.
The challenging bit is getting the true price paid for fuel by each airline because that varies quite a lot. Other details like cross-correlating the insurance premium between airlines are checked using the well known business formula: the smaller the airline, the bigger the premium. The maintenance cost database is kept up to date from the TV news: falling share price + CEO wearing expensive trendy suit, platinum AMEX card and cheesey accountant smile = maintenance cost trending down.
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Stick Pusher:
Possibly you miss read my post or I didn't make it that clear BUT what I was saying was that BM would have had a very difficult time with the F100. I am not suggesting for one minute that had he still been at Skywest the F100 problem would be solved.
GT
Possibly you miss read my post or I didn't make it that clear BUT what I was saying was that BM would have had a very difficult time with the F100. I am not suggesting for one minute that had he still been at Skywest the F100 problem would be solved.
GT
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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. . . .
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. . . .
Last edited by OverRun; 12th Jul 2003 at 09:22.
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Over run
Your maths are very good but some key facts have been forgotten.
The lease costs of the 737-800 are significantly higher than the F100 and must fly a great deal more to recover that cost. That means back of the clock flying and I am sure VP would rather commit a new A/C to a schedule on the SYD-MEL route before they commit it to Broome, so at best VP would schedule the broome service as an night flight like ADL-BME.
If this is the case then where are VP going to pick up another 168 people each way to make that profit? it might work for the Dry but it isnt going to work in the wet!
If we use your best guess that VP can get 90 pax at $495 then Skyeast could use the same cost and sit those 90 pax on the F100 that is already based in Perth, at prime time.
That would give Skyeast a reveune of $44550 which equates to a profit of $13157 for the round trip. Do that 7 times a week and they are returning 4.8 Million a year. Not a bad profit for an A/C that would cost less than that to buy.
Whilst the 737 has proved it's self to be the back bone of the low cost operations so far look it only works for cities with a population of greater than 50,000. Broome does not fit that category even in the dry.
Maybe it would be interesting for you to look at the jetblue model or germania becuse both of them have achieved success without the 1960's designed 737, and both seem to be making money.
Your maths are very good but some key facts have been forgotten.
The lease costs of the 737-800 are significantly higher than the F100 and must fly a great deal more to recover that cost. That means back of the clock flying and I am sure VP would rather commit a new A/C to a schedule on the SYD-MEL route before they commit it to Broome, so at best VP would schedule the broome service as an night flight like ADL-BME.
If this is the case then where are VP going to pick up another 168 people each way to make that profit? it might work for the Dry but it isnt going to work in the wet!
If we use your best guess that VP can get 90 pax at $495 then Skyeast could use the same cost and sit those 90 pax on the F100 that is already based in Perth, at prime time.
That would give Skyeast a reveune of $44550 which equates to a profit of $13157 for the round trip. Do that 7 times a week and they are returning 4.8 Million a year. Not a bad profit for an A/C that would cost less than that to buy.
Whilst the 737 has proved it's self to be the back bone of the low cost operations so far look it only works for cities with a population of greater than 50,000. Broome does not fit that category even in the dry.
Maybe it would be interesting for you to look at the jetblue model or germania becuse both of them have achieved success without the 1960's designed 737, and both seem to be making money.
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OverRun your BASIC figures need a bit of massaging. Virgin PINK may have 168 seats but Virgin BLUE 800's ALL have either 177 seats or 180 seats. Hope this helps with you new calculations!
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I'm still not sure where you came up with the 0.063 and 0.078 at the start of your intersting theory...
? and assuming this is true the other differences between the two airlines are that Skywest is a West Aussie Airline with has great patronage and will fly at the right times all year not at the back of the clock and only when the going is good (ie dry season) plus QF F/F the through check-in and full in flight service and a hell of alot more leg room than any 737 - assuming that all of this happens.
I guess we will have to wait and see...
? and assuming this is true the other differences between the two airlines are that Skywest is a West Aussie Airline with has great patronage and will fly at the right times all year not at the back of the clock and only when the going is good (ie dry season) plus QF F/F the through check-in and full in flight service and a hell of alot more leg room than any 737 - assuming that all of this happens.I guess we will have to wait and see...
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Another dimension to this discussion is that Virgin Pink or Blue now has 30% of the market and says it wants 50%. QF says its natural share should be 65-70% and after that it gets nasty.
The nasty time of course comes from August on when Virgin starts to get its 10 new 737-800s and QF' Geoff Dixon will start to see "red". Skywest will hope that the squadrons of Virgin Pink 737s fly Eastward to Fiji and NZ but I wouldn't bank on it.
The fact remains however that two 737-800 will be over-nighting in Perth.
Don't for one second think West Australia's will be loyal to Skyeast. It didn't help East-West owned by Ric Stowe and it doesn't help Qantas in its competition with Garuda/Thai/MH or SQ. It counts for absolutely nothing. And it didn't help Ansett in its battle with Virgin Blue.
You can dispatch that dream along with MU2's "there will be no price war" and Neville Chamberlains' "Peace in out time" forecasts to the scrap heap.
Far too many passengers will swap airlines for $20 on a $1000 fare, and I have senn even less!
GT
The nasty time of course comes from August on when Virgin starts to get its 10 new 737-800s and QF' Geoff Dixon will start to see "red". Skywest will hope that the squadrons of Virgin Pink 737s fly Eastward to Fiji and NZ but I wouldn't bank on it.
The fact remains however that two 737-800 will be over-nighting in Perth.
Don't for one second think West Australia's will be loyal to Skyeast. It didn't help East-West owned by Ric Stowe and it doesn't help Qantas in its competition with Garuda/Thai/MH or SQ. It counts for absolutely nothing. And it didn't help Ansett in its battle with Virgin Blue.
You can dispatch that dream along with MU2's "there will be no price war" and Neville Chamberlains' "Peace in out time" forecasts to the scrap heap.
Far too many passengers will swap airlines for $20 on a $1000 fare, and I have senn even less!
GT
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Thanks Sperm Bank, finger trouble in the transfer from excel, fixed it now, nothing changes. Still $56747 per flight profit on top of contribution at 100% LF.
The issue is the relative size of the planes - not the difference in operating costs or airline or even the boss. The operator of the small plane is at a disadvantage in taking on the operator of a larger plane. As GT said above Skywest would, in my view, make a serious error of judgement in taking on Qantas, and almost certainly Virgin Blue on Broome. Their smaller plane has to struggle against bigger ones simply because it is the smallest.
Just as an aside, the proponents of open skies and 'economic rationalisation' in WA completely miss this point of relative aircraft size. Skywest drivers can take heart from the fact that anyone with Metros going up against F50s can be made to suffer the same crunch.
Deriving this point of relative size theoretically, the operator of the smaller plane is constrained by the need to breakeven. Breakeven level, in turn, is controlled by the variability of pax loadings. For planning purposes, they haven't got much room to move when they set breakeven ticket price. Breakeven at 65% load factor is pretty high [and optimistic]. With 96 seats and 65% LF, that means that any F100 operator only has 62 seats to pay for the cost of the flight. Breakeven fare (calculated as per my previous example) is driven by aircraft size and is somewhat independent of the competition.
Then in comes the owner of the bigger plane. Even if they match the smaller plane ticket prices, they end up with quite a few spare seats on their plane. Those empty seats can be sold at any price or even given away [don't get me started on the dirty work stuff with holiday wholesalers owned by airlines], and can be used to bludgeon the operator of the smaller plane.
Look at the way that DJ have tackled QF – they have been very careful not to go head-to-head with them so that their 177/144 seat planes don't get crunched by the QF basket of 270-450 seaters. They don't want to get bludgeoned by QF [hands up all those that think that the White Rat wouldn't do this]
To show it in figures, I re-ran the PER-BME-PER scenario assuming that the two aircraft had exactly the same seat-km cost = 0.063 dollars per seat-km. Interesting. The required contribution from the F100 at breakeven is down from $31393 to $25,356. That drops their ticket price to $409. Virgin Pink counter with $395, and have to sell 113 seats to get $44,240 – close to their breakeven of $44,880. They still have 65 empty seats on the plane all-paid for.
Staying with the same yield management maths above, i.e. a 4 fare system and 15% premiums, the next 24 seats get sold at a premium of 15% = $454. The next 24 seats get sold at another premium of 15% = $522. That takes them to 90% load factor. Then they sell the last 17 seats at another 25% premium = $652. That gives them a profit of $34540 per return flight.
Not sustainable day after day of course, but good enough to bludgeon the operator of the smaller plane. The bigger plane wins.
Jetpipe makes the point that issues such as the size of the total market still have to be considered as well as the variability of the market throughout the year, and that is very valid. Add in the need for frequency and the market size issues as well. But it doesn't change the advantage of the bigger plane.
It makes me think of the third part of the marketing triangle, which is the need for deep pockets to fight a fares war. And that applies at all levels and routes – not just in WA. At the national level, we can see this shaping up today as the forces gather to tackle QF.
Domestically, QF has got it sown up beautifully right now. They have got frequency and customer-friendly planes on the east coast business routes (score one for their Citiflyer, and remember to flush the last CRJ down the toilet). They have got Big Planes on the trunk routes to bludgeon the operators of any smaller planes foolish enough to meet them head on (using the methods as described hereinabove). And they have the corporate deals, frequent flyers, and international on-carriage to keep the business market tightly grasped. It's going to be very, very hard for anyone to knock them off their perch, however many PPRUNE trial balloons are floated. When Doganis writes edition 4 of the textbook on airline economics in 10 years time, the QF strategy team will be held up as exceptional. To beat QF will take a real slugging match and deep pockets.
Far be it from me to comment on how QF would counter that potential competition. If it was me, I would start to accumulate cash now before the new guys come in. Can't put the fares up or DJ will jump me, so I have to slash costs. Thank goodness for a crisis – can sack a few more workers. Then I need to hide the extra cash or everyone will get jealous of it. Hmm – I know – I'll buy some new planes – pay outright for them – no leases. That'll soak up the cash for now and will lose it in the balance sheet. Then if I need the deep pockets, I can sell and lease back as many planes as I need. Should be able to cash up about $A200 million every plane I do that with. Remind me to start a rumour that my planes are old and I desperately need some new ones . . . . .
The issue is the relative size of the planes - not the difference in operating costs or airline or even the boss. The operator of the small plane is at a disadvantage in taking on the operator of a larger plane. As GT said above Skywest would, in my view, make a serious error of judgement in taking on Qantas, and almost certainly Virgin Blue on Broome. Their smaller plane has to struggle against bigger ones simply because it is the smallest.
Just as an aside, the proponents of open skies and 'economic rationalisation' in WA completely miss this point of relative aircraft size. Skywest drivers can take heart from the fact that anyone with Metros going up against F50s can be made to suffer the same crunch.
Deriving this point of relative size theoretically, the operator of the smaller plane is constrained by the need to breakeven. Breakeven level, in turn, is controlled by the variability of pax loadings. For planning purposes, they haven't got much room to move when they set breakeven ticket price. Breakeven at 65% load factor is pretty high [and optimistic]. With 96 seats and 65% LF, that means that any F100 operator only has 62 seats to pay for the cost of the flight. Breakeven fare (calculated as per my previous example) is driven by aircraft size and is somewhat independent of the competition.
Then in comes the owner of the bigger plane. Even if they match the smaller plane ticket prices, they end up with quite a few spare seats on their plane. Those empty seats can be sold at any price or even given away [don't get me started on the dirty work stuff with holiday wholesalers owned by airlines], and can be used to bludgeon the operator of the smaller plane.
Look at the way that DJ have tackled QF – they have been very careful not to go head-to-head with them so that their 177/144 seat planes don't get crunched by the QF basket of 270-450 seaters. They don't want to get bludgeoned by QF [hands up all those that think that the White Rat wouldn't do this]
To show it in figures, I re-ran the PER-BME-PER scenario assuming that the two aircraft had exactly the same seat-km cost = 0.063 dollars per seat-km. Interesting. The required contribution from the F100 at breakeven is down from $31393 to $25,356. That drops their ticket price to $409. Virgin Pink counter with $395, and have to sell 113 seats to get $44,240 – close to their breakeven of $44,880. They still have 65 empty seats on the plane all-paid for.
Staying with the same yield management maths above, i.e. a 4 fare system and 15% premiums, the next 24 seats get sold at a premium of 15% = $454. The next 24 seats get sold at another premium of 15% = $522. That takes them to 90% load factor. Then they sell the last 17 seats at another 25% premium = $652. That gives them a profit of $34540 per return flight.
Not sustainable day after day of course, but good enough to bludgeon the operator of the smaller plane. The bigger plane wins.
Jetpipe makes the point that issues such as the size of the total market still have to be considered as well as the variability of the market throughout the year, and that is very valid. Add in the need for frequency and the market size issues as well. But it doesn't change the advantage of the bigger plane.
It makes me think of the third part of the marketing triangle, which is the need for deep pockets to fight a fares war. And that applies at all levels and routes – not just in WA. At the national level, we can see this shaping up today as the forces gather to tackle QF.
Domestically, QF has got it sown up beautifully right now. They have got frequency and customer-friendly planes on the east coast business routes (score one for their Citiflyer, and remember to flush the last CRJ down the toilet). They have got Big Planes on the trunk routes to bludgeon the operators of any smaller planes foolish enough to meet them head on (using the methods as described hereinabove). And they have the corporate deals, frequent flyers, and international on-carriage to keep the business market tightly grasped. It's going to be very, very hard for anyone to knock them off their perch, however many PPRUNE trial balloons are floated. When Doganis writes edition 4 of the textbook on airline economics in 10 years time, the QF strategy team will be held up as exceptional. To beat QF will take a real slugging match and deep pockets.
Far be it from me to comment on how QF would counter that potential competition. If it was me, I would start to accumulate cash now before the new guys come in. Can't put the fares up or DJ will jump me, so I have to slash costs. Thank goodness for a crisis – can sack a few more workers. Then I need to hide the extra cash or everyone will get jealous of it. Hmm – I know – I'll buy some new planes – pay outright for them – no leases. That'll soak up the cash for now and will lose it in the balance sheet. Then if I need the deep pockets, I can sell and lease back as many planes as I need. Should be able to cash up about $A200 million every plane I do that with. Remind me to start a rumour that my planes are old and I desperately need some new ones . . . . .
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Over Run
Great post that makes one think, regarding big planes do
smaller ones I just had a look at Mondays flights SYD-MEL
for both DJ and QF and notice that:
Virgin Blue
19 flights with 737s
approx 3040 seats
Qantas
27 flights made up of
16x 767-300s
4x 767-200s
4x A330-200
3x 737-400s
approx 6000+ (Don't know exact seating Numbers)
Yet, Mr Dixon reports that Virgin have 35% of the main
trunks market, as Profesor Julius Summner-Miller would say
"How is this so"
Great post that makes one think, regarding big planes do
smaller ones I just had a look at Mondays flights SYD-MEL
for both DJ and QF and notice that:
Virgin Blue
19 flights with 737s
approx 3040 seats
Qantas
27 flights made up of
16x 767-300s
4x 767-200s
4x A330-200
3x 737-400s
approx 6000+ (Don't know exact seating Numbers)
Yet, Mr Dixon reports that Virgin have 35% of the main
trunks market, as Profesor Julius Summner-Miller would say
"How is this so"
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go_dj
"How is this so?" Well they came in through the back door. That's quite a stack of Big Planes that you list on the route, against the DJ smaller planes. Makes a mockery of the small planes vs big planes theory if DJ were taking on Qantas. But they haven't been up until just recently.
Step one for them was the classic low-cost model of Southwest, and DJ slavishly followed that. When DJ started off in Oz, they stayed rather clear of Sydney and avoided going head-to-head with QF. They looked for the 'undeveloped' routes. Their Southwest trained people did their strategic planning based more on bus and train timetables than airline timetables. They built their core business on these principles.
After AN fell over, QF got handed a massive market share in the domestic market. So DJ had to develop a new model for the sake of survival. QF was amassing money rapidly, and could use that to fund a long drawn out fare war that would eventually crush DJ. Umm, wasn't this round about the time that Richard B was running scared about his investment in DJ? Anyway, the Step Two model adopted was the spoiler - knock off the QF cashcows that gave QF the profits they needed to attack DJ with. Doesn't have to be a big spoiler or involve many flights – just enough to spoil the cashcow. By now DJ core business was well established, so a small percentage of flights could be safely thrown into the SYD-MEL ring to fight QF. Typically this was limited to about 5% of their capacity.
Step 3 came when the unexpected crawled out of the woodwork. Clutching their pillows in one hand and bubble gum in the other, the SYD-MEL flights filled up. Not with airline passengers – but with ex-bus and train passengers. This was predicted in the Southwest book, but not many people thought that it could really happen on an Oz mainline route full of business travellers, with no low-cost airline tricks like secondary airports to fly into. DJ could and did put on more aircraft, and they kept filling up too. The analysts couldn't believe it. The DJ departure gates often had 3-4 suits hanging around – 1-2 genuine travellers, and 2 analysts standing there counting who was getting on and how many business travellers there were. I used to. And there weren't many business travellers. So who were these people? QF was selling just as many tickets as before, and couldn't understand it. The analysts at the gates didn't know. Eventually it dawned on everyone that DJ had expanded into a genuinely new SYD-MEL market.
Step 4 is now, which is the DJ entry into the business market. DJ still keep the SYD-MEL flights down to less than 10% of their capacity, so SYD-MEL is not the core of the business. If the buses or trains or QF ever get too tough, DJ can leave 4-5 flights a day on the route to spoil the cash cow, and go and play with the rest somewhere else or hand the oldest planes back to the lessors (Compass didn't have those options). Now, and I suspect this came from Chris C, if there are all these DJ flights going back and forth SYD-MEL, what about spending a few dollars on advertising and see if we can catch some of these suits. Since Sept 11, a shift in buying behaviour has been taking place among business travellers, and the trend towards low-cost airline travel by suits is accelerating. It’s the big thing in the US airline world, and Oz is no different. I reckon CC saw that the start-up cost for DJ in Step 4 was almost nothing. They already have the planes and crews and terminals and are already flying the routes. Start-up cost is the price of a few adverts. Worth a go.
We can derive some rules for how the small guys can compete with the big guys on a route, which work for XR as well as for DJ:
- route cannot be core business
- can't use more than 5% of the fleet capacity (at least to start with)
- be able to walk away at a moment's notice
- nice to open up a new market
- must be pleasing to the punters
- start-up cost must be less than peanuts
- don't stand still long enough to get bludgeoned
Hmm that even sounds like someone with Metros could try on the F50 routes in WA (pity about the Metro's punter pleasing abilities).
How does the big guy beat the small guy?
- price
- bigger planes
- price
- deep pockets
- price
- mining contracts
- price
- international linkage for on-carriage
- and price
Stand by for the WA price war.
"How is this so?" Well they came in through the back door. That's quite a stack of Big Planes that you list on the route, against the DJ smaller planes. Makes a mockery of the small planes vs big planes theory if DJ were taking on Qantas. But they haven't been up until just recently.
Step one for them was the classic low-cost model of Southwest, and DJ slavishly followed that. When DJ started off in Oz, they stayed rather clear of Sydney and avoided going head-to-head with QF. They looked for the 'undeveloped' routes. Their Southwest trained people did their strategic planning based more on bus and train timetables than airline timetables. They built their core business on these principles.
After AN fell over, QF got handed a massive market share in the domestic market. So DJ had to develop a new model for the sake of survival. QF was amassing money rapidly, and could use that to fund a long drawn out fare war that would eventually crush DJ. Umm, wasn't this round about the time that Richard B was running scared about his investment in DJ? Anyway, the Step Two model adopted was the spoiler - knock off the QF cashcows that gave QF the profits they needed to attack DJ with. Doesn't have to be a big spoiler or involve many flights – just enough to spoil the cashcow. By now DJ core business was well established, so a small percentage of flights could be safely thrown into the SYD-MEL ring to fight QF. Typically this was limited to about 5% of their capacity.
Step 3 came when the unexpected crawled out of the woodwork. Clutching their pillows in one hand and bubble gum in the other, the SYD-MEL flights filled up. Not with airline passengers – but with ex-bus and train passengers. This was predicted in the Southwest book, but not many people thought that it could really happen on an Oz mainline route full of business travellers, with no low-cost airline tricks like secondary airports to fly into. DJ could and did put on more aircraft, and they kept filling up too. The analysts couldn't believe it. The DJ departure gates often had 3-4 suits hanging around – 1-2 genuine travellers, and 2 analysts standing there counting who was getting on and how many business travellers there were. I used to. And there weren't many business travellers. So who were these people? QF was selling just as many tickets as before, and couldn't understand it. The analysts at the gates didn't know. Eventually it dawned on everyone that DJ had expanded into a genuinely new SYD-MEL market.
Step 4 is now, which is the DJ entry into the business market. DJ still keep the SYD-MEL flights down to less than 10% of their capacity, so SYD-MEL is not the core of the business. If the buses or trains or QF ever get too tough, DJ can leave 4-5 flights a day on the route to spoil the cash cow, and go and play with the rest somewhere else or hand the oldest planes back to the lessors (Compass didn't have those options). Now, and I suspect this came from Chris C, if there are all these DJ flights going back and forth SYD-MEL, what about spending a few dollars on advertising and see if we can catch some of these suits. Since Sept 11, a shift in buying behaviour has been taking place among business travellers, and the trend towards low-cost airline travel by suits is accelerating. It’s the big thing in the US airline world, and Oz is no different. I reckon CC saw that the start-up cost for DJ in Step 4 was almost nothing. They already have the planes and crews and terminals and are already flying the routes. Start-up cost is the price of a few adverts. Worth a go.
We can derive some rules for how the small guys can compete with the big guys on a route, which work for XR as well as for DJ:
- route cannot be core business
- can't use more than 5% of the fleet capacity (at least to start with)
- be able to walk away at a moment's notice
- nice to open up a new market
- must be pleasing to the punters
- start-up cost must be less than peanuts
- don't stand still long enough to get bludgeoned
Hmm that even sounds like someone with Metros could try on the F50 routes in WA (pity about the Metro's punter pleasing abilities).
How does the big guy beat the small guy?
- price
- bigger planes
- price
- deep pockets
- price
- mining contracts
- price
- international linkage for on-carriage
- and price
Stand by for the WA price war.
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You've omitted cost of capital, which would have to be a huge issue. Apart from that- very instructional. And how about selling terminals for lease-back, instead of aeroplanes? Aren't they making noises about that? A war looks very plausable.
MU2-
you have been strangely silent lately. Good to see that some people have made some observations and have backed them up with some obvious knowledge of the industry. You claim that there will be no price war but cannott provide a source of info that backs this up. Of course Hendo and Godfrey aren't going to come out publicly and predict that there will be a price war. The fact is, as has already been pointed out, that if XR take their F100 and use it on some RPT routes we will have 3 airlines competing with jet eqpt. There are only 2 routes in WA that can sustain 2 jet operators, let alone 3, so it is inevitable that someone will have to give way, if that eventuated. Increased competition normally leads to lower fares, and i would be more inclined to take GT's sources of info as being far more reliable than yours, if indeed you have a source!!!
Good points all, and i like XR's new livery, check out their new website at www.skywest.com.au interesting to see their new internet fares, may stimulate a bit more business and could be a pointer to some new rpt routes soon perhaps...
you have been strangely silent lately. Good to see that some people have made some observations and have backed them up with some obvious knowledge of the industry. You claim that there will be no price war but cannott provide a source of info that backs this up. Of course Hendo and Godfrey aren't going to come out publicly and predict that there will be a price war. The fact is, as has already been pointed out, that if XR take their F100 and use it on some RPT routes we will have 3 airlines competing with jet eqpt. There are only 2 routes in WA that can sustain 2 jet operators, let alone 3, so it is inevitable that someone will have to give way, if that eventuated. Increased competition normally leads to lower fares, and i would be more inclined to take GT's sources of info as being far more reliable than yours, if indeed you have a source!!!
Good points all, and i like XR's new livery, check out their new website at www.skywest.com.au interesting to see their new internet fares, may stimulate a bit more business and could be a pointer to some new rpt routes soon perhaps...
Last edited by topend3; 23rd Jul 2003 at 10:20.
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Interesting thing about those new low fares.
When I asked, in relationship to the prospectus.... "how do you fly fewer hours, carry less passengers do you make more money."
I was told that the "recent 7% fare increase was working and that passengers were paying the higher fares."
Maybe its just a seasonal thing. Anyone have some accurate feed back on this apsect?
GT
When I asked, in relationship to the prospectus.... "how do you fly fewer hours, carry less passengers do you make more money."
I was told that the "recent 7% fare increase was working and that passengers were paying the higher fares."
Maybe its just a seasonal thing. Anyone have some accurate feed back on this apsect?
GT
Last edited by geoffrey thomas; 26th Jul 2003 at 21:04.
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From the Virginblue website;
July 14th
Virgin Blue has announced it will re-time its Adelaide-Broome flight to provide travellers with a convenient morning flight from August 2.
The schedule enhancement comes follows the arrival of more 737 aircraft and comes just weeks after the launch of the low fare carrier’s direct service, which currently operates overnight, providing thousands of travellers with an affordable travel option to and from the popular WA tourism spot.
The new daytime flight will depart Adelaide every Saturday morning at 9.35am, arriving in Broome at 12.05pm just in time for visitors to check in to their hotel and get into holiday mode with an afternoon on beautiful Cable Beach.
The return flight will depart Broome at 12.35pm, arriving back in Adelaide at 5.20pm.
Convenient connections will also available to and from Sydney, Melbourne and Brisbane.
Virgin Blue Public and Media Relations Manager, Amanda Bolger said, “As with all new Virgin Blue routes, we dip our toe in the water to test the reaction and, in the case of Broome, it has been tremendous.”
She continued, “Moving the flight from a late night/early morning service to a day-time flight is the first step in response to the support we have already received from both the community and the travelling public. We are confident the daytime flight will entice even more people to Broome to enjoy the delights of the region.”
The re-timing of the route is a clear commitment from Virgin Blue to further enhancing its Broome flights to meet the needs of supporters.
“The local Broome business and tourism communities have really got behind the airline and been instrumental in the early success of this route which, in turn, has led to us being able to offer an improved service. With continued enthusiasm and ongoing public support, we are excited about the future possibilities for this route.”
Virgin Blue will continue to closely monitor market demand with a view to introducing further flights and other possible destinations.
-----------------------------------------
Only a matter of time and Virgin will have the aircraft numbers to start daytime services between Perth and Broome. Services to Kalgoorlie and Darwin, Alice Springs will no doubt follow.
As for Skywest, very hard to see how they could make money with the F100 on RPT services up against QF and possibly DJ. Alliance couldn't do it in the east. Good luck to them none the less, I just hope it doesn't send them broke in the process. Interesting times ahead in WA!
Anyone know when some of the BIG contracts are up for renewal?
eg Cocos/Christmas Is service, Argyle, Murrin Murrin? Others?
AA
July 14th
Virgin Blue has announced it will re-time its Adelaide-Broome flight to provide travellers with a convenient morning flight from August 2.
The schedule enhancement comes follows the arrival of more 737 aircraft and comes just weeks after the launch of the low fare carrier’s direct service, which currently operates overnight, providing thousands of travellers with an affordable travel option to and from the popular WA tourism spot.
The new daytime flight will depart Adelaide every Saturday morning at 9.35am, arriving in Broome at 12.05pm just in time for visitors to check in to their hotel and get into holiday mode with an afternoon on beautiful Cable Beach.
The return flight will depart Broome at 12.35pm, arriving back in Adelaide at 5.20pm.
Convenient connections will also available to and from Sydney, Melbourne and Brisbane.
Virgin Blue Public and Media Relations Manager, Amanda Bolger said, “As with all new Virgin Blue routes, we dip our toe in the water to test the reaction and, in the case of Broome, it has been tremendous.”
She continued, “Moving the flight from a late night/early morning service to a day-time flight is the first step in response to the support we have already received from both the community and the travelling public. We are confident the daytime flight will entice even more people to Broome to enjoy the delights of the region.”
The re-timing of the route is a clear commitment from Virgin Blue to further enhancing its Broome flights to meet the needs of supporters.
“The local Broome business and tourism communities have really got behind the airline and been instrumental in the early success of this route which, in turn, has led to us being able to offer an improved service. With continued enthusiasm and ongoing public support, we are excited about the future possibilities for this route.”
Virgin Blue will continue to closely monitor market demand with a view to introducing further flights and other possible destinations.
-----------------------------------------
Only a matter of time and Virgin will have the aircraft numbers to start daytime services between Perth and Broome. Services to Kalgoorlie and Darwin, Alice Springs will no doubt follow.
As for Skywest, very hard to see how they could make money with the F100 on RPT services up against QF and possibly DJ. Alliance couldn't do it in the east. Good luck to them none the less, I just hope it doesn't send them broke in the process. Interesting times ahead in WA!
Anyone know when some of the BIG contracts are up for renewal?
eg Cocos/Christmas Is service, Argyle, Murrin Murrin? Others?
AA
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Topend3,
Change your link to the Skywest website: it has a comma on the end of it that causes the dreaded page not found!
What livery are you talking about? That star thingy??
F100: the greatest RJ ever built.
Change your link to the Skywest website: it has a comma on the end of it that causes the dreaded page not found!
What livery are you talking about? That star thingy??
F100: the greatest RJ ever built.
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One Ball:
My post was trying to answer MU2.
The facts are quite simple as explained.
I talked to a number of execs who all said they were going to fly Perth-Broome head to head with Qantas.
It does not require too much grey matter to work out there will be a fare war, as there is, all over Australia on any route involving Virgin Blue.
And that view was backed up by a number of industry watchers/analysts.
For Skywest to suggest there will be no fare war in that situation is wishful thinking at its best I believe.
GT
On the spelling...you're right should have been a tad better perhaps "less haste and more speed".
My post was trying to answer MU2.
The facts are quite simple as explained.
I talked to a number of execs who all said they were going to fly Perth-Broome head to head with Qantas.
It does not require too much grey matter to work out there will be a fare war, as there is, all over Australia on any route involving Virgin Blue.
And that view was backed up by a number of industry watchers/analysts.
For Skywest to suggest there will be no fare war in that situation is wishful thinking at its best I believe.
GT
On the spelling...you're right should have been a tad better perhaps "less haste and more speed".
Last edited by geoffrey thomas; 27th Jul 2003 at 09:34.
