Thursday, June 04, 2009

to Paris

Just some fun with numbers

I've already been musing over the economics of the new Delta flight to Paris. The Trib had a story yesterday with details on the contract with Delta Airlines over the how much revenue they are guaranteed on their new Pittsburgh to Paris flight. The deal is not based on seats as I figured it couldn’t be.. but on revenue. Delta has a claim for cash if revenue coming in below $64,706 per flight. USAToday said in the past the new flight from Pittsburgh will be a 757. I have no idea how accurate this is, but SeatGuru tells me a 757-200 has 24 first class and 162 economy seats.

Airfare setting is a black box. Case studies in price discrimination are written about how airlines change fares all the time to maximize revenue as best they can. The seat next to you can cost twice as much of half as much as you paid depending on when you bought it and other factors. Thus you can’t ever extrapolate from any one fare. All that being said, I pointed out that I was able to get $530 RT fares to Paris in this flight for large chunks of the summer. So $265 each way. If all 162 economy seats are sold at that low price it still gets you to $43K. What the first class seats could go for I have no idea, but many know that most first class seats are really filled by upgrades using FF miles or other perk programs. A real full fare ticket could be a lot more, but at $1000 on average per segment (which would be $2K RT) for the remaining seats it generates another $24Kfor a total of $67K.

Yes, I know the whole airfare process is lot more complex than that. But I am surprised a bit. Fares as low as I got I thought would have to trigger some of the clawback provisions Delta had negotiated. Not necessarily it seems. So even with all those really lowball assumptions the minimum revenue threshold is met. Since I am sure a lot if not most seats are sold above that low price, the revenue is safely above the threshold. If the seats are sold that is. The next question is whether the low fares are really indicative they are having problems filling the seats which would not be surprising given the state of the airline industry these days.

If the market were tighter and fares were more like last summer there wouldn’t any possible risk to meeting the threshold, I guess the question comes down to how off-season holds up more than anything else. Peak summer season normally pushes fares and the number of passengers up. Remember, the USAirways flights to Europe started only as seasonal flights to match seasonal demand (was there a subsidy involved? I really don't recall either way). Only later, and really just for a brief time when you consider the long run, were there ever full-year European flights out of Pittsburgh. So how those seats get filled in November, and at what prices will be the real question. I wonder a bit if the guarantee to Delta is calculated per flight, or on average over the year or any longer period. Could make a big difference if you think about it.

But I will report how filled the flight is next month.


Anonymous Anonymous said...

Generally automatic upgrades are only provided on Domestic flights. While some Frequent Fliers may be upgraded on flights over the pond, most of frequent travelers that I know (including myself) do not get auto-upgraded, even when there were available seats.

AFAIK, those seats in business class are either paid for or given away as award travel (usually something like 120,000 miles per seat).

Of course, many companies now only pay for business class when the non-stop legs are longer than 8 hours. Combine that with the bad economy, the rules for automatic upgrades may change because more people are flying coach and more seats up front may be available.

Thursday, June 04, 2009 11:14:00 AM  
Blogger Infinonymous said...

If your point is that our government officials might have negotiated unwisely -- from a position of perceived weakness to the point of desperation, without adequate concern for practical consequences, against an entity that possessed more information, more experience and a profit motive -- I believe we can not rule that out.


Thursday, June 04, 2009 12:11:00 PM  
Anonymous johnnyg said...

Infinonymous, please get your facts straight. The Allegheny Conference--essentially the chamber of commerce--is on the hook for the first $4.5 million in subsidies. Those are business dollars, not tax dollars. Business, not government, drove the deal with Delta/Air France.

Thursday, June 04, 2009 7:37:00 PM  
Blogger C. Briem said...

The state is on the hook for $4.5 million I read? Is that subordinate to the ACCD $$? and it's a divied up across the first two years right? Airport authority is also spending a decent chunk of money promoting that flight. So there is public money.

I'm a little unclear where the conference would ever get $4.5mil, but let/s hope they never need it.

Thursday, June 04, 2009 8:03:00 PM  
Blogger Vannevar said...

The other thing that's interesting to me is that, to some extent, this is a zero-sum competition among cities. You'll note that Continental cancelled their Cleveland-Paris flight after the Delta PIT-Paris deal was announced.

Inquiring minds wonder, to what extent was it Pittsburgh travelers who made Continental's Cleveland flight possible?

To me, and I'm not as informed as others, it seems like if you want to make the airport busier, and distribute the fixed costs across a larger population, you need to increase airport passengers beyond what the PIT origination and destination traffic will support.

In other words, you need people at the airport who don't want to be in Pittsburgh. That's a hub. Why would anybody hub at Pittsburgh?

One reason to run a mini-hub is to put people from a 500-mile circle onto international flights. In fact, that's the only kind of hub that's working in this economy.

In this viscous airline industry, nobody is going to build a mini-hub hoping the passengers will come.

So for $4.5M, matched by a private $4.5M, the County/State are taking a shot at inspiring a virtuous growth cycle.

Why should any airline consider putting a mini-hub into PIT? Well, for one reason, to sell tickets to people going to Paris.

Previously there was no reason.
Now there's a small reason.
Is it worth risking $4.5M, to revitalize a $550M airport investment?

It seems like a reasonable effort to me.

Thursday, June 04, 2009 11:18:00 PM  
Anonymous johnnyg said...

Yes. The state is subordinate to the ACCD. They have pledges from member companies. You know, to encourage members to use the Delta flight. The thinking is like the downtown partnership. Spend a little to support the many. My understanding is that over 80 companies have made pledges over 2 years.

Thursday, June 04, 2009 11:18:00 PM  
Blogger Infinonymous said...

There are pledges, and there are pledges.

USAirways was big on pledges at one time.

The important question, one long overlooked by some, involves who is left holding the bag if pledges, hopes, promises and whispers disintegrate.

Too often, this region's elected officials have put taxpayers on the hook, often in a "tails you win, heads I lose" context and just as often without knowing they have done, either because they hired hacks who weren't up to doing the work or were playing an independent angle.

If someone could identify the independent airline industry expert who represented the taxpayers with respect to any public involvement in the French flight deal, I would be less skeptical. Until then, I will expect to find that this resembles the usual pension fund advisory, insurance, legal services, software consulting, etc. deals.

Friday, June 05, 2009 6:37:00 PM  

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