IATA recently revealed their forecast for the coming year for airline revenues and traffic, and included in that was the 2012 revenue versus cost data. The figures revealed that the average revenue per passenger worldwide exceed the cost of carrying that passenger by $2.56. That’s right, a shade over 2 and a half bucks! That is less than a cup of coffee in most places, and that profit includes a significant portion from ancillary revenues, without which there would be a shortfall per passenger carried.
In this same climate, passengers still feel they are being forced to pay way over the odds for travel. Perhaps this is as a result of the Low Cost concept penetrating people’s minds, or maybe a lack of understanding of the costs involved.
Equate this with running a car. Typically when discussing “your” vehicle, you end up with a couple of distinct groups. On one hand you have those who discuss what a bargain they got on the vehicle cost regardless of maintenance and running costs. On the other hand, those who debate endlessly the low fuel consumption, yet disregard the asset cost, and sometimes other running costs.
Those organisations involved in the mass transportation of passengers do not have the luxury of looking at one or the other of these aspects. Asset costs and financing, operating costs, maintenance costs and insurance all come into play. However, in addition to this there are costs associated with landing/docking/parking/navigation/piloting to be considered. Motor vehicle owners actually have similar issues on occasion, without realising it. There are road taxes to cover road maintenance, parking costs in many areas and traffic fines (yes, you know who you are!). There is stress about accident damage, theft, traffic jams, all contributing to the total investment.
Now on top of all this, imagine you have to transport people in your vehicle for reward, and actually make enough to turn a profit. This is exactly what the transportation organisations need to do, often in a particularly cutthroat marketplace. Do yourself a favour, and work out what you might have to charge someone for a trip in order to cover costs plus that $2.56 cup of coffee and you would be surprised.
Did I have a point to all this? Why compare my car to a ship or aircraft, they are in a different league?
Take the analogy a step further. You shop around for insurance deals. You shop around for the best asset cost. These are the bigger things. But on the smaller things, and those which may make more subtle differences with a better financial reward, we have a variety of tricks. Most of us try to optimise our vehicle running costs. We look for cheaper fuel, and evaluate the distance to that fuel station versus the cost saved. We perform basic maintenance checks. Something as small as incorrect tire pressures can increase running costs by a few percent.
Now put this into the context of this article. Operators have similar behaviour. Assets are researched for the best cost options, as are many of the running costs. Schedules are planned both to serve the market as well as optimise utilisation of the asset. At the end of the day, there is only so much that may be done on the cost side of the equation, which is where Revenue Management/Profit Optimisation comes into play. Think of it as your tire pressure gauge. It is there to assist in tweaking that last couple of cents for the coffee out of the market demand. Undoubtedly we are trying to get the passengers paying a little more. Perhaps a little more than they would like, but at no point more than they are prepared to pay. We are not in an auction frenzy here where people may be carried away by bidding, and we cannot force passengers to buy a ticket. It is basic supply and demand, albeit with a lot of math behind the scenes. If the price is too high at that time, the passenger will either look for a different time, or pay the price. But basically the passenger needs to understand that Revenue management is setting the number of prices on offer based on the expected number of passengers who may be prepared to pay, so if they do not take the space at that price, there are others who will.
Over time, those cups of coffee add up to a bigger pot, which may mean the difference between being in the red or in the black at the end of the financial year.
And that means the difference between having the coffee shop around to offer you coffee in the future!
As always, we want to hear your thoughts. Leave us a comment below.
Jason Codd
VP, Services
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