Delta admits they now schedule routes based on how it’ll help sell credit cards. That requires a very different understanding of route profitability and how you attribute (card) revenue to flights.
United’s Scott Kirby lamented the airline’s leaving New York JFK even though they believed those JFK flights were unprofitable.
- They lost corporate contracts on the West Coast
- Turns out, those companies didn’t want to fly into Newark
They were doing the math on those JFK flights wrong, failing to attribute revenue from the overall corporate deal to those flights. The flights looked like losers. They weren’t – even though ticket revenue for passngers onboard didn’t cover costs. Other flights under the deals weren’t as good as they looked either, effectively subsidized by that JFK service.
I had an argument years ago with Ben Baldanza over 6 a.m. Monday morning flights… he said corporate deals were money losers because you had to operate those flights to business destinations that didn’t fill up. But that meant either
- the corporate deal is unprofitable (don’t do it) or
- it isn’t and you are doing the accounting wrong if it looks profitable overall, but some flights you have to run to get the deal aren’t.
Some flights look better than they really are – the ones with the ticket sales – while others look worse, the ones you have to run to get those sales on other flights in the first place. A given deal may or may not make sense but you have to attribute revenue correctly and that is a problem across companies throughout the economy. It is even a problem measuring the economy itself. Build bombs and drop them on people and GDP goes up..!
But you get decisions based on what (and how) you measure, and traditional measures can mislead. Decisions to make money need to start with what products your customers want (and are will pay for, but pay for can take many forms).
If a customer will pay for the option on a flight it doesn’t matter if the flight is empty if the option is expensive enough!
You can run empty flights to a dream destination and if the idea that a customer might redeem there later and that drives card spend (consumer revenue-enhancing behavior now) the flight could actually be profitable.
Delta serves customers by (1) moving them from place to place, (2) by offering them the future option of flying place to place, and (3) the subjective consumption that they participate in an activity that gives them the future option to do so.
All of those are products they are producing and selling and traditional accounting only picks up the first and fails to value the second and third.
I have had this bugaboo for more than 20 years as regular readers know. Somehow it seems like some airline executives finally think along these same lines! It’s important, because how you measure a flight’s profitabiltiy drives network decisions and brand decisions and product decisions as well.
All probably because Newark is a sh!thole.
I love how for decades Continental and United and I’ll assume others try to put the corporate spin on Newark as if one is really flying into New York.Dishonest
I avoid Newark at all costs based on end experience.Perhaps if they collapse and rebuild these antiquated terminals it could work.As well as manage traffic flow in and out of the airport.@ present a complete failure.Then add the airport traffic control operators shortage situation.Downright scary
One of the worst airports I can think of in every regard.Happily spend more to avoid
Cost accounting and revenue accounting are complex and fascinating topics. So many executives make their lives much harder by not making sure they get the right data.
Ah, a VFTW classic… hyperbole. There are no ’empty’ flights, Gary. Some may have a few open seats, but it’s nothing like your title suggests. As to the bigger picture, yeah, the game has changed, these are no longer logistics companies, and modern commercial airlines are indeed ‘credit cards with wings,’ in no small part due to the relatively unregulated ‘corporate pseudo-currencies’ (points, miles, status), which arguably was a precursor to proliferation of both ‘crypto’ and the ‘attention’ economy; yet, now, we’re going to collide all of this with the ‘AI-bubble’ (for better and worse, already Google will ‘advise’ you where to travel if you ask it), so who knows why or where these companies decide to fly. Like, United just renewed Nuuk for another year, so clearly, it’s not just about reliability or actually making any money… *facepalm*
Of course, someone like @Craig Jones had to go there… and, now, I have to defend New Jersey. Ugh. EWR has come a long way since opening Terminal A (which, like the new LGA, is incredible) as well as United updating its Terminal C standard United Clubs (both quite nice these days). Sure, Newark, the city, isn’t really a destination (unless you like the NJ Devils or seeing a show at the Prudential Center, or delicious Portuguese food in the Ironbound, or more affordable rent, with any connection on the PATH or NJ Transit or Amtrak to NYC and all along the NE corridor). So, no, neither EWR nor the city, is as doofus Craig says. Besides, wasn’t our President calling other countries that silly name… Huh, and His Bedminster golf course is so near by. We wouldn’t want upset our Dear Leader, would we…
I think it’s safe to say that one of the reasons that AA typically loses money or claims nominal profitability, is because they have taken a hatchet to flights from NY to the west coast and NY to Florida, plus the constant chopping of traffic through Chicago. Stellar traffic on flights from El Paso to DFW will never turn this company into a money maker.
@Joseph — If only those MBA-types would include a few more ‘buzzwords’ in their decks. For instance, let’s circle back on our deep dive about this paradigm shift to disrupt bespoke, curated, sustainable, organic synergy within our core competency!
Constant devaluation of points and constant increase of credit card annual fees seem likely to reach a point where neither works for consumers. And it takes only one woke Congress to regulate the points business out of existence.
Gary is right that airlines do have to allocate revenue from all sources to their specific routes but no airline gets enough revenue from non-transportation sources to cover airline losses.
Let’s remember that AA gets a less than 2% profit margin on almost $60 billion in revenue; DL gets more revenue from its credit card and other ancillary sources – including its MRO – than any other airline in the world so, yes, DL can do more developmental flying supported by its credit card and ancillary revenues.
AA simply does not run a core airline that is anywhere near as profitable as DL so the notion that AA isn’t accounting for its NYC revenue probably misses the whole boat which is profitability of the entire airline.
as for NYC, as much as CO and UA want to believe otherwise, LGA is the preferred and largest airport of the 3 NYC airports for destinations inside the LGA perimeter while JFK is for destinations outside of the LGA perimeter, including international.
UA believe/d that they could do it all at EWR but miss the fact that the majority of either the shorthaul domestic or longhaul domestic and international market flies out of LGA and JFK, both DL hubs.
And EWR was never built for the volume it handles which is why the FAA has finally forced UA to reduce the amount of flights there, despite the fact that UA and CO have operated over 60% of EWR’s flights for decades.
DL simply has led the industry in building a sustainable business model while UA is trying to follow DL – and has the best success of any of the other US airlines -while AA and the LCCs are all floundering, credit card deals or not.
Ah – thank goodness! I’ve missed Fan-Boy Tim’s Delta love for a few days… glad he’s back in fine form!
TIMMY!
Kirby is often right, but on JFK he is wrong. United flights from JFK to a handful of destinations won’t add much to its share of NY corporate travel.
@Kirk — Ah, yes, the strawman that any regulation is automatically bad… No, sir. The railroad has already come to town. The wild west is over. When the adults are back in-charge, it’s time to get some reasonable rules on the books, and enforce them (so that we don’t devalue everything into oblivion). For instance, let’s do the equivalent of putting up a sign: ‘no weapons in the saloon.’ Barkeep gets to keep his though; can’t be havin’ shootouts… it’s a place of business, darn tootin’!
@T Car — For JFK, with what Star Alliance members are planning at the new Terminal 6/7 and United’s supposed ‘deal with jetBlue,’ maybe they’ll get their slots by like 2027. (Don’t worry, @Tim Dunn, it’ll take a while for them to even try again. Oh, remember during the pandemic… oof, @Max Power, sorry, but that was awful timing on those JFK-SFO/LAX routes with the 757.)