Airline revenue accounting on cnx flights

[internet]

In its simplest form, I was wondering how airlines account for revenue on connecting flights.

For example, pax A flies YWG-YVR, where as pax B flies YWG-YYC cnx YYC-YVR. How is, say, the $200 in revenue divided amongst the flights. Is it based on mileage? Does one flight get all the revenue? Is is 50/50? Is there some other way of doing it?

Thanks

[better4me]

In its simplest form, I was wondering how airlines account for revenue on connecting flights.

For example, pax A flies YWG-YVR, where as pax B flies YWG-YYC cnx YYC-YVR. How is, say, the $200 in revenue divided amongst the flights. Is it based on mileage? Does one flight get all the revenue? Is is 50/50? Is there some other way of doing it?

Thanks

Generally mileage based allocation.

Although the allocation can be different as there are no generall accepted procedures for internal financial records (e..g WestJet will not be disclosing the revenue split in the external reports).

[Fido]

The revenue split between two legs is not crucial anyway. In a 'True O&D' environment you are more interested in what did that segment contribute to the whole network.

In your example you would put the whole $200 onto the YYC-YVR leg and in your analysis would be interested in calculating if the total dollar value of all ticket covered the cost of that leg (YYC-YVR). You would also put the whole $200 onto the YWG-YYC leg and weigh that against the cost of operating YWG-YYC.

The principle is to decide if a particular leg did not operate what is the affect on the total network. Where would the passenger go if you did not operate that leg.

In a simple example:

YYJ-YVR I can assure you that none of the flights come close to break even based on a pro-ration of the tickets.

But, if you did not operate YYJ-YVR would you get any of the YYJ-YVR-NRT or YYJ_YVR-LHR or YYJ-YVR-YYZ traffic at all? Would the passengers take the ferry and still buy a ticket on your flights or would they get to YVR and then travel on BA, JAL etc.

[Thebean]

Generally mileage based allocation.

Although the allocation can be different as there are no generall accepted procedures for internal financial records (e..g WestJet will not be disclosing the revenue split in the external reports).

It's not all mileage based.

If it were, for the sake of an example, the YLW-YYC portion of YLW-LHR would amount to less than $38 each way including all taxes, on a $1,365 r/t.

It's generally a combination fixed charge per departure and mileage.

It's anything but high yield and imo, airlines that base profitability on network feed are living dangerously. There are 3-5 routes in Canada that are notable exceptions. At the end of the day, it's the O & D's that make the money. Network adds a few bucks to the pot.

I recall the CEO of VistaJet telling me that by using VP's Dash 7's to get network feed from other points in Ontario that they'd be profitable in 3 months. The instant that came from his yapper, I knew they were done.

You can see that the profitability of the much shorter legs is a function of how much revenue is attributed to it.

This leads to the concept of "beyond revenue" when calculating route profitability.

If the theory is that without YLW-YYC, you'd never get the YYC-LHR revenue, then an inordinate amount of the $1,365 fare is assigned to YLW-YYC leg, perhaps as much as a full Y fare.

If you do it this way, the YLW-YYC leg will have high yields and will appear to be very profitable, but at the expense of the YYC-LHR leg.

Qantas BoD prohibits Qantas management from basing route profitability on the "beyond revenue" argument as it tends to create profitable routes where they don't actually exist and makes it very difficult for airlines to figure out where to cut capacity when the network as a whole is losing money. If everything appears to be profitable, why cut anything?

I suspect this is an area that all legacy carrier are going to have to review as they try to curtail losses. They need to firmly and clearly establish what makes money and what is losing money and then get rid of what loses money. If it means curtailing service to Oshkosh and Fargo, so be it.

I doubt One World, Star Alliance et al would suffer much in the big scheme of things by losing the smaller centers.

Folks might not like it, but who ever said it was a God-given right that if you live in secondary markets that you should expect hourly jet service and $59 fares to the big city?

[Fido]

Bean:

You are mixing up two different principles:

Pro ration between two seperate airlines

and

Network profitability.

If a little dash8 had a 30 minute flight that cost a couple of grand but it meant the same airline got 4 x $5000 sales to Singapore would you axe it because the pro rated revenue was $200 or even $2,000?

[Thebean]

Bean:

You are mixing up two different principles:

Pro ration between two seperate airlines

and

Network profitability.

If a little dash8 had a 30 minute flight that cost a couple of grand but it meant the same airline got 4 x $5000 sales to Singapore would you axe it because the pro rated revenue was $200 or even $2,000?

..and therein lies the argument about "beyond revenue" and "contribution margin". You can see why many airlines become slaves to the concept because by using it, anything and everything is justified, even it results in network wide losses.

If Fred wants to travel from YKA to SIN, he's more than likely going to fly out of YVR, assuming the pricing is similar to, say SEA.

Fred is going to make his way from YKA to YVR one way or another. Is it really worth the extra $50 fare ($1,050 vs $1,100), to operate connector flights on the route for Fred's convenience? 99 times out of 100, Fred is going to fly the same airline anyway for the international flying.

What are Fred's choices? $55 Greyhound bus fare to Vancouver? A four hour drive with $1.50 a litre gas? A $50 add on for a flight?

If Fred wants to fly Singapore Airlines, he's going to have to find his way to YVR in any event. If he flies. He's going to pay the $144 anyway.

I say that unless the Fred's of the world are prepared to pay much closer to the "sum of fares", in this case, about $144 more than the YVR fare, it's better to let the Fred's of the world find their own way to get to the hubs and not have the network carriers suffer the losses incurred in subsidizing their short haul travel.

Airlines are going to have to get much tougher about this sort of thing. They are all in the same boat. With $120 oil, the status quo can not continue.

[melcrothers]

On interline "code share" from my experience a number of components were used especially on the South Pac code share with QF and NZ.

1. For feed, we used a minimum of 1,000 miles for any given sector be it YYJYVR or YLWYVR.

2. For the initiating carrier - that carrier retained a 15% retention ( cost of sale ) component to cover off credit card and travel agency comission expense.

3. The balance of the revenue was split on a straight rate mileage pro-rate.

So..... Pax YYJ-YVR-SYD. the overall mileage is X miles lets say 7,000 for sake of argument.

How the agreement would work is this.

Carrier "A" originating ( their ticket stock )

Ticket value $ 1,000.

Carrier "A" retains $ 150.00 to cover cost of sale.

Carrier "A" gets 1,000 miles credit as a minimum for the YYJYVR sector or $ 121.42 for 1/7 th of the net balance of the revenue.

Carrier "B" gets the residual 6/7th of the revenue less the cost of sale or $ 728.57

for the long haul.

Carrier "A" overall revenue is $ 150.00 for cost of sale plus sector feed revenue of $ 121.42

Hope that helps.