Entries in aviation (1)

Tuesday
May112010

How Revenue can be killed by efficiency

So what do Qantas and Elvis have in common? 

The answer is in the economic Supply and Demand curve, which does not always work as it should.

The theory is that as supply decreases, then prices increase.  If you are the only person selling Elvis memorabilia on eBay, you can fetch a high prices.

Some airlines such as Qantas are using the same philosophy.  When executives are rewarded on efficiency of stock price and resources, then crazy things can happen.

Using Qantas as an example.  From Sydney Australia, they used to fly all over Europe to places like Rome, Paris, London and Frankfurt.   Like all airlines, in order to be efficient, they have codeshare deals with other airlines.  All flights now go to Frankfurt or London for connections.

So to fly to Istanbul, Turkey you fly over Istanbul to Frankfurt, then connect to Turkish airlines for a 3-4 hour flight back.  Oh and instead of paying $2,500.00 you get to pay an extra $1,000.00 for the privilege.

Loyal frequent flyers who are prisoners of their programs are paying more money, for a more torturous flight, for worse in flight service, and get to pay an extra 40% for the privilege.  And the flights are packed – in fact a last minute booking through London (not that anyone would want to) is impossible.

Sounds like good business.  What’s the problem?  Flights are full and they are charging a premium.  The executives would be thrilled because they are meeting KPI’s.  However, there is a big problem.


Eventually whole groups of loyal customers (I am on the second highest tier) stop flying.  Eventually it gets to be too much.  Last year a similar situation caused me to fly Singapore airlines (wow!) and in two weeks I am taking Emirates.

My (forced) loyalty has been broken.  Eventually you cannot take anymore.  An the drop in business comes suddenly, without warning.  A point is reached when you have the most efficient business in the world, but you are doing the least business.

Higher price does not mean higher service.  Sometimes higher price is just… higher price.  When value is lost, the business follows.