Zero Fares Add Up to Better Bottom Lines
Posted on: Monday, 12 May 2008, 00:00 CDT
By Kang Siew Li
CAN airlines still make money while giving away free seats amid rising fuel
prices?
But then again, the free seats are not exactly free.
"These airlines make money from the fuel surcharge, insurance surcharge,
administration charges and baggage fee, which can add up to a substantial
amount of money," a senior airline manager, who declined to be named,
told Business Times.
At the same time, airport taxes and airport security charges paid by passengers,
while collected by the airlines, are passed on to airport operator Malaysia
Airports Holdings Bhd and partly to Express Rail Link Sdn Bhd, which operates
the high-speed train service between the city and the KL International Airport in
Sepang, he said.
Japan Airlines International Co Ltd senior director of sales and marketing for
Malaysia and Brunei, Alan E. H. Tan, said while a freeseat fare might not generate
any profit, it is better to have the seat filled by a revenue generating passenger
which helps cover part of fuel costs.
Once a model used only by low-cost carriers (LCCs) like Ryanair and AirAsia,
Malaysia Airlines (MAS) last week introduced its "zerof are" seats for domestic
flights, making it the first full service carrier (FSC) to offer free seats.
"When some airlines offer zero-fare seats, it does not mean it applies to all
flights. This is basically on limited routes and these seats make up a small percentage
of the total seats on offer," said Tan.
He added that airlines usually break even by filling up a certain percentage of
aircraft capacity (depending on certain drivers such as market make-up and aircraft
type), which means any seats sold in excess of that is profit.
"Also bear in mind that the surcharges such as fuel, insurance and administration fee are non-refundable.
"Given the restrictions on the change of dates or flight plans, payment for the surcharges will be forfeited if passengers cannot travel as per booking, which has to
be made in advance at least 30 days prior to intended travel date," he said.
Additionally, these fares are only available online, thereby the airlines save on
distribution costs such as the global distribution system (GDS) fees and travel
agency commission.
Tan also said basically FSCs have a different business model with different
cost structure targeting different market segments from LCCs.
"To make full use of available capacity, promotions are inevitable for exposure
and market share maintenance.
"But at the end of the day, FSCs focus more on the business market rather
than the leisure market and stress on safety, service quality translating into
premium experience, ontime performance and good connectivity as priorities compared with LCCs, which stress on strict cost control as its priority," said Tan.
For promotions, FSCs would normally offer early bird fare discounts than free seats where, for example, travellers can enjoy discounts of up to 30 per cent if they book three months in advance.
That's because they do not want their premium-fare passengers to find out that the person seated next to him has paid a completely different fare, and thus lose them.
"MAS is the first-full service airline to offer free seats or zero-fare seats," said Tan.
(c) 2008 New Straits Times. Provided by ProQuest Information and Learning. All rights Reserved.
Source: New Straits Times
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