Airline “Pay Per Minute” Plan Is a Bad One

Anyone heard of Airtime Airlines out of South Africa? If not, you’re about to hear about it as every blogger that covers airlines is bound to write about it. These guys want you to buy minutes for travel like you buy minutes for cell phones. Let’s be clear here. This isn’t a good idea.

Before I get into why it’s bad, let’s talk about exactly what it is a little more. You buy a 09_01_07 airtimeairwayscertain number of “minutes” and then you have to spend however many minutes it takes for a flight to complete. Now this isn’t real-time minutes we’re talking about here. It’s just based on the scheduled time. That would really suck if they billed you extra for circling during a thunderstorm, huh? And what if you ran out? Yikes.

The airline was scheduled to start up very soon with flights from Johannesburg to Durban, Port Elizabeth, and Cape Town, but it appears their deal for aircraft fell through. If it does happen, the Durban flight, for example, will take 75 minutes, so that’s how much you’ll have to pay.

It looks like you buy a starter kit with minutes at South African R5.00 (about 50 US cents), and then you top-up as you go. The top-up rate changes whenever they want it to change. When I looked on their obnoxious Flash-powered site, it was R6.00 per minute, so that’s about $50 each way to Durban, but it could go up or down from there. This appears to be the only form of revenue management they have, and that’s why it won’t work.

As my wife said to me, the simplicity in the message to the consumer is about the only thing that they’ve got going for them. It may work in the cell phone world, but for the airlines, this just isn’t a good idea, and it all comes back to the high fixed costs and perishable product in the industry.

Effectively, this ties fares to costs, and it completely ignores demand. Since airlines have high fixed costs and those seats can’t be sold once the plane has departed, the key is to maximize the amount of revenue that goes on to each flight. But this doesn’t allow for that. So let’s say that you sell a bunch of minutes to people who want to go to Cape Town, but you aren’t selling any minutes to people who want to go to Durban. You could try to drop the cost of minutes, but then that will lower the rate for people who want to go to Cape Town as well.

Sure, you could also offer deals to Durban saying that you only need half the minutes for the flight, but once you start getting away from the simple message, then you lose the whole point of the plan in the first place. If a minute doesn’t actually mean a minute, then just stick with fares and don’t bother with calling them “minutes.”

What if there’s a huge cricket match in Durban one weekend. Will you make people use double minutes for the peak time? If you do, people won’t be happy with the sudden and seemingly random devaluation of their purchase. As you can see, the simple method breaks down quickly.

It’s not like this is the first time this has been tried. It’s effectively how US fares were structured before deregulation (but they used miles). And what happened after deregulation? The airlines adjusted fares to match demand in the market. That meant they could lower fares in most places since the comfy confines of regulation had pushed them too high, but it also meant they could offer multiple tiers of fares with a variety of fences to get people to pay closer to what they were willing to pay.

I definitely appreciate the desire to make things easier for the customer, but the high fixed costs and perishable product in this industry make this a bad idea.

11 Responses to Airline “Pay Per Minute” Plan Is a Bad One

  1. AN says:

    Agreed that this isn’t the best idea. But I have always been fascinated about the idea of paying based on distance, either when using real money or miles. For example, why does it take the same number of miles to fly from anywhere in the US to anywhere in Europe? SFO – LHR is a far longer flight than JFK – LHR. Shouldn’t it take more miles? Sometimes it costs more, sometimes it doesn’t. Anything that makes sense out of the fare structure would help people to hate the airlines less. You wouldn’t feel like you were always getting scammed.

  2. David says:

    Your analysis omits one other thing…..
    The big players like SAA and Comair already have a pricing structure which matches fare to demand. Consider the person who wants to fly Jo’burg to Cape Town. If demand is high, the consumer flies with Airtime for a cheap fare. If demand is low, consumer flies with SAA for a cheap fare. In either case, the consumer pays the cheap fare. Airlines like SAA have the reserves and corporate contracts to ride this out – Airtime will just see its reserves disappear into thin air !

  3. CF says:

    AN – I think the mileage requirements are mostly due to simplicity reasons. It would take a big restructuring to actually tie miles to distance (and it’s not necessarily the right thing), but the airlines would probably be too afraid to try anyway.

    David – Actually, if demand is high, then both airlines will probably fill their planes but SAA will get a lot more money for it. If demand is low, you’re right, SAA will drop fares and fill its planes more. This could get ugly.

  4. Agreed, it’s not a great pricing model. Hopefully they’ll forget about that nonsense and put in place a proper pricing structure – the competition and low fares are most welcome!

  5. Randy says:

    Short haul vs. medium or long haul also becomes an issue. A short haul flight has more fixed costs, crew, landing fees, vs. the time/distance flown. Hence CASM on a transcon, the cost per seat mile, or may it be time in this case, is far lower, where the airfare would be sky high based solely on time, but on a short flight, the airfare would be low but the CASM/cost per minute would be far higher. As you also mentioned, it takes revenue management right out f the equation. Good gimmick in the public’s eye, terrible for revenue optimization.

  6. Brian Lusk says:

    CF, is the cricket match an International Test Match? But speaking of that, you ask if they would raise their minute fee for an important event like that, or maybe even holidays. For the most part, airlines with city-specific fares don’t raise fares for the Super Bowl or holidays, they just restrict the amount of discounted fares. I would imagine that Airtime’s costs wouldn’t change for an event, so if they have their minute fee at the right rate, their overall revenue would increase for the cricket match through additional passenger without having to raise the minute rate. On the other hand, it seems like a minute fee would lend themselves to adjusting rates throughout the day. You could have premium morning and evening minutes, even discounted night minutes. And, you could publish event fees well in advance so it wouldn’t be a surprise. I don’t know but it would seem like supply and demand would work here too. The only difference is that everyone on the airplane would be paying the same. This is still revenue management, you are just substituting time demand for using complicated seat demand system. Instead of squeezing the max revenue out of each passenger, you would get max revenue out of the time of day.

  7. …on the upside, the flight minutes convert to cell phone minutes if unused. :)

    And don’t forget that they will still allow traditional bookings. The prepaid plan is just a gimmick.

    As I argued when I posted about this on Monday, this is similar in concept to the NetJets card or other private jet fleet subscriptions, just on a much lower-brow level.

  8. CF says:

    Brian Lusk – Let’s say it’s a nice long 5 day match so the peak period will last for a week! I definitely understand that airlines don’t raise fares but rather restrict lower classes, but in this case there’s no other option because there is no revenue management ability. Adjusting minute rates doesn’t really work that well, because you can buy minutes to book within 90 days on flights up to a year out. So, when you set minutes at a certain price to stimulate demand, you have no way of directing those minutes on to a certain flight or time period. If you’re going to try to have types of minutes (peak, off peak, etc), then you’ll quickly get away from the point of the simplicity, don’t you think? then you might as well have fares.

  9. axelsarki says:

    i aggre whith the obnoxious site!!!!!!!

  10. Brian Lusk says:

    CF
    I partly agree with you. I think airlines morphed from offpeak “Night Coach” fares into a whole range of fare buckets so they could maximize revenue by date and flight. Paying by the minute wouldn’t offer that flexibility. However, based on my pre-deregulation days, I don’t think time-based fares are all that complicated, unless you have different fares every hour.

    I think a bigger question might be, is the cost to operate of all the apparatus involved with today’s revenue management systems a self-perpetuating system. In other words, would any revenue loss by going to a simple system be overriden by the reduced expenses? I would guess not, but I think it is an interesting question.

  11. CF says:

    Brian – I would imagine they’d have peak and off peak minutes by time, but that would vary by route. Then you’d have seasonal peaks and special event peaks as well. That does start to get relatively complicated in that when you buy minutes, you don’t necessarily know what they’re worth. Besides, all the sophisticated guys with revenue management systems can shoot you out of the water. (PeopleExpress anyone?)

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