There’s been a lot of talk of supply and demand here on the blog this week, so I figured, why not pile on? Unlike our Monday discussion, however, this one isn’t controversial at all. Alaska has been lowering First Class fares. The result? More people buy First Class seats. Thank you, Captain Obvious.
On its recent earnings call, Alaska said that it had seen its paid First Class loads factor rise by two points in the last year, and revenues went up by 20 percent on an only 7 percent increase in seats. Good news all around. How did they do it?
Some of it is thanks to the more long-haul flying that the airline does. People may not care about First Class for the less than two hour flight from San Francisco to Portland, but they sure care a lot more on a 5+ hour flight to Hawai’i or a long haul from Seattle to Newark. Hawai’i in particular has really ramped up in the last couple years to become a major part of the airline’s route map, so that alone can make a big difference. But it’s more than that.
Alaska President Brad Tilden noted that back in the day, the First Class cabin barely earned its keep even though the fares were really high. Then this happened:
. . . we brought the First Class fares way down, I think our current add-on over the [full coach] fare is $150 in the longest stage length market. I think our customers have really responded to that value. We’ve gone from maybe from 1 to 1.5 [First Class] seats per airplane to four or five [First Class] seats per airplane. And we’ve also done a lot better with the upgrades, the fares that our mileage plan customers are paying to sit in first-class. And if neither of those work, we are selling first-class upgrades at the gate. I think we had a 20% increase in first-class revenue in the second quarter, and we are doing it in a way that our customer, I think, feels like they are getting really good value.
The decrease in fares isn’t a recent thing, but since it was brought up in the call, I thought it was worth discussing.In the end, this has resulted in a big revenue increase for the airline, and that’s great for everyone involved. The airline makes more money by selling more high fares, but the customers win because those “high” fares are lower than they used to be. This was the same kind of thing we did at America West back in 2002, though that was for the entire fare structure and not just First Class. The result, however, was the same.
So why don’t other airlines follow? Well, other airlines have a different passenger mix. Some of the big old legacy carriers actually sell more of those First Class seats, so cutting fares and increasing demand might actually result in dilution. It’s really an airline-specific type of thing, and only those airlines that don’t sell a ton of the high fares can afford to cut them down.
If you’re Alaska and you’re only selling 1 First Class seat per flight, you can cut the fare in half as long as you sell at least two of those tickets. Then everyone’s a winner. And that’s apparently exactly what’s happening here.