Monday, December 14, 2009

Charter Flights vs Scheduled lights: Part II

The second part of the equation is, of course, money. Aircraft are extremely expensive to operate, airline seats are extraordinarily perishable, and the margins are extremely tight.

However, while margins are tight, they are potentially hugely profitable, and it is this risk/reward ration that attracts new entrants each year.

Simply put, a charter operators will work out the actual costs of flying, determine (an upmarket word for a guess) the potential market, divide the latter into the former and come up with a “price”; this fare will be compared to alternatives, the market forecast will be dropped a little, and a new “price” will be reached.

The operating vagaries of a weekly flight will be examined; how many seats will be sold from each end, for example, and will they have similar prices in each market? This is a difficult calculation as each seat from A to B will need a corresponding seat from B to A to come home again; if you sell too many passengers originating at either end, the balance can be badly skewed.

And finally, and this is the bit that the consumer needs to know but never will, what is the operator’s tolerance for loss? At what point will they pull the rug out and say that there is appearing to be insufficient revenue to continue the program?

This creates difficulties; in an ideal world, consumers will have their money returned by the operator and few will have badly affected trips; no tour programs forfeited due to the cancellation of the program and no money lost. However, should the operation of the charter be undertaken by a new company, established solely for this purpose, monies paid to the company may have already been spent on deposits, salaries and marketing with none left, and a bankruptcy will ensue.

The difficulty is always in knowing one’s suppliers. Is the charter carrier well respected with a strong track-record? Are they well known and bonded? The more partners that are involved in a program may appear to increase the chances of success, but this depends on allocations and sales; two strong partners may be brought to heel by a poorly performing third company.

Is the consumer world, now so used to outlandish prices on virtually every good and services inured from making a rational choice? The travel industry seems to reflect this observation with low price being the single driving force behind so many transactions.

Too frequently people buy products solely based on price with little thought given to whether or not the operating company, be it hotel, tour company or airline needs an improbable 90% load factor to break-even, and the effect that this threshold being failed will have on their own travel plans.

If a price is low there are shouts of joy; when a company goes badly there are please for government intervention. When did personal responsibility and logic disappear?

There are no simple answers; in Canada some provinces offer consumer protection and regulation, and some do not. In those provinces where there is no protection at all, there is one and only one simple solution.

Buyer Beware.

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