Unsurprisingly, the airlines aren't doing too well right now. I'll be looking for another round of bankruptcies before too long, as companies try to shed suddenly-unprofitable routes--which means planes, debt, and labor.
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Thank you captain obvious!
I've flown across country and 6 times in the last 2 months and every flight I have been on has either been 100% full or oversold and packed with standby people waiting to get on.
HNL, CLT, MDW, ATL, JFK, LAX, ORD, SLC are the last few airports I've been too in recent montsh. Maybe I just got lucky and traveled at peak times in all of them, but it seems like the airlines are doing a good job of consolidating as I never used to be on packed flights most of the time at these routes.
And the one route I used to get 2 whole rows of 3 seats to myself (ATL to VIE) is no longer available...
The only time the airline industry was profitable was when it was regulated by the Civil Aeronautics Board. In truth, the major airlines never really created a business model that could adapt to the post-deregulation realities of the marketplace. Southwest is the exception. And now fuel costs are making the business model even more untenable. Once the dust settles there will still be an air travel industry--two or three huge carriers and a few start-ups at any one given time--but I doubt whether they'll ever really be profitable.
Wow, insightful commentary! Didya have to go to college for lots of years to be able to figger this all out?
Bet you'll next be reporting that expensive fuel is leading to increases in the inflation rate. . .or that GM, after years of mismanagement and unprofitability is cutting jobs, selling assets, and closing factories.
Megan's my first stop for economic analysis!
Brian in Tucson,
I think you need to change your name to "Dick with Ears"
Claudius, the airlines were only profitable in the regulated era because the regulatory regime amounted to a government-enforced cartel.
Major routes were being served by three or four airlines on lockstep schedules and identical fares, and were seeing load factors of 40-50 percent. On lesser routes the load factors were even lower.
One-way coach fare in 1969 between New York and Chicago was $44. First-class was $53. That equates to $260 and $313 each way, respectively, at today's prices. Coach fare today is about $300 round-trip.
In the international arena, it was far worse: in 1968, Pan Am was flying to London from New York for $210 off-peak and $255 peak (summer fares) each way. That's about $1300/1600 each way in today's dollars. Right now, fares to London are about $900-1100 round-trip: in the fall, they'd be about $600-750.
Bankruptcies which don't involve liquidations won't move the industry to sufficient efficiency to provide for wide spread profitability. In fact, having some airlnes operating in bankruptcy, not having to pay their bills, competing against other airlines which are paying their bills, just starts the cycle over again. The unions and management teams of these businesses need to be utterly dissolved.
Why can't the airlines raise fares? As sam notes above, all the flights are booked solid, often with standby lists. This suggests plenty of demand at the current price point. Simple economics suggests (to me) that an industry with rapidly rising costs should be able to raise prices to cover their costs up to the point that the market will not bear higher prices. I don't see that they've tested the market's acceptance of significantly higher prices. If flights were routinely going out at less than 80% capacity or something, that would be different.
Why couldn't, say, American Airlines, raise its prices by, oh, 3% per week (just to pick a number) until demand starts to taper off. The other airlines would be able to follow suit, and the entire industry could move toward operating in the black. Are there perverse incentives here that check expected market behavior?
What am I missing?
Megan, I'd love a post on why the European airlines can offer such drastically cheaper rates and still be profitable. Last time I was in Europe, I went from London to Berlin for $15.
I suspect that legacy labor costs for US airlines have something to do with it, but even firms like SouthWest and Jetblue seem to have problems.
Please comment.
Look - air travel is going to go away. What is interesting is that the entire American economy has been built on leisure in the last 30 years, (restaurants, hotels and other leisure service oriented operators) as well as airlines are going to get killed, which will further exacerbate the decline of America.
Look-air travel is not going to "go away".
Southwest's load factor was about 72% for the first 6 months of 2008, so I think the notion that the airlines in general are flying at near capacity is misplaced.
I just looked up the entire industry, and it had a load factor of about 90% in the 2nd quarter of 2008. Unless the numbers I received were funky in some way, it's kinda strange that the most consistently profitable operator had such a lower load factor compared to the rest of the industry.
Will Allen,
I think the SWA issue may be related to it's market. SWA doesn't do a lot of business travel, so I assume it's somewhat more exposed to the price fluctuations of the consumer market. That being said, their fares have been rising to the point where on a lot of flights they are more expensive that AA, USAir or Continental.
I prefer SWA for a lot of reasons (Mdiway v. O'Hare being one), but if I am not getting a discount on the fare, I might choose to avoid the cattle call seating.
I wouldn't swear to it, but I thought I heard mention some while back that Southwest held longer-range hedges in low priced fuel than the other carriers, who at the time didn't have comparable funds for that.
Oh, it is absolutely true that Southwest hedges fuel costs in a manner that the other carriers have not benefitted from.
"the regulatory regime amounted to a government-enforced cartel"
This isn't unusual in capital-intensive, low-return industries. The railroads did the same thing - heck, they welcomed regulation when the Feds imposed it in 1887, thinking it would be a welcome change from rate wars. The outcome of deregulation of the railroads in 1980 was a downward trend in prices, not a climb - until just recently, of course.
Not all markets are perfect, and our regulatory regime doesn't always recognize that cooperation is in some circumstances a rational and defensible strategy - but it is.
By the way, I'll fly Southwest even at a slightly higher price, to avoid hub airport connection delays, usually better on time performance overall, and the fact that the typical SWA employee, unlike, say, United's, is less likely to have the attitude of an non-recovering hard core alcoholic who hasn't had a drink in three days.
Will,
I totally agree with you on why I fly SWA, but I assume the no first class, limited pref boarding, and no super platinum awesome dude elite status program which a lot of people like, shifts thier market to a more unstable one.
I was under the assumption that the fuel hedges had run out, and that was forcing them to raise rates faster than the competition. I may be wrong though.
As for pricing, I do think we need to re-structure some of the pricing model - which may include higher base ticket prices - to make the market work. I don't know if that's possible, with load levels at 90% now, would they drop to 80% at 20% higher prices? I wonder how much of the load factor is not price sensitive at all: consulting, larger companies...
As far as discount airlines in Europe go, I'm curious as well. You can get fares as low as 2 euros round trip into Paris from a variery of Euro airports. But then they add on a 10 Euro ticketing fee and 30 Euros in "taxes/fees" and some other fee. So basically they're just covering up their "fare" with a lot of other costs.
Still, it seems strange that in high priced Europe I can go from Eastern Europe to Barcelona and back again for 100 Euros total (after taxes, fees etc).
Europeans pay more taxes, pay higher wages, but they do benefit a little bit in buying their oil in dollars (euro v. dollar). There most be some government subsidizing of the airlines going on, or perhaps in the US excessive government taxing on jet fuel?
Am I the only one who things 80% load is great? Some people write like 80% load is worry some.
If the airlines all ran at 100% load, everytime there was an increase in demand, or even more likely a plane that needed repairs, etc, it would cause far more havoc than it does now on people's schedules all the way down the line. When you miss a connection because of a plane delay, and the next two connections are full, you're screwed. If there are 100 people waiting along with you and load is at 90% it will take a long time to make it home!
sam, if the airlines could figure a way to fly with a butt in every seat, they'd do it (that's what overbooking is supposed to achieve). It's far cheaper to rebook and compensate people with future travel than to fly with empty seats.
Amusing side note: a well-known economist devised the system that is now more or less universally used to deal with overbookings. Can anyone name this economist?
This is very non-economic thinking.
Higher oil prices is not what is driving airlines into bankruptcy.
Higher coal prices aren't driving utilities into bankruptcy. Higher food prices aren't driving restaurants or supermarkets into bankruptcy.
When coal prices rise, utilities raise prices and pass the cost and signal on to the consumer. When food prices rise, supermarkets pass it on.
The price of poultry has gone up similarly to the price of jet fuel, but you don't see KFC and Church's disappearing.
If this was merely a case of fuel prices, when fuel prices go up, airlines would all raise prices to pass on the increase to the consumer. This is not the case.
Southwest has fuel hedges worth two to three billion dollars right now. That's a reasonably large fraction of the market cap of all six major airlines put together.
Southwest is also making money. They price their tickets so that they make a slight profit and every other airline makes a slight loss. This is because Southwest is fundamentally not an airline, it is an energy hedge fund with airplanes.
There are a few factors that complicate this, but this is at the core why airlines are going bankrupt and KFC is not.
I believe it was St. Milton of Chicago who suggested that airlines should look for volunteers when they overbook flights, thus inconveniencing those who valued their time the least.
As far as load factors go, I believe published load factors are revenue passengers, and thus exclude frequent-flyer "free" tickets and deadheading employees. Flying Northwest DTW-PVD or DTW-ORD and reverse, I haven't been on a flight with an empty seat in a couple of years.
And as hateful as flying has become, now that I'm entirely a leisure traveller I wouldn't go back to the days of regulated travel for anything. The regulated environment was great for business travellers (half empty planes, lower fares than today), but the end of one price for all (ignoring the old excursion fares that required a seven-day stay) has resulted in lower fares for those of us who want a quick getaway.
As for why the airlines haven't been able to make money in recent years, I think the answer is on the high-end (last-minute purchase, no restriction) coach fares. In my old days of business travel, I had a lot of $1,200 one-day round trips DTW-LGA or $800 fares DTW-ORD. Then my company decreed that we had to choose the lowest fare, with $50 round-trip leeway to get a better time or preferred airline. Without trying hard, I just found a fare of $909 to travel tomorrow or Friday to New York with a same-day return. Hmmm... same fares for Ma and Pa Kettle, lower fares for business travellers, higher fuel prices, no wonder they can't make money.
"Southwest is also making money. They price their tickets so that they make a slight profit and every other airline makes a slight loss. This is because Southwest is fundamentally not an airline, it is an energy hedge fund with airplanes."
I must be a huge nerd, cuz this made me laugh hard...
Don't forget that U.S. air travel is way, way safer now than it was before de-regulation.
Which is even more impressive when you consider that we have not substantially changed the FAA regulations govern airline safety.
While better technology (planes, avionics, simulator training, etc) certainly does help, my take is that the margins have shrunk so much that the airlines simply can't afford the business downturn that would result from a well publicized accident. Consequently, they're a lot more careful and we're a lot more safer.
Good effort, Don K, but it was actually the late Julian Simon. See this article if you are interested:
http://www.cato.org/pubs/regulation/regv17n2/reg17n2-simon.html
Also, just also wanted to add:
From Alfred Kahn, A.K.A. "Father of Airline Deregulation"
http://www.econlib.org/library/Enc/AirlineDeregulation.html
"Air travel is unequivocally safer now than it was before deregulation. Accident rates during the twelve-year period from 1979 to 1990 were 20 to 45 percent (depending on the specific measures used) below their average levels in the six or twelve years before deregulation."
And, the accident rate has gotten better even as the number of flights has increased.
http://findarticles.com/p/articles/mi_m0UBT/is_38_21/ai_n27399370/pg_1?tag=artBody;col1
Air Safety Week, Oct 8, 2007
"[By the end of Sept 2007 a reduction in the] accident rate of about 65 percent was achieved, one fatal accident in about 4.5 million departures, down from one in nearly two million in 1997."
Southwest's hedges are going to decline dramatically in 2009. Once that occurrs, the airline is going to have to deal with the higher costs of as well, and Southwest will be in the same boat as many of the current carriers.
I stated that "air travel" is going to go away. I agree - it will never go away. However, unless they can truly develop alternative energy sources which can provide airlines which cheaper fuel, the current price per seat does not provide enough cash in-flow to cover the cost of the cash out-flow to cover a single flight. As such, eventually prices will rise to the point where flying will become too expensive for many Americans. It is why the future of air travel will likely be Business airlines and then charter airlines, run by destination resorts or consortiums in destination areas (such as Florida).
Brad,
I don't buy that energy prices are responsible for the downturn. Airlines in the rest of the world are doing fine.
Personally, I suspect that it's a combination of labor costs(American Airlines has the most generous health insurance policy I've ever seen), union-introduced structural friction, and remaining regulations(Mandating minimum number of attendants per flight).
It may be worth making a distinction here between airlines globally and airlines operating in the hyper-competitive domestic U.S. market.
Jim Rogers has said recently that he's been buying (non-U.S.) airlines, partly for the reason that Sam mentioned near the top of this thread: every time he flies, the planes are packed. I suspect the airlines Rogers is buying have less competition on their routes than domestic U.S. carriers, and thus have more pricing power (so they can pass on the higher fuel costs to their passengers).
Brad,
I stated that "air travel" is going to go away. I agree - it will never go away. However, unless they can truly develop alternative energy sources which can provide airlines which cheaper fuel, the current price per seat does not provide enough cash in-flow to cover the cost of the cash out-flow to cover a single flight. As such, eventually prices will rise to the point where flying will become too expensive for many Americans.
Highly implausible. In the near-term future, Americans may fly less often on average than they have been in recent years, but the idea that air travel will become "too expensive" for the average American to use is pretty silly. Analysts seem to expect the U.S. domestic market to contract somewhat over the next couple of years, but the long-term projection is continued growth. Even if air fares increase substantially, flying will still be much cheaper in real terms than it was thirty or forty years ago. Newer planes are considerably more fuel-efficient than older ones, and advances in computerization, air traffic management and flight paths will allow airlines to use their aircraft more efficiently.
And outside the U.S. air travel continues to boom despite large increases in fuel prices. Airbus and Boeing have received record orders for new aircraft over the past two or three years. And just this week, at the Farnborough air show, both planemakers have received orders for hundreds of additional aircraft worth tens of billions of dollars. Airlines would not be spending vast sums of money on new aircraft if they did not think they could fill them with paying customers. In fact, the backlog of orders is now so long that new customers will have to wait many years to receive their planes.
This is an honest (not loaded) question. Earlier someone mentioned the great health care benefits an airline offered. How large of a role do growing health care costs play in the airline industry? Could part of the "cheap" European fares be explained by the fact that it is more likely that the government is picking up those costs, not the airline? Similarly, there have been some mention of unions as another source of costs, but I'd imagine that European airlines also have strong unions.
I know nothing about the airline industry so maybe this is a stupid comment/question set. Feel free to say so.
As for the question of cheap air fares in Europe, I'd guess this applies to RyanAir or carriers like it. RyanAir's model, unless it has changed, were based on underserved regional airports, or rather, having those small localities pay municipal subsidies for RyanAir to serve them.
There was a famous case where Lufthansa sued RyanAir for advertising that they served Frankfurt, whereas the airport they actually flew into was a minor tarmac 100km out in the sticks. The local government, true to the model, paid RyanAir a subsidy to use their facilities, which no one but private pilots use.
Also, their pricing model was something like a bidding system: The first few travelers to book get the ultra-cheap seat, with prices going up drastically to within days of the actual flight. RyanAir never offered any flight transfers or guarantees for passengers to make connections, as this might raise costs -- I believe by giving passengers a potential claim of indemnity for missed connections.
The stronger euro likely keeps fuel costs down more than here. And the Europeans did not have the experience where more than half the industry was in reorganization, like we had here after 9/11. That long period, along with federal rescue funds doled out to keep companies like United from failing, forced the companies not in bankruptcy to slash costs in order to stay solvent.
Frankly, I was amazed that American staid solvent. Yet I'm sure competing against others who weren't burdened by, you know, having to pay their normal bills reduced longer-term capital investment opportunities. Oh, and let's not forget how many flagship carriers in the US were "rescued" by being allowed to dump their pension liabilities off onto the taxpayer-backed Pension Guarantee Corporation after they raided their own pension funds as part of "reorganization."
This is an honest (not loaded) question. Earlier someone mentioned the great health care benefits an airline offered. How large of a role do growing health care costs play in the airline industry?
Short answer: a lot. And it's not just health care - the older airlines are burdened with legacy pension plans that are expensive and increasingly unaffordable. And just to make things more fun, airlines are subject to the Railway Labor Act, which tends to enshrine work rules, cartelize the labor market, and generally limit airlines' ability to effect efficiencies in the labor force. That's one reason SWA does a bit better: its work rules were written in 1990, for its existing business model and equipment. That makes management a LOT easier.
It is why the future of air travel will likely be Business airlines and then charter airlines, run by destination resorts or consortiums in destination areas (such as Florida).
Stupid question time. Why would it be profitable for destination resorts to pay for flights, presumably to fly tourists in, if it's not profitable for individual tourists to play for flights?
Stupid question time. Why would it be profitable for destination resorts to pay for flights, presumably to fly tourists in, if it's not profitable for individual tourists to play for flights?
Volume pricing and timing. Resorts can purchase whole blocks of seats a year in advance at a substantial discount compared to an individual buying one ticket a month or two before the flight. The resort can then roll that into the price of a vacation package. This is already being done -- airfare, car rental, boat rental, etc., are simply combined into one lump sum with the cost of the hotel.
MarkG,
American carriers also use regional airports that are quite far from the destination city.
American carriers also bid up prices right before the flight.
Drastically higher gas taxes far outweigh any advantages that the euro provide, to say nothing of the effects of lower discretionary spending per capita.
Some other explanation is necessary.
One thing I think helps RyanAir (the only low cost euro I've tried) is that the service and experience would probably never fly here.
-The seats are small, much smaller than any plane I've been on stateside
-You don't get a complimentary snack or drink, and I remember them being a couple of Euro's each - like Beer on planes here
-Much less bag space in the cabin
-I think my 1.5 hour flight only had 1 stewardess
-EVERYTHING that can hold an add does including the seat back, bottom of the overhead bins, etc...
-WHOLE PLANES are sold as advertisements - the one next to me had Shrek painted on it
I just heard on the radio a bit ago that American Airlines posted (IIRC) a $500 million loss in the first quarter. As mentioned before, this is with most flights at or near capacity. In other words, they're loosing money on each passenger, but making up for in volume.
I still have seen no explanation for why they don't raise ticket prices. Yes, labor costs are huge. Yes, fuel prices are way up. That doesn't explain this apparently suicidal refusal to raise fares to reflect those costs. Sure, they would loose some business to Southwest, but that lost business is loosing them money, anyway. Southwest can't just magically add enough new flights to bleed away all AA's business -- once their fights are full, they're full. Besides, if all the other airlines raised their rates so as to be profitable I suspect Southwest would raise theirs as well, at least somewhat.
This just makes no sense to me, so I'm sure I'm missing something. What?
T. Mott
My understanding (someone correct me if I'm off base) is that Southwest and the other carriers DO have enough excess capacity to soak up any fares that their rivals lose due to higher prices. All those shrink-wrapped planes in the Nevada desert are just waiting to be put to use.
As a result you get a sort of armed stand-off, where each airline is unwilling to "blink" first on prices for fear that their market share will suffer irreversible declines. So they all sit tight and hope that someone else goes bankrupt first.
Yeah, the cost of entry into the industry, or schedule expansion, is suprisingly low, given how captal intensive the business is. Given how many planes could be brought back into service, maybe even some liquidations wouldn't shrink capacity enough to change the fundamentals. Eventually an old plane that is mothballed loses utility, but it sure seems to take a long, long time. Hell I think there are still 707s still in service, albeit not in North America.
Skullberg:
"I think the SWA issue may be related to it's market. SWA doesn't do a lot of business travel, so I assume it's somewhat more exposed to the price fluctuations of the consumer market. That being said, their fares have been rising to the point where on a lot of flights they are more expensive that AA, USAir or Continental.
I prefer SWA for a lot of reasons (Mdiway v. O'Hare being one), but if I am not getting a discount on the fare, I might choose to avoid the cattle call seating."
1. Southwest has TONS and TONS and TONS of business customers. Perhaps not in your market, but assuredly in others, like TX and CA.
2. There is no "cattle-call" any more.
3. The proper abbreviation is "WN", not "SWA."
Get up-to-date, dude.