The Airline Industry is so F**ked......

[marmar]

Reuters, via Airwise.com:



June 7, 2008


A record one-day spike in global crude oil prices on Friday pushed the anticipated fuel bill for US airlines up by more than USD$4 billion, driving down shares and heightening uncertainty about industry prospects.

"Things just got worse for us today," James May, the chief executive of the Air Transport Association said.

Airlines are particularly sensitive to price increases with carriers spending more on jet fuel than any other expense.

Domestic airlines are expected to pay more than USD$61 billion for fuel this year, USD$20 billion more than for 2007, the ATA estimates. The figure accounts for some of the pending capacity cuts, imposed by the biggest airlines to counter high fuel expense.

The ATA estimated that Friday's USD$10 jump in crude prices -- if it sticks -- added more than USD$4 billion to the industry's annual bill.

US crude settled up USD$10.75 at USD$138.54 a barrel on Friday. Prices could reach USD$150 by July 4, one of the busiest American travel holidays, investment bank Morgan Stanley said in a research note.

Analysts have warned that continued sustained increases in fuel costs could eventually push more US airlines into bankruptcy. A handful of small airlines have gone out of business this year. Frontier Airlines is operating under bankruptcy court protection.

"I know one thing, people can't afford to fly and so you're seeing a decline in revenue and increasing costs that will probably result in more bankruptcies in this industry," former Continental Airlines chief executive Gordon Bethune told CNBC.

Airlines have imposed multiple fare increases this year to try and offset oil price increases. .....(more)

The complete piece is at: http://news.airwise.com/story/view/1212835417.html

[glowing]

1. Wasn't deregulation just so great.. This is how corporations do it better?

This should prove to everyone.. corporations suck and when it comes to transportation, they should NOT be in control.

[AngryAmish]

5. More flights, much lower costs

Enough bashing of Jimmy Carter.

There are more flights at a lower cost nowadays than before. People going on more vacations because of the lower costs.

Should the arrival/departure slots be reallocated (auctioned)? Yes. The current system is not working on that front.

Bottom line: For the consumer if all the old carriers went away then we would not really notice. The carriers go bankrupt, the planes are sold (or repossed by the lessor) then repainted then a new airline uses them. The employees are screwed in that scenario.

[marmar]

7. "There are more flights at a lower cost nowadays than before"

That's quickly coming to an end.....Many fares are up 400 percent from last year. Flying is again going to become a relatively elite activity.
And as for new carriers rushing in to replace the older ones? I wouldn't count on it. Not in this environment.

[sam sarrha]

10. carter inherited that disaster.. just like Obama will inherit Bu$h's worst disaster in history

and i am sure he will also be blamed for that... about 90% of all ReThuglican administration have created recessions, Carter wasn't responsible, he never had a chance to do anything the ReThugs hijacked the government just like they did to bill clinton

[AngryAmish]

22. Airline deregulation was passed in 1978

<http://en.wikipedia.org/wiki/Airline_Deregulation_Act_of_1978>

In 1978 Jimmy Carter was in the White House, Tip O'Neill was Speaker of the House and Senate majority Leader was Robert Byrd of West Virginia. I suppose you think Tip O'Neill, Robert Byrd and Jimmy Carter were so stupid and weak the Rethugs rolled over them? That is stupid and you know nothing of history. Please shut up on this subject lest you make a bigger fool of yourself.

I am sick of people trashing our party, especially those supposedly inside of it. Airline deregulation was a Democratic idea and we deserve all the credit for what it has done for our nation.

[sam sarrha]

29. here is a >>link>> with some specifics.. the Democratic party has changed a lot sense then, and you

could discuss this in a civil manner.. couldn't you..??

the agencies have changed too, it looks like the agencies involved in the regulation were much to blame in what happened,, i don't think they were appointed by democrats.. but i am sure you will bitch me out regardless

[MindMatter]

13. Only one airline has turned a profit since deregulation

If you add up the cumulative income statements for all the airlines since deregulation, there is only one that has actually made money during that time, and that is Southwest. And I believe they have turned a profit every single year.

While fuel prices are a real challenge, they have nothing to do with the fundamental problem. The fundamental problem is that the people making decisions in this industry, with the exception of Southwest, are complete morons. They continue to operate under a mindset that is 180 degrees wrong, and they refuse to learn from the one airline that figured it out.

Yes, some consumers have gotten some cheap fares along the way. That is the only factor that has improved under deregulation, and that is artificial. The cheap fares only resulted from these morons making horrendous pricing decisions. Instead of maintaining a level of service that would satisfy the business and more affluent customers who bought seats at a price that could be profitable, these morons just kept trying to sell every last seat with pricing that never had a prayer of being sustainable. So the losses and mergers mounted.

Just look at the list of dearly departed airlines since deregulation. There were several dozen large, healthy airlines back then. Now there is only one healthy airline. All the others except AA have been in and out of bankruptcy, some of them have been there multiple times. And AA's service has become horrendous as they follow the strategy of cutting customer service to try to be profitable. That never works.

[Hannah Bell]

24. Surely someone would have figured out there were "morons" in

charge over 30 years?

[MindMatter]

31. They didn't figure it out in Detroit, did thry?

Group think is a powerful thing. The people running the airlines are mostly enamored with the notion of flight and not good business people. Same can be said of the Detroit executives. Their pulse rate jumps with each new vehicle they produce, and they don't have the clarity of though to make difficult business decisions in a timely way.

Maybe "moron" is too harsh. How about ignoramuses?

Again, the fact remains that the only airline to make a profit since deregulation is Southwest, and they make a profit every year. In many cases, they do things 180 degrees opposite from the conventional wisdom.

That's another important factor. When an executive (or middle manager for that matter) has his head up his ass and really doesn't have a clue how to run the business, he takes great comfort in the conventional wisdom. "Look. That's how Eastern, TWA, Frontier, and America West have always done it so it must be the best way."

[Hannah Bell]

35. see, i wonder about detroit. i sometimes wonder whether it wasn't

deliberate.

[MindPilot]

2. Even with tens of billions in corporate welfare

the airlines can't keep it together. The average ramp rat could probably do a better job of management.

[screembloodymurder]

8. Actually, this has little to do with airline management.

We're going to see a worldwide "mobility crisis" if oil stays at these levels. Without mass transportation, the poor will be confined to the inner city. Only the rich will be able to afford air travel. I expect only three airlines to survive.

Expect gas rationing and mandatory AC temperature levels. This is the end of suburbia as we know it. What really sucks is that GW Bush has squandered billions that could have been spent productively.

[Clear Blue Sky]

3. If you have frequent flier miles, use them before the airlines cancel them.

[marmar]

4. Yup.....'Cause you know that's coming.....

ala THe Sharper Image refusing to honor gift cards.

[Benhurst]

6. I never did understand how The Sharper Image got away with not honoring gift cards.

They represented merchandise which had been paid for in advance. Their refusal to deliver the merchandise was outright theft. The corporate management ought to be in jail.

[screembloodymurder]

11. I agree, but it just goes to show:

You don't get something for nothing so don't give something for nothing. Never buy a gift card.

[mwooldri]

27. Gift cards are unsecured loans to the merchants.

It's effectively a 0% interest loan to the company until it is called upon for repayment by means of shipping merchandise.

If a company goes BK it cannot pay back its loans. Gift cards being unsecured ones tend to go towards the middle or the back of the line.

[Clear Blue Sky]

16. I didn't hear about Sharper Image gift cards. I thought gift cards were like gift certificates.

[MindMatter]

14. No way., They have a better plan.

They have already been doing this. They artificially limit the dates, flights, and number of seats where you can use the points, but if you are willing to throw in some cash, maybe you can use your points. And now AA charges a fee to book the flight using your points.

They don't need to get rid of the points. They are already worthless.

[FarCenter]

9. Things will get better

The airlines basic problem is that there are two many competitors in a business with high fixed costs and low variable costs. In this situation companies keep cutting their prices to add volume and as a result they fail to cover their fixed costs of depreciation, etc, as they cut prices all the way down to marginal costs.

Higher fuel prices helps in several ways:

- The ratio of variable to fixed costs increases, helping the competitive situation,

- Weak airlines are forced out or merged,

- Higher prices force out low-cost leisure travel and shift the load factor back to less cost sensitive business travel.

[MindMatter]

15. Too many competitors?

There is only one airline that has managed to make a profit over the past 20 years. That is Southwest.

The problem isn't the number of competitors. it is the decision-making by all the airlines except Southwest. Year after year, Southwest goes about their business serving routes efficiently, not nickel-and-diming their customers, maintaining a friendly, helpful staff, offering fair prices without outrageously complex rate rules, and they make money. All the other airlines do exactly the opposite on each point, and they all lose money over the long haul.

I don't know what the "right" number of airlines is, but it isn't 1. What we need is a few more airlines that have executives at least half as smart as Herb Kelleher. Until that happens, this industry will continue to be f***ed up and it has nothing to do with the price of fuel.

[FarCenter]

18. The right number is 3

Typically, in a non-regulated marketplace, companies will either merge or go out of business until there are three left. The remaining mergers will usually be disallowed by anti-trust law.

With three competitors, you have a stable situation, both with respect to "price leadership" by the strongest, who holds up a "price umbrella" for the other two, as well as with respect to coalition building between the weaker two to better compete with the strongest.

The legacy airlines had some issues with labor relations, high cost structures inheirited from the regulated days, etc. that Southwest didn't have. Southwest also had excellent management. Note that the other entrants since deregulation haven't had comparable sucess in the US. Maybe Virgin and Ryanair are comparable sucesses elsewhere.

[MindMatter]

20. Which is not nearly enough for free market principles to work

We should simply admit that certain industries are vital to our economy, but face such a difficult risj/reward picture that they cannot thrive in a completely unregulated market. This is obviously one such example. I'm OK with 3 companies, but not if they operate as a cartel. If three is the number, then we need to return to some sensible regulation of their products, prices, customer service, and route decisions.

[Lydia Leftcoast]

21. Yes, having only 3 companies makes it easy to form a cartel

They kind of do already. One airline eliminates meals, and pretty soon they've all eliminated meals.

Unfortunately, they seem to match ONLY deteriorations in service and rises in fares, not improvements in service.

[FarCenter]

23. "Free market principles" are mostly unworkable anyway

It presumes many suppliers, many customers, standardized products, and minmal barriers to entry by new suppliers.

Most areas of business lack one or more of those conditions.

The "deal", rather than the "market" is the hallmark of most business, especially for higher value transactions. For example, the purchase of aircraft by airlines involves limited numbers of suppliers of airframes and engines, high barriers to entry, customized products, and a fairly small number of customers.

[sam sarrha]

30. free market is a ReThuglican fantacy .. cant work, never has, no free markets

[Hannah Bell]

25. you have an oligopolistic market, i.e. gentleman's agreement

to price-fix.

we could have skipped the whole "deregulation" charade.

[FarCenter]

26. True, but that's a normal US market structure

The classic example is the wave of mergers that resulted in GM, Ford and Chrysler.

Microprocessors for servers have gotten down to Intel, AMD, Sun and IBM. Back in the day, there were dozens of mainframe and minicomputer vendors, each with their own processor design.

In some cases, the process goes global. Large jet engines are dominated by GE, United Technologies, and Rolls Royce.

Airliners got down to Boeing, McDonnell-Douglas and Airbus, but the US government allowed Boeing and MD to merge.

I'm sure airline deregulation is viewed as a failure because this process hasn't happened expeditiously.

[Hannah Bell]

28. yes, normal us markets are oligopolistic, i.e. rigged. if only more

people would admit it.

capital markets too.

oligopolistic markets = oligopoly: gov't by the few.

[Deja Q]

34. After mergers, prices tend to go up so I'm not understanding your logic.

[mr_hat]

12. My oldest son just got his BS in aviation science.

All he's ever wanted to do was fly...

Gonna be a real tough world for him, macro and micro.

[timtom]

17. And of course,

TSA tightening would have no impact whatever

(Except for me -- I refuse to fly until air travel is restored to 1965 conditions)

[Commie Pinko Dirtbag]

32. 1965? 1995 conditions were super to me.

Anyway, I wasn't around in 1965. Weren't tickets outrageously expensive vis-a-vis people's earnings then?

[timtom]

33. Yeah, actually 1995.

That WAS pretty good, now that I think on it.

I don't recall 1965 prices being particularly exorbitant, but I've forgotten much, it seems...

[Lydia Leftcoast]

19. The pricing structure has encouraged a "race to the bottom"

Whether you pay $200 for a ticket bought three months in advance or $2000 for the same flight, only bought on the same day, you get a cramped seat, a 4-oz. beverage, and a bag of pretzels. Under those circumstances, who WOULDN'T look for the cheapest possible price?

Domestic first class is mostly upgrades, because who in their right mind would pay several hundred percent more for only a slight increase in service?

Same thing with international business class and first class. Just for fun, I priced a ticket from Chicago to Tokyo on United in all three classes. At the time of the year that I went, I could get a pre-purchased coach ticket for $700, but business class was $7,000, and first class was $12,000. They were underpricing their coach tickets and trying to make it up by overcharging their business class and first class passengers--a large number of whom were upgrades anyway.

It would seem smart for the airlines to simplify their pricing structure. Figure out what it really costs to fly the aircraft and charge accordingly with allowances for seasonal fluctuations and maybe one discount price for advance purchases, not a constantly fluctuating set of prices that encourages bargain hunting.

Just to take a hypothetical example, suppose the airline figures that it needs to charge $500 per passenger, averaged between coach and first class, to break even on a flight one-way from A to B. Say the plane has 200 seats, about 10 of which are first class. It should therefore be a bit of simple algebra to figure out how you could balance out the advance purchase discount with the premium charged for first class and still make a profit.

If that leads to fewer passengers, then just run fewer flights.

The type of situation I once encountered, where I kept pricing flights between Portland and Minneapolis at $550 RT for months until they dropped overnight to $198, only encourages bargain hunting and airfare roulette.

Under the "capacity control" system dreamed up by the bean counters, the passenger at the window may be paying $200, the passenger at the aisle (a same-day business traveler) may be paying $2,000, and the passenger in the middle (who is on a "bereavement fare") may be paying $700, all for sardine seating and minimal refreshments, if any.

Obviously, the bean counters aren't as smart as they thought they were, because their nickel and diming has taught consumers to bargain hunt. Where once airlines competed on service, they now compete on price, and they're all in trouble.