more US Air woes.....

And I'm sure they'll be cutting executive's salaries as well, not putting money that they need for operations into bankruptcy proof pensions as well.

And I'm sure they told GE Capital we're paying X dollars for these aircraft, and if you don't like it, come and move them to the desert parking lot.

Of course they did all these things first.
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I don't know if they did that or not, but as always, it's the evil employees and their unions that are the reason these folks are having trouble.
 
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I don't know if they did that or not, but as always, it's the evil employees and their unions that are the reason these folks are having trouble.

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It doesn't matter what the execs did, and whether you know what they did, you will accuse them of it anyway.

Having said that, USAir is a terminal case and nobody seems able to pull the plug. Clearly the employee groups were willing to sacrifice to try to save their jobs. Now we've hit the magic point where some labor groups will throw in the towel and refuse to do their jobs which should mean the end is very close. (I'm not saying I blame them).

But I don't get the idea that the necessity of lowering labor costs is tantamount to "blaming" the employees or saying that is "the reason these folks are having trouble".

Income has to be greater than expenses or your business dies. If you can't pay employees what they demand, your business dies. If seat supply exceeds demand, forcing artificially low prices, then some businesses will die. If your business leveraed itself unreasonably so that it can't pay it's debt, your business may die. This is all basic math and economics, not some sinister plot to attack labor. The same economic system that produced high wage and benefits for decades in this industry is now reclaiming them.
 
Well, seeing how someone got a five million buck pat on the back to leave.....

Doesn't seem like anyone ought to give the execs the benefit of the doubt.

Bottom line is, people ARE going to say, screw this. I'm going to collect every last dime from you now, because I know my pension is shot, and I know that we're toast. And who can blame them?

As part of my job, I talk to people at US Airways about various things. Last year, after they came out of chapter 11, they were pretty pumped about things, thought they had turned the corner, and that they'd be doing okay.

This year? Morale is in the crapper, and the attitude is screw this company, because they screwed me.

You can't turn a company around when people there have that attitude. And it isn't just the rank and file. The people who I'm talking to have titles that start with director or VP or SVP.
 
Things would have to be in the crapper there.

My only point about the execs is that in some cases they have done the right thing and never get any credit for it. (I don't include USAir in that group).

The over-paid, over-bonused executive was a symptom of the stock bubble of the nineties. Nobody cared what those guys were making as long as their portfolios were going up like a rocket. Then when the inevitable crash came, the boards and the execs were still hooked on the big pay and bonuses. That all is working it's way out of the system and in the cases where execs and BODs have done the right thing they should get credit for it. That's the nice thing about free enterprise, excesses always get handled by market forces.

There is no solution to the airline industry woes that involves villifying either executives or employees. I think one of the reasons that Continental is in such a commanding position right now is they fought this all out, to the point of exhaustion, many years ago. They know more than anyone that you can't win if you are fighting internally.
 
Oh, definitely, there are plenty of examples where the execs did the right things. You mentioned Continental. I'll add Southwest.

One thing that these two airlines have going for them is that they have good employee relations. Why? Because the employees feel like they are being treated fairly.

Fairly. Not well. Continental has been pounded, and they did the layoffs as well. Southwest just went through some contentious negotiations where they had to get Herb Kelleher involved to get a contract done.

But I'm sure that you don't have VPs, SVPs, and directors there saying, screw this company, because they screwed me. These are mid-level execs and they're saying that!

If you've got a company with people at that level thinking that, the company is doomed.

Smart execs (Kelleher and Bethune, for example) realize what you said -- if you've got internal fighting going on, you're doomed.

We need more of them.

BTW, I am not anti-exec. I am anti-screw up. Screw up and pat yourself on the back with things like bankruptcy proof pensions and the like, and I get even more irritated!

You and I would have gotten canned and told get the bleep out of here if we screwed up as much as some of the execs I'm criticizing have. But then they reward these people and that is what angers me.
 
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I don't know if they did that or not, but as always, it's the evil employees and their unions that are the reason these folks are having trouble.

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Income has to be greater than expenses or your business dies. If you can't pay employees what they demand, your business dies. If seat supply exceeds demand, forcing artificially low prices, then some businesses will die. If your business leveraed itself unreasonably so that it can't pay it's debt, your business may die. This is all basic math and economics, not some sinister plot to attack labor. The same economic system that produced high wage and benefits for decades in this industry is now reclaiming them.

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If seat supply exceeds demand, how is that forcing artificial low prices? It seems to me that the fares would be responding to legitimate market pressure if that is the reason they are low. Woudn't artificial low prices be something like SouthWest lowering their prices so much that US Air can't compete out of Philly?

I don't know anything about the market forces in play. I do know that fares are way too cheap, especially given inflation. What is really going on to keep the prices where they are? Would it be good for the airline industry if one or more airlines bit the dust? After all, supply would be reduced, increasing loads, and prices may rebound... At least, that's how it should work, right?

????

G
 
Did you post to Flightinfo as well?

A couple of points:

1. Inflation. What is it, anyway? Have prices really gone up? Is a car really more expensive, how much to the features and modern fuel economy play into the average price, as well as various safety enhancements? What about computers, are they more expensive now? Cell phones are more? Electronic devices in general? The "market basket" used to guage inflation is somewhat controversial now (certainly an arbitrary list of items), and it could be argued (very easily) that we've been in a deflationary mode for quite some time.

2. If capacity goes down, I think all it would do is create more opportunity for the LCCs. It *might* spike prices for the short term, but the bottom line is that the price is set by the market, and the LCCs ARE able to make a profit at the current market rates.

I don't think that seat supply exceeds demand at all, seems to me that most airlines are running at historically high load factors. How does that play into your theory?
 
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I don't think that seat supply exceeds demand at all, seems to me that most airlines are running at historically high load factors. How does that play into your theory?

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I have to agree here. At SWA, our loads were always high, and at ExpressJet out of Memphis, it's near impossible to nonrev to Houston. Newark and Cleaveland are normally close to full during peak hours as well. The problem is that the LCCs have put so much price pressure on the legacies that people would rather drive than pay more than a Fun Fare. I checked in a guy yesterday flying to Caracas, Venezeula for $150!! The LCC can make it work since their cost structure was built for those fares from the ground up. The legacies can't make that happen. It would take a total top to bottom restructuring. Song and Ted are definately not solutions to that problem. What the legacies need to do is stop trying to match the LCCs and start producing a quality product they can charge a higher price for. I used to think the open seating policy at SWA was the greatest thing since sliced bread, but now I LIKE being able to check in 24 hours in advance and know where I'm sitting. Things like this are what the legacies need to be promoting.
 
You, personally, may be willing to pay a bit more to have seat selection, but you're in a tiny minority there. If the legacies do what you advocate they'll be destined to be catering to a small number of pax and give more market share to the LCCs. In the end, they'd end up being much smaller than they are now, just shadows of their present form.
 
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If the legacies do what you advocate they'll be destined to be catering to a small number of pax and give more market share to the LCCs. In the end, they'd end up being much smaller than they are now, just shadows of their present form.

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If they continue to drop prices to the point where they can't turn a profit, then the end result is still the same. The seat choice was just one example. Others are that the legacies offer service to markets not served by LCCs. SWA has absolutely NO presence in the Midwest for example since they can't make any money out there. The LCCs only serve markets with large numbers of travellers, which is why they can drop their fares so low. It doesn't make sense to fly a 737 into Podunk, Iowa. The odds of having an 80% capacity on the flight are slim to none. The area where a lot of legacies are really dropping the ball is customer service, though. There've been sometimes were even on SWA, I felt like I was just another one of the cattle in the stockyards.

One things that's totally clear is that the airline industry is not going to be even remotely the same in a few years as it was in the 80s and 90s. Once prices come down, it's near impossible to get them back up again. Even with the rising cost of fuel airlines are afraid of raising prices. If it weren't for the hedging SWA did, they would have lost money for the first time in over 30 years.
 
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If seat supply exceeds demand, how is that forcing artificial low prices? It seems to me that the fares would be responding to legitimate market pressure if that is the reason they are low. Woudn't artificial low prices be something like SouthWest lowering their prices so much that US Air can't compete out of Philly?

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You are right I should not have said artificially.

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I don't know anything about the market forces in play. I do know that fares are way too cheap, especially given inflation. What is really going on to keep the prices where they are? Would it be good for the airline industry if one or more airlines bit the dust? After all, supply would be reduced, increasing loads, and prices may rebound... At least, that's how it should work, right?

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None of this will get resolved until some capacity leaves the market and some hubs get shut down. Absent that then labor costs will have to keep coming down.
 
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I don't think that seat supply exceeds demand at all, seems to me that most airlines are running at historically high load factors. How does that play into your theory?

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Airline seats are most like a consumer commodity, like bananas. If the banana crop is big bananas will get so cheap that consumers will still buy up the crop. Price is the variable that brings supply and demand together. Cost has nothing to do with it. It doesn't matter if bananas are selling below cost of production, if you don't price them correctly many will rot on the shelf. So bananas get priced to squeeze the maximum revenue out of the existing banana supply.

So while it's true that airlines are filling all their seats, they are doing it by adjusting price. If there were fewer seats or more passengers they could fill the seats at a higher price. Internet ticket sales have made the price extremely elastic. Consumers type in a city pair and instantly get offers from 6 or more airlines with each of them offering several flights at different prices. This makes it nearly impossible for one or two airlines to raise fares.

The only thing that anyone has much control over right now is supply. If some hubs were shuttered and/or some airlines ceased to exist then fares would rise. Nothing else is going to have much impact.

This is a transition period from a regulated industry to deregulation. The legacy carriers were not in a position to compete in a market-driven environment because of their costs. Eventually the industry will move to where supply and demand are stabilized at a price-above-cost point. Labor costs will find a level that is sustainable from both viewpoints. Then somebody will see an opportunity and go out and buy a bunch of airplanes and throw them into the market and it will all start over again.
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We are talking about the typical elastic demand curve, which we have, and if capacity were reduced permanently, then the prices would rise, I agree. However, there is currently economic profit at the current fares for *some* carriers, and until THAT changes, the capacity will continue to adjust until the economic profit is zero, which is where all competitive industries end up (note to the non-econ types out there that economic profit is NOT the same as accounting profit!).
 
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We are talking about the typical elastic demand curve, which we have, and if capacity were reduced permanently, then the prices would rise, I agree. However, there is currently economic profit at the current fares for *some* carriers, and until THAT changes, the capacity will continue to adjust until the economic profit is zero, which is where all competitive industries end up (note to the non-econ types out there that economic profit is NOT the same as accounting profit!).

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Well I question the current profitability. Especially given fuel prices. Given that the economy is relatively solid and seats are full the fact that LCCs are just scraping out a profit or chalking up small losses should say it all.

But I do agree that the industry will always head for that zero profit point which means it will never be a super stable industry. But in truth there is no such industry in the world right now that I can think of. Technology makes it too easy for competitors to come in. Why is Wal Mart so successful? Because they can make money on razor thin margins that their competition can't match. A window into the future airline industry.

There are two reasons it has taken the airline industry this long to shake out from deregulation:

One was the defacto regulation of restricted slots and access to gates.

Two was the sustained economic growth of the 80s and 90s during which the airlines kept expanding (in part to shut out competition), avoiding big profits (retained earnings) and insuring they would hit the invevitable downturn with lots of debt, too much capacity and out of control costs. Ouch. This is going to leave a mark.
 
You may question the current profitability, but if we have reached zero economic profit, then we are where the laws of economics would put us. In reading your post, it appears that you are not aware of what the meaning of economic profit is. It has nothing to do with industry stability, the oil industry has been at zero economic profit for about 50 years now, for example. In simple terms, accounting profit is when earnings exceed all the costs (fixed and variable), but that doesn't account for the cost of investment, which has to be measured in terms of opportunity cost. When economic profit is zero, then you won't find anyone investing to try to get into the market (i.e., new entrants, airlines, in this case). Such is not the case now, which means that there are still some economic profits to be made (even if that is at the expense of the legacy carriers).
 
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In reading your post, it appears that you are not aware of what the meaning of economic profit is. .................When economic profit is zero, then you won't find anyone investing to try to get into the market (i.e., new entrants, airlines, in this case). Such is not the case now, which means that there are still some economic profits to be made (even if that is at the expense of the legacy carriers).

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Absolutely agree with that. Obviously a number of people see an opportunity in this industry. The legacies are in no position to compete until they collectively rationalize their systems and debt loads.

It is not so much a matter of too much capacity as it is too many hubs. With so many connecting hubs every city pair is served by every legacy carrier. So they are cutting each others throats for traffic. When the number of hubs gets rationalized you'll see RJs replaced by bigger equipment. Unit costs will come down like crazy and the "LCCs" will have their hands full competing.

I would argue that because the legacies let their costs get out of control they have been below an economic profit level for some time. I remember in the mid-90s when one legacy CEO tried to convince his company that if costs weren't reduced there was no future going forward. That was pretty farsighted, but it cost him his job and now that carrer is massively in debt and not competitive.

But it will get ironed out, and I don't think it well take that long.
 
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Did you post to Flightinfo as well?

A couple of points:

1. Inflation. What is it, anyway? Have prices really gone up? Is a car really more expensive, how much to the features and modern fuel economy play into the average price, as well as various safety enhancements? What about computers, are they more expensive now? Cell phones are more? Electronic devices in general? The "market basket" used to guage inflation is somewhat controversial now (certainly an arbitrary list of items), and it could be argued (very easily) that we've been in a deflationary mode for quite some time.

2. If capacity goes down, I think all it would do is create more opportunity for the LCCs. It *might* spike prices for the short term, but the bottom line is that the price is set by the market, and the LCCs ARE able to make a profit at the current market rates.

I don't think that seat supply exceeds demand at all, seems to me that most airlines are running at historically high load factors. How does that play into your theory?

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No, I only post here. My post was mainly a set of questions. If the airline industry doesn't obey normal market pressures such as supply and demand, why not? The government propping them up would seem to be a factor...

I didn't have a theory at all. I think you mistook my previous post as making a point, when in fact I was just trying to understand what might be going on.

G
 
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If the airline industry doesn't obey normal market pressures such as supply and demand, why not?

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But it does. In fact it is completely at the mercy of them. The reason things are so ugly is the industry is making the transition from a regulated/protected industry to a deregulated/free-market industry.
 
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