Why is the industry so unstable?

[CFIse]

Why is the airline industry so unstable? How is and industry that has tons of customers so volatile? Unstable gas prices? That can't be it. Are the airlines undercutting that much? It seems like everyone has to deal with it, customers and employees.

Because it is a capital intensive business with high fixed costs. If you presented the basic facts of an airline to a set of first year business majors WITHOUT identifying it as an airline they'd tell you that you'd be insane to invest in or attempt to run such a business - and in fact most of them would tell you such a business could not exist.

So why do airlines exist? Because you CAN make a lot of money when the cycle is right (precisely because it is capital intensive and fixed cost), but like gambling you have to get in at the right time and pick your money up from the table and walk away at the right time - and both those things require a) the discipline to do it and b) finding some sucker willing to take over from you. Because unlike black jack there is a cost to getting up from the table.

In fact there are other capital intensive fixed cost businesses. Telecom is one such business - and that business has gone through the same fiasco as the airlines with de-regulation and is just now emerging with the only viable business model - large, consolidated players with a few companies coming and going nipping at their heels. I used to read reasoned opinions from apparently perfectly sane people tha long distance phone calls should be free - because the phone company already had the switches and lines and there was no cost to use them. The same argument could be made for the airlines - tickets should just cover the fuel - after all the airlines already have the planes......

 

[surreal1221]

The same argument could be made for the airlines - tickets should just cover the fuel - after all the airlines already have the planes......

But find me 5 American airlines that 100% all of their fleets?

Sure the airlines have the planes, but they are certainly not paid in full and as such are not 100% OWNED by the Airlines. A cost still to be associated and reflected on the ticket price.

That seat cushion still costs something, and it costs a lot more than the $89 it is being charged compared to ten years ago.

 

[CapnJim]

Doug's on it. Aviation is the Great American Fantasy. Everyone wants to go from NY to LA in ten minutes, and pay fifty dollars. But we ain't there yet.

Big, stinky, jet airplanes cost money. Lots and lots of money. The pretty veneer we put on them lulls people into thinking otherwise, but it's all smoke and mirrors. These damned monstrosities take a ton of dough to keep flying safely, and that money has to some from somewhere. Trouble is, no one wants to pay it.

Taxpayers voted that they didn't want to, ticket buyers sure as hell don't want to, managment thinks pilots should pay but that goes over (predictably) like a turd in the punchbowl-- so what's the fix?

Easy answer: higher ticket prices, better customer service. A lot better. Good customer service is cheap; all you have to do is treat your employees well, and they will make the money for you. It's counterintuitive to the Standard American Bottom-Line Business Model, but it will work. Thats the answer, I think. But I may be wrong.

 

[seagull]

Doug's on it. Aviation is the Great American Fantasy. Everyone wants to go from NY to LA in ten minutes, and pay fifty dollars. But we ain't there yet.

Big, stinky, jet airplanes cost money. Lots and lots of money. The pretty veneer we put on them lulls people into thinking otherwise, but it's all smoke and mirrors. These damned monstrosities take a ton of dough to keep flying safely, and that money has to some from somewhere. Trouble is, no one wants to pay it.

Taxpayers voted that they didn't want to, ticket buyers sure as hell don't want to, managment thinks pilots should pay but that goes over (predictably) like a turd in the punchbowl-- so what's the fix?

Easy answer: higher ticket prices, better customer service. A lot better. Good customer service is cheap; all you have to do is treat your employees well, and they will make the money for you. It's counterintuitive to the Standard American Bottom-Line Business Model, but it will work. Thats the answer, I think. But I may be wrong.

Sorry, disagree. Everyone also WANTS to pay 10 cents/gallon for gas. Everyone also WANTS to pay just 10 cents for a full dinner at a fancy restaurant. Everyone always WANTS to have something cheaper. What prevents it? Simple economics, supply and demand. Why can FedEx and UPS make a profit? Large, non-governmental, barriers to entry that prevent it. Why do oil companies make a profit? Same reason. Banks, same issue again. What do they all have in common? It takes a LOT of capital to compete, and those businesses are not earning what is termed as "economic profit", such that there is not excess over what it takes to get investors to invest in them (simplified).

Pax airlines have a problem that I outlined. It is a continuous cycle and the only solution to it in the short term would be government regulation, but that would have the effect of hurting it in the long term. The industry has never settled from leaving the "womb" of regulation. It is not so different than the companies within the Russian economy. Hard to take a company that has a culture designed around being protected and convert it to a truly competitive enterprise. Can be done, but not easy. That's why China is doing so well. They are mostly just letting the smaller, formerly mostly black market, outfits, grow and allowing outside competition to let things filter out. Works better in the long term, although painful for those in the older outfits. You could think of it as the difference between someone that loses weight with liposuction and doesn't change their eating or exercise habits to someone that just does the latter. The one with the fundamental changes will have the longer term effects, but it is a longer process that requires some shorter term sacrifice.

 

[surreal1221]

So how much longer will it take the industry to feel comfortable outside of the womb?

Anyone . . . anyone?

Serve on our own...without government handouts? Never. . . it's not the American way.

 

[CapnJim]

Sorry, disagree.

No, you don't, But I'll let you think you do if it makes you feel better.

 

[seagull]

So how much longer will it take the industry to feel comfortable outside of the womb?

Anyone . . . anyone?

Serve on our own...without government handouts? Never. . . it's not the American way.

Well, the partial handouts they get only prolongs the agony. Not much different than the current welfare system, actually. However, we are in an industrial revolution of sorts. How long did it take for those impacted by the last one to finally get things sorted out? Some never did is the truth, but, overall, more people are better for the changes that occurred. History will likely judge this one the same way -- not that that helps those that are in hard times now.

 

[surreal1221]

Well, the partial handouts they get only prolongs the agony. Not much different than the current welfare system, actually. However, we are in an industrial revolution of sorts. How long did it take for those impacted by the last one to finally get things sorted out? Some never did is the truth, but, overall, more people are better for the changes that occurred. History will likely judge this one the same way -- not that that helps those that are in hard times now.

I agree wholeheartedly. . . Unfortunately, it doesn't do this generation any good to sit back and wait for history to judge us. Act first, die later

As for our welfare system, don't get me started. . . and I'm a lybaral :insane: !

 

[CFIse]

But find me 5 American airlines that 100% all of their fleets?

Sure the airlines have the planes, but they are certainly not paid in full and as such are not 100% OWNED by the Airlines. A cost still to be associated and reflected on the ticket price.

That seat cushion still costs something, and it costs a lot more than the $89 it is being charged compared to ten years ago.

Let me get this straight - I make a patently obviously stupid statement and you want to argue that the statement isn't true based on the facts?

Have at it.

The sky is a greenish purple color as well - take a run at that while you're on a roll.

 

[mpenguin1]

Opinion only.

You're dealing with multi-million dollar pieces of equipment, that need hundreds of thousands of dollars of fuel (per day) and a vast network of trained professionals from pilots to dispatchers to mechanics to even the people ensuring the security of the operation.

But the general public only wants to pay $85 to fly from SNA to JFK, "Friends Fly Free!" and I can't believe I checked a bag in Copenhagen, connected in JFK and now I've got to wait 10 minutes for it to arrive at the carousel in San Diego...This is preposterous!

The airlines are their own worst enemy, the Public does not demand "Friends fly Free". The airlines make that crap up to steal customers from another airline, or prevent another carrier from invading their turf.

 

[sargeanb]

Odd...I'm working on a report about this in one of my MBA classes right now. Mainly about the effect of the recent jet fuel increases on airline ticket prices and revenue. To our surprise, though fuel prices increased dramatically in the last 5 years, ticket prices continue to go down so the legacies can compete with the LCCs. Until the gov't cam update the ATC infrastructure (more direct routing), or build more airports to relieve some congestion at major hubs (ie less delays), it's not going to change. Oh, or decrease labor costs...but hopefully we can prevent that. Airports often use Pax facility charges to fund expansion to meet demand, besides their federal grants, but airlines can't afford to raise prices, or lose market share to the competition, so it's a tough situation. It's mainly infrastructure that needs to change, and it's not going to come quick or cheap.

-Brock

 

[skydog]

First of all, you can make money with airplanes, witness FedEx and UPS.

There is a big difference between FedEx and UPS and the passenger airlines. FedEx and UPS are not airlines, and they do not make money with airplanes. They are package shipping companies and, as part of their business, they use airplanes to ship packages. It's a subtle difference, but a very fundamental one.

In the case of UPS, their mission is to move packages in the most cost efficient manner. For the majority of the companys' existence they did not even use airplanes. Somewhere along the line, management determined that using airplanes was a good way to accomplish the task. However, I have no doubt however that if management ever determined that airplanes were not the best way to do it, they'd get rid of their fleet in a hearbeat.

FedEx is the exact opposite. They started as an overnight air shipping company, and then added the ground component later. I don't know what they would do in the situation I described above.

The other difference, I think, is that people don't have much heartburn paying $14.95 to ship a 1 pound letter coast-to-coast overnight. I think it's because $14.95 is not a lot of money to people who need to use overnight shipping. Hence it is perceived as good value. Now imagine that same pricing structure to move a 185 pound human. A lot of people would have a big problem paying $2765.75 flying NYC to LA, one way.

 

[DE727UPS]

"FedEx and UPS are not airlines"

I don't know, man...

They told me when I first got hired (1990), I wasn't a pilot for an airline, so I shouldn't expect to get paid like an airline pilot. On this last contract, they told me how much less airline pilots made, these days, so, as an airline pilot, I need to lower my expectations.

I'm just a little confused....

 

[wheelsup]

There is a big difference between FedEx and UPS and the passenger airlines. FedEx and UPS are not airlines, and they do not make money with airplanes. They are package shipping companies and, as part of their business, they use airplanes to ship packages. It's a subtle difference, but a very fundamental one.

I agree - with an additional point. The above companies don't just move freight - there is more to their business model than that. Pax carriers in general just focus on moving people. Some have other businesses, such as credit cards, but nothing like the wide range of services UPS and FedEx offer businesses.

If you look at the companies that *just* move freight, they are all supplemental carriers. No independent carrier to my knowledge just moves packages, except the USPS, and they need the government to keep them afloat. That is why UPS and FedEx have been so sucessful, IMO.

 

[CapnJim]

"FedEx and UPS are not airlines"

I don't know, man...

They told me when I first got hired (1990), I wasn't a pilot for an airline, so I shouldn't expect to get paid like an airline pilot. On this last contract, they told me how much less airline pilots made, these days, so, as an airline pilot, I need to lower my expectations.

I'm just a little confused....

727, wouldn't the logical response be "Yes, I shouldn't expect to get paid like an airline pilot. I carry, flight for flight, more revenue than any 'people airline', so I should by all rights get paid more!!"?

Out of curiosity, what is the IPA's stance?

 

[seagull]

There is a big difference between FedEx and UPS and the passenger airlines. FedEx and UPS are not airlines, and they do not make money with airplanes. They are package shipping companies and, as part of their business, they use airplanes to ship packages. It's a subtle difference, but a very fundamental one.

In the case of UPS, their mission is to move packages in the most cost efficient manner. For the majority of the companys' existence they did not even use airplanes. Somewhere along the line, management determined that using airplanes was a good way to accomplish the task. However, I have no doubt however that if management ever determined that airplanes were not the best way to do it, they'd get rid of their fleet in a hearbeat.

FedEx is the exact opposite. They started as an overnight air shipping company, and then added the ground component later. I don't know what they would do in the situation I described above.

The other difference, I think, is that people don't have much heartburn paying $14.95 to ship a 1 pound letter coast-to-coast overnight. I think it's because $14.95 is not a lot of money to people who need to use overnight shipping. Hence it is perceived as good value. Now imagine that same pricing structure to move a 185 pound human. A lot of people would have a big problem paying $2765.75 flying NYC to LA, one way.

Yes, all true, and entirely missed the issue. It has nothing to do with the model, it has to do with what you are competing with. You are selling space on an airplane. It's a perishable product. If someone comes in and starts offering the service that FedEx and UPS do at below their costs, you better believe it would cause problems. The issue, has been mentioned, is the LCCs ability to cherry pick.

 

[kellwolf]

The problem with the industry is someone has to be the maverick and try the "grand experiment" of raising fares. I thought it was gonna happen a couple of months ago until United decided to cut fares, then everyone dropped back down. I see nothing wrong with passing cost increases along to the consumer, and I think there are plenty of people out there willing to pay for that in order to get from point A to point B in a timely fashion. However, they aren't willing to do that if in the process they get crappy service and a barely caring CSA to check their luggage. Just observe the ticket counters in MEM and you'll see a nice little cross section of what's a major issue in the industry: customer service. "Huh?" and "Waht'choo want?" are NOT the proper ways to greet paying customers, yet I see it daily (or at least on the days I fly).

As far as supply and demand, the past 7 legs I've flown have all been 42+ passengers, even the early morning/late afternoon flights. That says to me that the price can go up some. Now, if the loads were like 20-25 people each flight, I'd say probably not. But, if you've got full loads going out at the current prices, the demand is probably there to sneak the prices up a bit. I'm not saying $15 each way right off the bat, but maybe a $2-3 per month increase. Look what it did for gasoline. A year ago people were bitching b/c gas was getting close to $2/gallon, but now they're happy it's not at $3.

 

[seagull]

The problem with the industry is someone has to be the maverick and try the "grand experiment" of raising fares. I thought it was gonna happen a couple of months ago until United decided to cut fares, then everyone dropped back down. I see nothing wrong with passing cost increases along to the consumer, and I think there are plenty of people out there willing to pay for that in order to get from point A to point B in a timely fashion. However, they aren't willing to do that if in the process they get crappy service and a barely caring CSA to check their luggage. Just observe the ticket counters in MEM and you'll see a nice little cross section of what's a major issue in the industry: customer service. "Huh?" and "Waht'choo want?" are NOT the proper ways to greet paying customers, yet I see it daily (or at least on the days I fly).

As far as supply and demand, the past 7 legs I've flown have all been 42+ passengers, even the early morning/late afternoon flights. That says to me that the price can go up some. Now, if the loads were like 20-25 people each flight, I'd say probably not. But, if you've got full loads going out at the current prices, the demand is probably there to sneak the prices up a bit. I'm not saying $15 each way right off the bat, but maybe a $2-3 per month increase. Look what it did for gasoline. A year ago people were bitching b/c gas was getting close to $2/gallon, but now they're happy it's not at $3.

If they could raise fares, they would, just as a gas station would raise prices if they could. You think they don't want to just keep the prices at $3/gallon?

They CAN'T raise prices on their own without losing market share. This is not complicated economics here. The problem is that others charge less for the same product, even if they are doing so at a loss, to gain market share, forcing the prices down. That doesn't happen with the gas station because it costs a LOT of money to start an oil company, and not everyone has BILLIONS of dollars to invest to make it happen. Same with UPS and FDX.

 

[killbilly]

Opinion only.

You're dealing with multi-million dollar pieces of equipment, that need hundreds of thousands of dollars of fuel (per day) and a vast network of trained professionals from pilots to dispatchers to mechanics to even the people ensuring the security of the operation.

But the general public only wants to pay $85 to fly from SNA to JFK, "Friends Fly Free!" and I can't believe I checked a bag in Copenhagen, connected in JFK and now I've got to wait 10 minutes for it to arrive at the carousel in San Diego...This is preposterous!

Doug, you and I have argued this issue before in another thread...

The reason people have that expectation is that they've been allowed to have it. People didn't demand $85 seats. People wanted/and want fair prices for travel - their perception of fair is absolutely skewed by comparison shopping.

I still stand by my assessment in the earlier thread about SWA, and some of the issues of fare setting:

Business travelers make up the bulk of your passenger traffic - charge them incrementally more over time - they will absolutely still buy the tickets because they have to.

I do this monthly, and sometimes, it doesn't matter what the ticket costs - I have to go somewhere.

What the airlines can do to compete is make the damned tickets flexible - SWA does this, and the rest of the airlines need to follow suit; by doing this, they create far increased value. And the business traveler will respond to that value proposition.

Business travelers will buy tickets from an airline if their overall productivity (read: time spent) increases. And you're able to do that by letting the guys buy, change, alter and cancel tickets at will. This is absolutely why I pay more to fly SWA's full-fare tix vs. the cheaper mainline carrier - it's the flexibility it gives me, which lets me control my time/productivity when traveling. It's also why Priceline is so freakin' evil.

If the airlines would realize this, they could very easily charge more. Better lives for all of us. The real question to ask is, if they do charge more, and make more money, staying profitable, will any of that increased revenue find its way into the pilots' pockets?

 

[scramjet]

I had someone tell me the other day that Airline pilots today are nothing more then glorified bus drivers. We know thats not the case, but I think the general public see's pilots becoming more and more like bus drivers as word gets out about airplanes flying themselves etc. Not really part of the original topic, but I think the public's perception has a lot to do with what they are willing to pay for airfare.

Not only that, but just ten or so years ago pilots got a lot of respect and aircraft have barely changed since then. I think what it really is is the public's perception of pay. Ten years ago: "Oh wow! Pilot. You must be making half a million!" Today: "Pilot, too bad! How's those food stamps working out?" In other words, people get stereotypes about the pay influenced but what they hear in the media and so forth.
Incidently, when I tell people, especially the ladies, I'm in training to fly professionally, they are always greatly impressed. :insane: I guess perception varies.