September 19, 2005
From the desk of Jane Galt:Whither aviation?
Why can't the airlines seem to get it together?
Three reasons, seemingly. First, the labour model is terrible. They are saddled with pensions promises they made back when the industry was heavily regulated and airlines were basically allowed to operate on a cost-plus basis. They have multiple, militant unions, none of whom have any incentive to leave any value on the table at negotiating time because they justifiably fear that anything they leave at the negotiating table will simply be claimed by another union. And the unions, plagued by loss aversion, will generally not give up enough in downturns to make the airline profitable unless they are ordered to by a bankruptcy judge.
Second of all, the business model is terrible. Airlines have a very high fixed cost, which is the cost of flying even if you don't carry any passengers, and a very low marginal cost, which is the cost of carrying each additional passenger. The temptation for airlines to sell empty "extra" seats at a very low price is extremely high. But every time one airline does this, it makes it that much harder for competitors to operate at a profit. Because so many of the costs are fixed, companies seem to enter a competitive death spiral, where everyone is desperately trying to dig themselves out of the hole as best they can by selling their product below cost. Also, the "hub-and-spoke" model, which makes it easy to get connecting flights, is much less profitable than the point-to-point model competitors use, cherry-picking only the most lucrative routes. And the airlines are hugely vulnerable to swings in the price of fuel.
Third, the legal model sucks. Easy bankruptcy is a very fine thing for the economy as a whole, but for industries like airlines, which because of the high-fixed/low-marginal cost thing already tend to be plagued by overcapacity, it's a disaster. Creditors would almost always rather keep the hulk running in the hopes of getting some cash out down the road than liquidate, especially because most of an airline's major assets, like planes, tend to be secured, leaving precious little for hungry debtees. So they rehabilitate the business with radically reduced debt and labour obligations. But this doesn't remove the excess capacity that makes it hard for anyone to make a profit; in fact, it makes the rehabilitated business more competitive, which pushes other companies into bankruptcy.
Is there hope? Transportation seems to be an iffy business; railroads as an industry never made a dime for their owners. Certainly, if I were an airline employee, I'd be looking into acquiring some new skills.
Probably the most hopeful recent development for the industry is the emergence of the regional jet (RJ). Heavy travellers hailed the coming of the RJ as it saved them from having to fly turboprops into obscure destinations. But the airlines are discovering that they can fly RJs on routes that they previously flew (half empty) 737s on. This allows them to serve niche routes and switch back and forth between large planes in peak demand seasons and small planes in lesser demand seasons.
The RJs are surprisingly cost effective to fly, even on a seat mile basis. All in all, the emergence of the RJ is starting to mitigate the high fixed costs of the airlines, which might allow them to compete more effectively in dynamic markets.
Your point about railroads may be true if you go back to the dawn of railroading, but is it true in recent decades? Consider Norfolk Southern's stock price and a ROE of about 14.6% isn't all that shabby.
There is an airline model that works, its called "Southwest"
1. Fly one type of aircraft.
Pro: This dramatically lowers cost of support at all levels from pilot training and scheduling to maintenance and purchasing contracts.
Con: If the Aircraft type gets pulled from service by the FAA, goodbye airline.
2. Fly one to two hour hops.
Pro: Do what you do best. Dont try to be the "end all and be all" one stop all purpose carrier.
Con: People start to think youre a bus company and act accordingly in the waiting area.
3. Use older out of town airports ( midway,not ohare, Love not DFW)
Pro: Gates are available at giveaway prices by willing city governments.
Con: Connections to other airlines? HA!
4. Load quickly.
Pro: We live by the clock we die by the clock.
Con: "Like a cattlecar in the sky"
5. unload even quicker.
Pro: Aircraft dont pay when they sit on the ground
In short, Get people where they wany to go at low price with a reliable safe platform. Drop the pretense, air travel is no longer exotic, its a simple commodity.
Too many airlines are still stuck on the model of the secured routes airlines. Too many airlines have no idea what business they are in, they still think they are in the luxury business.
Full disclosure: I'm a 750K flier with United. I prefer Southwest and fly it every chance I get domestically. Today, its only if I am going overseas that I tend to stay on United.
I once bet my coworkers that I could drive to LA from the Bay Area faster than I could fly United to LA door to door. I won the bet.
This might explain why Southwest is the only airline to make a profit, even through the 9/11 massacre.
In addition to what you've already mentioned, the airlines just honestly have a terribly difficult pricing problem: They are trying to sell a perishable good with a very peculiar marginal cost schedule, they are trying to sell it to extremely sophisticated consumers who are these days very good at tracking down the lowest price for their trip, and they are trying to do it in an extremely competitive commodity market. They're not dumb, they're just trying to cope with an almost impossible problem, and all the value created by the transaction is being scooped up by the customer.
On top of labor agreements and debt structure built at a time when it was a very profitable industry they just can't figure out a way to stay afloat...
After Delta's and Northwest's filings last week, 50% of US passenger capacity is operating out of bankruptcy. I really find the whole thing surreal - As a practical matter the Fed's aren't going to let the US travel infrastructure disintegrate and the only outcome I can really imagine is defacto nationalization.
Why don't they just get it over with and ditch the unions? I'm surprised they haven't pawned off the pension problem on the federal government as of yet.
The best thing the Feds could do is not just "let the US travel infrastructure disintegrate", but to actively push it over a cliff.
Their planes and the airport terminals won't go away, and the pilots/mechanics/aircrew will still be around to hire. Out of the asset-corpses of United, Northwest, Delta, and US Airways, a number of new Southwest/JetBlue/AirTrans airlines could be formed.
The other problem with airlines is that just do not control enough of their market mix. All airlines basically share the same waiting room, the same security system, the same parking lots, the same check in areas. Thus, there is no reason to pay more for any type fo boutique service since the airline cannot deliver what people want. Thus, price is the only thing to base purchase on (and FF miles).
Also, if the U.S. goes to a Southwest type system that means all international flights will be on foreign carriers since they are subsidized. Also, about half of the airport in the US will have to close immediately.
Ms. Galt: I think your discussion of airlines is incomplete without addressing one obvious question: why do they so utterly fail to differentiate? superdestroyer notes above that much of the infrastructure is shared, but I do not regard this as sufficient explanation.
I can fly around the world in steerage for around US$2000, but I can't even cross the Atlantic for that price in business class -- yet those two classes (and the even less accessible First) are offered, essentially without variation, by each airlines (except the execrable Virgin).
At many airports outside the US, waiting areas at gates have controlled access, so the airline should have substantial control over the waiting experience there, but they do very little. Their idea of customization is limited to putting up two large TVs tuned to different channels.
I am resigned to flying being an unpleasant experience, but it disturbs me that no airline even attempts to sell me a solution.
...if I were an airline employee, I'd be looking into acquiring some new skills.I know! Let's retrain them all in computers and information technology!!
I remember a question from business school - should a business continue to operate when it is not making a profit? The answer is yes - if everyone is receiving their salary, why not?
The question concerning the airlines is, who are the losers? Because only the losers need to ask themselves whether or not they should get out.
The workers? Perhaps - but then again these people were making hugely inflated salaries for years. I'm thinking they will still come out ahead even with pay cuts. Financial institutions and investors? They took the returns for years and now think they have a right to avoid the risk side of the equation.
As for me - I'm hoping these bankrupt airlines all go completely under and quickly. I am concerned for my safety, and I'm sick of the treatment I've received. Flying has become a truly unpleasant experience. Bury them all, and make way for something better.
If the British government wants to subsidize the travel of Americans to and from London, what's the problem for the general public in the U.S.?
If we have more airport capacity in locales than the current level of passenger traffic will support, then yeah, some will wind up shut down. And? Rough on the airports, sure, but why should anybody else care?
Enhancing the waiting room experience would only make economic sense if it would allow an airline to raise prices and still keep the business, and that doesn't seem to be the case because of the price sensitivity of most travellers. Yeah, it'd be nice, but how much is anyone willing to pay for nice? We want our nice for free, thank you very much.
Warmongering Lunatic asks:
If we have more airport capacity in locales than the current level of passenger traffic will support, then yeah, some will wind up shut down. And? Rough on the airports, sure, but why should anybody else care?
You care if you live or have a business somewhere that's likely to lose service and there's no convenient alternate and you (or your city/town/locality) wish to continue participating in the national/world economy.
Any not-very-booming place (like, say, LaCrosse WI or Appleton WI or Syracuse NY, to mention some places I've flown on business in the past couple of years) has a lot to lose if the air service goes away or is reduced, because it's yet another disincentive for any employer to stay and/or set up shop.
As another poster mentioned above, perhaps the regional jet is the best thing in a long time to happen to less important air destinations. I've certainly flown in a lot of them.
Yeah, it'd be nice, but how much is anyone willing to pay for nice?
Quite a lot. That's why we have first-class airfares, motels nicer than the Motel 6, rental cars nicer than Tauruses and Geo Metros, and restaurants nicer than Denny's.
Quite a lot. That's why we have first-class airfares, motels nicer than the Motel 6, rental cars nicer than Tauruses and Geo Metros, and restaurants nicer than Denny's.
Don't some airlines have higher-class lounges for first-class travelers? If not, they could probably make a buck by putting some in.
But I think the point BP is making here is that airlines will not spruce up their regular departure lounges because the travelers likely to be in them will not be willing to do anything more than complain about the conditions--if ticket prices increase, even to improve the lounges, they will take their business elsewhere.
Megan, could you explain something for me? You wrote:
They are saddled with pensions promises they made back when the industry was heavily regulated and airlines were basically allowed to operate on a cost-plus basis.
Is that true? Airline deregulation took place in 1978. Weren't a lot of the pension promises made after de-regulation? There have been a lot of union contracts negotiated since then. Wouldn't it be equally true that the Uniteds and Americans have been saddled with management who continued to behave as though they were on a regulated cost-plus basis long after they had ceased to be?
Management bought decades of continued operations (and continued top management salaries) by avoiding confrontation with their unions 25 years ago when they should have done it. Now they want a do-over (by dumping the pension plans they contracted for) without surrendering what they got from the deal.
Quite a lot. That's why we have first-class airfares, motels nicer than the Motel 6, rental cars nicer than Tauruses and Geo Metros, and restaurants nicer than Denny's.
Right, right. I was really talking about airline specific airport areas, rather than the actual aircraft/flight. But why does it seem to be unfeasible for airlines to offer anything between coach and first class (or anything between the standard gate waiting area and the airline frequent flyer wating area)?
I would say that making noticeable changes in the flying experience for some (but not all, by definition) travellers is expensive enough that just charging a 10% (or 25% or whatever) premium won't actually do the trick. So the airlines don't try -- they have really nice accomodations for people who are willing to pay a BIG premium, and regular accomodations the nature of which is determined by the price sensitive people, and nothing else.
Actually, Midwest Express used to have a flying experience that was nicer than your typical -- four across seating, even on 737's and DC9s, actual meals with non-disposable dishes and silverware. I was told a few years ago that their strategy was to target business travellers almost exclusively, and basically ignore the leisure travellers who are so price sensitive. I don't know if they're still doing that, because my employer switched over to a different preferred carrier for cost reasons.
if ticket prices increase, even to improve the lounges, they will take their business elsewhere
I don't see why that's necessarily true. People don't leave hotels in droves when they charge slightly higher room rates in order to have a nicer lobby or a better complimentary continental breakfast. If they did, nobody would ever say at the Four Seasons.
The problem is that much of the air travel experience is out of the airlines' hands, so they have no way of improving it.
Does anybody know if the upcoming bankruptcy law change will make chapter 7 more frequent in the airline industry? Short of liquidation and redistribution of assets, both human and capital, the industry will continue to be, on average, a dog.
Ah, but there is a much greater difference in marginal utility between, say, a nice hotel room and Motel 6 vs. Business Class and Economy Class.
I always stay in business hotels becuase the alternative means that I don't get any sleep. At Motel 6, the walls are paper-thin, the sheets are 100% polyester, and when the trucker upstairs takes his shower at 4:00 a.m. you will be awakened by it. Cabs don't line up outside, the room might not have an iron, etc., etc. At a business hotel, on the other hand, you can actually get 8 hours of sleep. This is very, very important and is well worth the extra $60 or $100 per night.
Or take rental cars. I use Hertz becuase they let you go straight to your car. They cost more but the convenience is well, well worth it. If you go to Alamo you will save but if the airport is busy you might have to stand in line for an hour and a half. I am happy to pay an extra $20 or $40 to save myself an hour, particularly when my flight arrives at 11:00 p.m. and I have an 8:00 meeting the next day in some town 40 miles from the airport.
But consider the difference between business class and economy class. In business class you get a nicer seat, more space, and a fancier meal. But if it's a two-hour flight, who cares? No one likes being squeezed like a sardine into an economy seat for two horus but I am not going to pay an extra $100 or $200 to avoid it. If the price premium were 10%, sure, I'd pay more for business class, sure, I'd pay more. But it's more like 50-80%, and that isn't worth it. Business class is only worth considering on cross-country and international flights, and then the price premium is even greater. But all you get is the seats and the meal. Business class does not save you any time.
For this reason I understand why the airlines can't charge much of a premium for business class and first class.
People don't leave hotels in droves when they charge slightly higher room rates in order to have a nicer lobby or a better complimentary continental breakfast. If they did, nobody would ever say at the Four Seasons.
I think that a lot of people aren't choosing airlines based on amenities in their flights, and especially not on the waiting areas. They're going to priceline.com and choosing the absolute lowest number in the cost column. Now, some people do care about their layover wait, and they may be willing to pay a premium. I'm arguing that there's probably not enough of these people to make it worthwhile for the airlines.
The people I've traveled with are less price-sensitive in their hotel choices, because they are going to be staying there, not just passing through in hopefully the shortest time possible.
Now, this is anecdotal, so maybe there is free money laying on the ground that airlines can pick up by improving their departure areas. But I doubt it.
...also, the 'government regulation' model is the big 4th 'reason' for airline woes.
Though the Federal Civil-Aeronautics-Board {CAB} enforced airline-cartel was phased out, the government still maintains vast regulatory interference with the airlines.
All aspects of airline operations from aircraft design, personnel, maintenance, flying, routing, capital investment, mergers, airline coordination, etc. are HEAVILY controlled by government politicians & bureaucrats. Foreign airline competition to domestic airline routes is still severely restricted, just like the good old days of the CAB cartel.
'Half-way' measures of airline deregulation are not working.
Get the government entirely out of the airline business !
In the interim, let ALL unprofitable airline companies go out of business !
==================
If the British government wants to subsidize the travel of Americans to and from London, what's the problem for the general public in the U.S.?
This has it completely backwards: the British carriers operate in the real world where they make profits or go bust. British Airways, for one, has done dramatic things radically to change the cost structure of their operations since 9/11. Their senior executives are, understandably, completely scathing about the US bankruptcy laws which effectively shield US carriers from the real economy and provide massively unfair competition.
We're not just talking about the small towns here. Supposing that the entire Big Six fail, and also the somewhat weak Independence Air (which lost as much as its entire shareholders' equity in the last six months). Then a fairly substantial region with two top-100 metro areas (east Tennessee) suddenly has no service within two hours. That might not hurt too badly in Europe, where the train is a viable alternative, but here in the States, it would be incredibly ugly.
You care if you live or have a business somewhere that's likely to lose service
Which is to say, nowhere. To quote myself:
---
The best thing the Feds could do is not just "let the US travel infrastructure disintegrate", but to actively push it over a cliff.
Their planes and the airport terminals won't go away, and the pilots/mechanics/aircrew will still be around to hire. Out of the asset-corpses of United, Northwest, Delta, and US Airways, a number of new Southwest/JetBlue/AirTrans airlines could be formed.
---
Virtually any metro area that currently has a major airline servicing it large enough to sustain profitable air travel into and out of the city with at least a small commuter point-to-point carrier. Which will be able to use the abandoned gates and some bargain-priced ex-big airline planes to fly at least to one bigger city's airport. At which point a flight at the bigger airport to points beyond would need to be arranged by the traveler. It will be inconvenient compared to the current single-carrier hub-and-spoke model, and it might be more expensive – but if there's a price point at which operating costs can be covered, there'll be serivce.
The other challenge to me was that it would make all overseas air travel fall to subsidized foreign carriers. My point is that American fliers shouldn't care if that happens. Whether or not British Airways (for example) gets those subsidies is largely irrelevant. If flights to Europe only are available on foreign-subsidized airlines because the subsidies were large enough to prevent any profitable American lines, then the foreign taxpayer is paying the costs of American businesses and vacationers. Fine by me.
Okay, if the entire Big Six and a seventh airline were to all evaporate overnight, yeah, there might be trouble for East Tenessee during the time it takes until Southwest/AirTrans/JetBlue were to add lines flying reposessed Big Six planes with ex-Big Six pilots from the ex-Big Six gates of those airports. Even if all the current Chapter 11s were switched to 7s, the disappearance wouldn't happen that fast.
Then a fairly substantial region with two top-100 metro areas (east Tennessee) suddenly has no service within two hours.
Well, to be fair, this is a region of the country that by its voting record shows a strong commitment to small government and free-market economics. I'm not sure why they should enjoy government-subsidized air service or federal mandates for "essential service."
Virtually any metro area that currently has a major airline servicing it large enough to sustain profitable air travel into and out of the city with at least a small commuter point-to-point carrier.
I agree that it is unlikely that any airport currently seeing major airline service will completely lose service. However, it does seem likely that a major rearrangement of the airline industry will result in a reduction in service to some places, and my point is that this has an an economic impact beyond immediate resident convenience, especially for a city that's already economically struggling. And the struggling cities are the most likely to have reductions in service, right?
Even if the sheer number of flights to/from a given small city doesn't change, without the hub-and-spoke operations of the "legacy" carriers, some journeys that currently require two hops will require three or more, and that reduction in convenience is effectively a reduction in the level of service.
I am in a bit of a unique position here, as Chattanooga is one of the largest cities in the country that not only has no "low-fare" carriers, but that none of the majors serve with their own planes (we have only their "commuter" carriers). So we could indeed lose service completely here. And while I can do most everything a normal person can do, there are three I can't, and one of them is driving. So indeed, I personally would be pretty well hosed in this scenario.
Not to mention, when you're having to change carriers along the way, what happens when a delay blows your connection?
The airlines in this country are learning the most difficult lesson of all. The leadership philosophy taught in business schools until the early 80's was overwhelmingly Management by Objective (MBO) and it is a fraud.
I know this because I was one of the victims and it took me several years to realize that the world is made of processes you have to manage - not sales budgets and operating plans that ignore reality.
MBO is a license for corporate arrogance. It is largely found now in older white males (guilty again!) Fortunately, Edwards Deming came along with the theory of variation and its practical cousin, continuous improvement. It is hard to implement, is not as glamourous, and full of tedious analysis. Hallelujah!
Now at least I can see how to get from point A to point B without risking my net worth. I recommend this solution to anyone who will listen, but it is not for the lazy or intellectually undisciplined.
Please - the low hanging fruit is gone forever! Business leaders have to build management systems that work and the employee can use effectively. If you need help, try cqm.com, they're the Salvation Army of American management.
...the British carriers operate in the real world where they make profits or go bust...Their senior executives are, understandably, completely scathing about the US bankruptcy laws which effectively shield US carriers from the real economy and provide massively unfair competition.
marek: clarification, please, because this doesn't make sense. Surely the firms that sell fuel and lease planes and lend money to US carriers are as well informed as British Air is about US bankruptcy law, right? Wouldn't the prices that US carriers are charged for such things reflect this higher risk (and their own poorer creditworthiness)? I can't imagine there's any free lunch to be had by US-based airlines on this account.
I am in a bit of a unique position here, as Chattanooga is one of the largest cities in the country that not only has no "low-fare" carriers, but that none of the majors serve with their own planes (we have only their "commuter" carriers). So we could indeed lose service completely here.
Wait a minute, let me get this straight. You live in a small city with a small regional economy and you say your small city's lack of size and economic clout is reflected in...less convenience than is available to people living in big cities?
SHOCKING!!!
To the "let them die" crowd:
1. How can Southwest or JetBlue economically fly to Hawaii, Alaska, etc using a point to point system?
2. How can a country particpate in the world market when flying from St Louis to London means flying Southwest from St Louis to Newark and then changing airports and airlines (British Air and JFK) to fly to London?
3. How many states will end up with no airport and how many will end up with only one (image Alabama with only an airport in Birmingham or Iowa with only Des Moines)?
3. If have of the commercial airports close, can the Fedex/UPS provide the same level of service?
To Superdestroyer,
As long as there are people willing to pay to fly to the various destinations you describe, there will be an airline to fly them. And if there are no people willing to pay, then there will be no airline willing to fly. On many of my business trips, I fly most of the way and drive the last 100 - 200 miles. It isn't a big problem. In fact its nearly always faster and cheaper to drive that 200 miles than it is to fly it.
The airline industry hasn't really been around that long. The idea that the model of the past 50 years is the only possible model seems a bit limited. Especially considering that it obviously isn't working.
1. How can Southwest or JetBlue economically fly to Hawaii, Alaska, etc using a point to point system?
By picking an endpoint that they already serve (Los Angeles, San Francisco, Las Vegas, whatever), flying the route and charging what the market will bear. I'll bet that Hawaii, at least, won't see any significant reduction in number of flights. Reduction in number of nonstop destinations maybe.
(Come to think of it, though, does anyone fly 737's on Transpacific routes? Southwest has an all 737 fleet, IIRC.)
The demise of the hub/spoke system may make the airlines more reluctant to serve small markets. But I don't think Hawaii/mainland counts as a small market.
2. How can a country participate in the world market when flying from St Louis to London means flying Southwest from St Louis to Newark and then changing airports and airlines (British Air and JFK) to fly to London?
The economy of the whole country and its ability to participate in the world market might be just fine even if St. Louis had no air service at all. It would be bad for St. Louis, of course, and you could debate whether it would be good for the country.
3. How many states will end up with no airport and how many will end up with only one (image Alabama with only an airport in Birmingham or Iowa with only Des Moines)?
I think the vast majority of airports that have some service will continue to have some service, albeit possibly less frequent and/or less convenient. I also think that expecting people not directly affected by cutbacks to see them as a problem is probably a lost cause.
3. If have of the commercial airports close, can the Fedex/UPS provide the same level of service?
I don't think that half of the airports will close outright, and does UPS use air at all?
I don't think the economics of Fedex's business is the same as that of the passenger airlines. Fedex might choose to continue to serve airports that don't otherwise have scheduled passenger service, and maybe that would be enough to keep those airports open. And then again they might not.
3. How many states will end up with no airport and how many will end up with only one (image Alabama with only an airport in Birmingham or Iowa with only Des Moines)?
I don't know why a state would end up with significantly less airports. We're talking about airports here, not castles of videogame endbosses. The terminals aren't going to collapse around the CEO of Northwest with him screaming "Curse you! Curse you, negative cash flows!" The infrastructure will still be there, and will be used. (A major problem in a lot of areas has been trying to get land to build more airports or expand existing ones, which runs into NIMBYism)
Surely the firms that sell fuel and lease planes and lend money to US carriers are as well informed as British Air is about US bankruptcy law, right? Wouldn't the prices that US carriers are charged for such things reflect this higher risk (and their own poorer creditworthiness)? I can't imagine there's any free lunch to be had by US-based airlines on this account.
All other things being equal, airlines which have to pay their own way will have a competitive disadvantage over airlines which are both unable to pay their own way and are protected from being forced out of the market as a result.
PB Almeida: we are vulnerable on this point here in a way that other cities of almost identical size (Harrisburg, for example, or Portland-Maine) are not.
And by the way, even Southwest would have lost money in the last quarter had it not made a massive winning bet on the direction of oil prices several years ago.
2. How can a country particpate in the world market when flying from St Louis to London means flying Southwest from St Louis to Newark and then changing airports and airlines (British Air and JFK) to fly to London?
I don't understand the point you're making here. In the specific case, there are plenty of transatlantic flights leaving out of Newark and they would continue into the future because transatlantic makes money. In a general sense, I would imagine that a decline in air travel would lead to consolidation of airports, so you're not likely to see extremely awkward connections between different airports in the same city.
The question is what changes technology will or will not make. There are smaller commuter jets. Will they be improved even further? Can jets be made significantly more fuel efficient than they currently are, whatever their size? There are currently several companies working on very small jets that could work as "air taxis" operating out of small airports. They use technology adapted from cruise missiles for their engines and modern control systems that make flying much simpler than the complex systems of large commercial jets, simpler than even current small aircraft.
I guess that there not many consultant types here based upon the inability of people to see how things are connected.
If the big six (or seven) hub and spoke airlines go out of business, then many aiports (I would argue most) would not have enough gate rentals or enough landing fees to stay open. In addition, the FAA would lose reasons to maintain commercial air service support at many airports. The end factor being many of those airports downgrade to general aviation airports. Thus, no commuter flights, no Fedex landings, etc.
If the big six go out of business, who is left to buy the small commercial jets. They do not fit the business models of the profit making airlines.
If the big six go out of business, then who is flying the wide bodies to Hawaii or Alaska. It does not fit the business model of Southwest, etc.
If the big six go out of business, then who is flying transatlantics from Newark or Dallas to London. Southwest's business model is to avoid the "expensive" airports where most of the Trans-Atlantics take off. Is the future of aviation means taking a taxi from Midway to Ohare to catch a Transatlantic?
Superdestroyer,
You recite a change of events worthy of a science fiction novel. In the real world, the price mechanism is more than capable of responding to the failure of the major airlines. The worst case scenario is that prices will go up. But considering that the true costs must be, and are being, paid by someone, these price increases will actually be more of a change in who pays than a true price increase. I foresee a paradigm shift, not a disaster.
superdestroyer,
But isn't some of the things that aren't in the business models of Southwest, et al aren't in there so they wouldn't have to take on established businesses? If the big guys disappear, the way will be open for smaller firms to expand into those areas (or for new players to enter the game with a more level playing field). But any way you look at it, if the airport is there and the passengers are there, someone will be flying out of those airports. The only question is what will happen to seat kost.
EDIT: The spam filter here is apparently out of its mind right now. I've had to edit about 10 times to get it to work. It's even stopping see-ee-ess, so pri-see-ee-ss won't work, as well as the proper spelling of the word "kost"
Kall me krazy here, but the odds of the six biggest airlines all going out of business simultaneously seems right up there with the odds of the Yankees supporting a salary kap. So why is everybody using a skenario like stat to analyze this? Konsider, say, three of them going out of business, and the other three pikking up whatever of the slakk is profitable, and thereby stabilizing themselves. That seems a whole lot less doom-and-gloom, wouldn't you agree?
Also, good god, has your spam filter has gone haywire. Any word using the third letter of the alphabet seems to be verboten - hense all off the K's and S's. Please, for the love of god, fix it.
I tried to post something along the lines of Alsadius' yesterday, and gave up.
Superdestroyer, you seem to have missed the concept of process. All the big airlines aren't going to go out of business on Wednesday morning at 10:23 am.
The rational question is, what happens when one of the big six go out of business? What happens when a second of the big six go out of business? If you think there's still a problem when you get to "what happens when a fifth big airline goes out of business?", _then_ you can ask about all six going under.
I think it's pretty obvious that the answer to "What happens when five of the big six go out of business?" is "The sixth airline rakes in huge profits." The real puzzle is how many have to shut down before the industry is profitable, not what we would do without airlines.
PJ,
Good point. If we were talking about restaurants, it would be obvious that in a town with too many restaurants, some won't turn a profit and be forced to close. So what is the difference between airlines and restaurants? That there is so much money and therefore politics surrounding the airlines that someone has always been around to bail them out. I don't think that this can last forever though. Market equilibrium is unavoidable. The only question is to what extent the taxpayers will be burdened before it happens.
PJ,
You have changed the argument. The original argument was that the tradiational, hub-and-spoke, sell every seat at a different price, union staffed airline is an unworkable/unsustainable market mix and should be replaced with a Southwest type, point to point system. I have argued that going to all point to point airline (Southwest, Jetblue) would have a huge number of unattended consequences to include many airports having to close, increased difficulty in international travel, and increased ticket costs.
Now you are arguing that hub and spoke can work and that there is just too much capacity in the system. Now which one is it? Can a tradiational airline (like American) survive with its current market mix or is the idea of the big airline dead?
Why either/or? Perhaps at the end of the day, if we get unnecessary political maneuvering out of the market's way, one or two carriers may be competitive enough to survive an industry crash and run hub-and-spoke operations profitably, while the rest of the slack is picked up by low-cost carriers and commuter operators.
Practical demonstration of the if-there-are-customers-they-will-come strategy: I live in a regional population center (Albany area, New York). Up until the last several years, we had no low-cost carriers, much like the Chatanooga situation. We would all either drive to New York City (three hours each way) for a cheap fare, or bite the bullet and pay double to fly out of Albany's airport.
Then, Southwest started flying out of Bradley, in western Connecticut (about 100 miles away). Pretty soon, Southwest noticed that a significant portion of their traffic at Bradley was people driving over from the Albany area. The price differential was so extreme that a couple could drive to Bradley at night, get a hotel room, and fly out in the morning--and still save $300-$400 on a cross-country trip.
Southwest correctly deduced that even more Albanians would fly Southwest of they could do it without the drive. We've had Southwest here for several years now, and Albany's airport is doing a lot more traffic over all carriers now, since flying makes much more economic sense for most people.
As long as the successors to the Big Six act like Southwest did, regional customer bases should be able to get service.
How can one say that the US isn't subsidizing air travel when the airlines are declaring bankruptcy and pushing 100's of millions of dollars onto taxpayers (pension funds, anyone?).
Comments are Closed.