American Airlines pays about $34,000 in fuel

[Bob Owens]

The airline takes in about $54,000 in total revenue for the average flight from JFK to LAX. That leaves the company about $20,000 to pay for everything else, let alone make a profit.

Maybe CNBC should do a story on airline workers and how after paying taxes, paying insurance, medical bills, the mortgage, utilities and paying to get and forth to the airport that they have nothing left for food let alone possible savings, investment or education for their children.

 

[Bob Owens]

The MBA school I attended was less interested in teaching economic theory--and most of the economic models out there are just that...theory--and more interested in teaching business facts, such as "If you consistently sell your product for less than it costs to produce, it won't matter how elastic the demand is, you'll be out of business."

As far as your vaunted elasticity of demand...
1. The travelers most likely to forego travel if the price goes up are the same people who think they have a Constitutional right to transcon airfares less than $100 each way. Losing them will not seriously affect the bottom line of AMR. In fact, we would be well rid of those passengers.
2. The travelers we most depend upon, the business traveler, will not much care if fares go up. The increase will either be passed on to their customer, or they will deduct it from their business income tax as an expense.

Plus without those $100 fares you could spread the seats out a little more,float a little bit of that lobbying money, have someone pass a law requiring more room between seats-citing the danger of DVT -thus reducing industrywide capacity and raise your prices $10 or so plus they could jam more cargo into the bellies now that the passengers have to pay for checked in bags.

 

[Hopeful]

Maybe CNBC should do a story on airline workers and how after paying taxes, paying insurance, medical bills, the mortgage, utilities and paying to get and forth to the airport that they have nothing left for food let alone possible savings, investment or education for their children.

Bob, I feel the need to answer this post before the pro-company sorts do so....

"Be lucky to have a job......just look at the other airlines who have gone bankrupt and what happened to their employees."

 

[eolesen]

1. The travelers most likely to forego travel if the price goes up are the same people who think they have a Constitutional right to transcon airfares less than $100 each way. Losing them will not seriously affect the bottom line of AMR. In fact, we would be well rid of those passengers.

Wholly agree.

2. The travelers we most depend upon, the business traveler, will not much care if fares go up. The increase will either be passed on to their customer, or they will deduct it from their business income tax as an expense.

Wholly disagree. We do care when fares go up, mainly because we, too subscribe to the concept of spending as little as possible and making a profit. To wit, today I've been on two rather lengthy conference calls that would have been face to face a year ago.

I had a $60K budget for airfare this year, and now it's been belt-tightened to $40K. Instead of traveling in J to Europe, I'm traveling in Y more and more or using mileage to upgrade. With the archaic Saturday night stay reappearing, I'm going to get to be a tourist more, but the tradeoff will be sitting in Y. Instead of buying midweek returns, I'm spending an extra day or two to qualify for lower fares where the incremental cost of hotels/meals is still lower than the fare premium for a short stay.

So, the travel will continue to occur, but it's going to result in lower overall revenue for the airline, since it takes five full fare Y's to offset a single lost seat in the J cabin.

 

[jimntx]

E, I'll match your anecdotal evidence with my own. I have a friend here in Dallas who is an executive with a major international consulting firm. I asked him how a raise in fares might affect his company and employees.

His response was that it would not affect them at all because they have no choice but to travel, and their customers all understand that "reasonable" travel costs must be passed on to the customer. It's a clause in every contract they write.

Their customers understand that all International travel (and domestic flights over 3 hours) is done in Business Class, minimum. Longer flights, such as US-Australia, are upgraded to First whenever possible, but the employee usually uses FF miles for the upgrade and any service fees, etc are passed on to the customer.

I'm not saying that no company other than yours is cutting travel budgets, but they've been doing things like teleconferencing instead of traveling since the 1990's. We had some of the first dedicated teleconference rooms at Texaco. Even then, customers wanted a face to face on some issues.

I was trying to get across that price shopping is the purview of the leisure traveler most of the time. The business traveler is predominantly concerned with schedule.

And, in any case, we are still faced with the fact that if we continue selling our product for less than it costs to produce, it won't matter much whether your travel budget is $40,000 or $40 million. We won't be around to grab any of it.

 

[frontline]

The MBA school I attended was less interested in teaching economic theory--and most of the economic models out there are just that...theory--and more interested in teaching business facts, such as "If you consistently sell your product for less than it costs to produce, it won't matter how elastic the demand is, you'll be out of business."

As far as your vaunted elasticity of demand...
1. The travelers most likely to forego travel if the price goes up are the same people who think they have a Constitutional right to transcon airfares less than $100 each way. Losing them will not seriously affect the bottom line of AMR. In fact, we would be well rid of those passengers.
2. The travelers we most depend upon, the business traveler, will not much care if fares go up. The increase will either be passed on to their customer, or they will deduct it from their business income tax as an expense.

I'm not saying we should not raise fares, but your idea that airlines should jack up fares in parallel with the cost of oil just isn't going to work. Especially since the playing field is not level (WN hedges).

On point 1 you exaggerate significantly. I've never seen or heard of a $100 transcon outside of a genuine mistake fare. But you are correct that losing the lowest rung of leisure travelers will not significantly affect AMR's bottom line.

On point 2 I disagree entirely. Sure there are some people who will pay $5,000+ for first class JFK-LAX no matter what, but credit and business conditions are worse now than they have been for a looooong time. Like you and eolesen I only have anecdotal evidence, but mine points to belt-tightening among small and medium businesses as well as individuals.

 

[Borescope]

Now, unlike the workers of AA where I as a mechanic gave back $20,000 a year in return for 449 shares of stock....I immediatley LOST a ton of money because the stock would have to hit $300 a share for me to just break even....

You must have an MBA also......