AMR reports 4th quarter loss

[MrMarky]

Hi Ch 12,

Sorry, I am unable to make much sense of your response.

But try this on for size:

In the past year and a half the oil companies have dramatically increased their prices -- like 2 1/2 times more than they were charging just a short time ago, with no prospects for a return to the previous pricing levels. And I don't see anyone walking away from their cars.

 

[Ch. 12]

Hi Ch 12,

Sorry, I am unable to make much sense of your response.

But try this on for size:

In the past year and a half the oil companies have dramatically increased their prices -- like 2 1/2 times more than they were charging just a short time ago, with no prospects for a return to the previous pricing levels. And I don't see anyone walking away from their cars.

I guess the part you didn't understand, then, was the elasticity. Demand for air travel is highly elastic meaning that a small change in price causes a large change in demand. IOW, if you raise fares by 2%, it may cause a 10% shift in purchases. On the other hand, you bring up the oil industry (i.e. gasoline) which is a much different story. The demand for gasoline (and cigarettes, for example, as I pointed out in my last post) is highly inelatic. This means that we are more dependent on the product and/or less averse to price changes. I filled up my car at $3.99/gallon b/c I had no choice.

I'm sorry that you could not make sense of my post but my message was simple: It is much more difficult to collectively raise fares than you allude to. And as far as the WN example you mentioned...I understand that you say that WN only has so much capacity and once that is full, legacies have more room to sell higher fares but the fact is that WN has a 69% load factor so the legacies would be giving WN 45% more pax (which would bring their LF to 100%) and therefore actually getting much less traffic. The marginal increases they would get on the remaining demand would make them even less profitable than today.

Does that make sense?

 

[FWAAA]

FWAAA --

I can't argue with your logic. It's a very complicated issue. But I do think the claims of overcapacity are false and I think the load factor numbers support my argument on that.

Looks like we're in permanent disagreement. If most of the airlines reporting record-high load factors were also reporting net profits, then I'd agree with you that there was no glut of domestic capacity.

Looking at load factors and concluding that they prove that there's no such thing as domestic overcapacity is very similar to looking at high load factors and concluding that a particular route is highly profitable. Ameteurs do this all the time when their favorite route is axed. They say "but the plane was always packed" as if that meant the route was profitable. But you aren't that kind of ameteur. Load factors don't matter; what matters is whether the mix of paid fares covers costs or not. With the right fares, a 50% load factor can be highly profitable, and with the wrong fares, a 95% load factor can be a money-loser.

But nearly every airline showing high load factors is also bleeding money. Lower the price enough and you can fill every seat. If new Escalades and Corvettes were $20k, many people would be trying to buy them, and GM would be very busy. Probably not profitable, but very busy. Well, some of the airlines are just about there - like B6 with more than 85% of its seats filled on average.

Oh, and about B6: it showed a pre-tax loss in the third quarter and is expected to show a more significant loss for the fouth quarter. Low fares = high load factors = disappointing profit potential. Over at WN, on the other hand, lower load factors are going hand in hand with consistent profits.

Nearly everyone realizes that WN is not always the cheapest airline for a particular trip, but with a walk-up maximum of $299 each way, it is never a price gouger. No doubt that helps WN's bottom line. People often pay a little more to fly WN than they might pay to fly a legacy airline, but there's zero chance they will be gouged at WN, while that's the whole business plan at AA, UA, DL, NW, CO and others.

I agree with Ch 12. The demand for air travel is highly elastic. If it weren't, then all airlines would merely raise fares just like the oil companies raise gasoline prices.

I can accept a broad-brush indictment that the management of one or two airlines consists solely of stupid idiots to explain away financial failure, but when several huge airlines continue to sell their seats for less than their total costs for several years in a row, that's evidence of domestic overcapacity, not management stupidity. If the domestic market was not suffering from overcapacity, then all the airlines would raise average fares the $40 to $60 necessary to stem the losses and generate decent profits.

Some conspiracy theorists have previously posted that such pricing power currently exists at all the majors but that the management of those airlines would rather price under cost for a prolonged period solely to bust the unions. With UA's professional fees related to its bankruptcy thru 9/30/05 totaling a whopping $446 million, and widely expected to total nearly $600 million by time UA actually emerges from Ch 11, I can't believe that management would willingly transfer such vast wealth to lawyers, accountants and bankers just to screw the workers. Others will disagree. Cheers.

 

[Ch. 12]

You hit the nail on the head, FWAAA.