April Financial Report Filed With Court

[justaumechanic]

I know I bash you when I get the chance.. So don't take this as a bashing.

Is this not a statement somewhat like "Master of the obvious"?

Network carriers will never be able to get their costs to that of the LCC's. It is close to impossible. Operation of multiple fleet types is a major factor in this. You simply can not run an efficient system like Southwest or JetBlue or AirTran with all of the different fleet types not to mention the Express operations.. It is a cost item that can not be removed from the CASM without cutting Employee expenses well below that of the LCC's.

Taking a close look at the April Numbers it is very clear that US Airways is not servicing its massive debt load as it hides in chapter 11. It still continues to consume its remaining assets to survive.

This current influx of money from the investors is not money that are throwing in because its a great investment. They are getting something for the money. Something they can sell if the company spirals out of control.

On the operations side any airline can make money if they do not have to service the debt they incur.. Thats easy.. Hell my bank account would be huge if I didn't have to pay for my house and my car!!!

642 million in revenue with a 7 million operating net gain (which is actually more like 4.5 because they sold off some of their material) is at or less than 1%. That is pretty low numbers.. Not profitable by any means.

Virtually every airline analyst and CEO's from companies like AA & NW repeatedly indicate that the industry has over capacity, but what has top be asked is what is causing the over capacity.

It's the LCCs because of their expansion. If the LCCs would not grow network companies would have better pricing power.

With that said, legacy airlines must be able to compete across-the-board to fight off the LCC advantage. If the legacy companies can compete, LCC expansion will slow.

Regards,

USA320Pilot

[post="273756"][/post]​

 

[eolesen]

The Airline Deregulation Act of 1979 gave any carrier the ability to serve any airport from any other airport. The Wright amendment added "except Love Field" as a means of protecting DFW and it's largest tenent, American Airlines.

[post="273951"][/post]​

Technicality -- Braniff was the largest tenant at DFW when Wright was enacted. AA wasn't the largest tenant at DFW until 1982.

 

[funguy2]

However, if some high-cost capacity were to disappear, that remaining would see an increase in the percentage of higher fare traffic - that traffic wouldn't disappear - thus increasing average fares while still competing for the low-fare traffic.  Everyone would be better off, legacy and LCC alike.

You've got to be careful here...

1. If airlines are generally full and capacity disappears, then some traffic must disappear. (If you have 10 airplanes, and they are all full, and then you take 1 airplane away, does traffic disappear? Relative traffic... No (Load Factor still 100%). Absolute traffic... Yes.

2. If fares increase, demand decreases. Econ 101. Mweiss has gone into a long dissertation regarding price points etc, but at the basic, most simplistic level, this would continue to be true. Part of the reason for the strong traffic levels today are the fares. There are many folks who would not be travelling if the fares were higher. Case-in-point: The Washington Post recently noted that Airfares to/from WAS area have declined 20% since 2000. So, traffic levels are at about the same level as 2000, but revenue is down 20%.

So follow this logic: 2000=normal year. 9/11/01 occurs and dampens traffic (initially security concerns and hassles, later due to economic recession). Airlines lower fares to stimulate traffic. Welcome to 2005. The challenge for the indsutry now is to raise fares without reducing traffic - something the airlines have not done on a system basis since Deregulation.

 

[EyeInTheSky]

It's all a vicious cycle. Until carriers learn to price their product properly, the American public will continue to suck the life out of the airline industry. It's not the American public's fault, it's the airlines for conditioning them to act this way. It's Pavlov's airfare theory.

 

[Busdrvr]

If fares increase, demand decreases. Econ 101. Mweiss has gone into a long dissertation regarding price points etc, but at the basic, most simplistic level, this would continue to be true. Part of the reason for the strong traffic levels today are the fares. There are many folks who would not be travelling if the fares were higher.

Here we go again. And I thought I'd fully explained the concept of Price elasticity of demand.....

In the past, when ticket prices were SIGNIFICANTLY higher in real terms and as a percent of wealth and income, P.E. of D was estimated to be 0.1 for last minute travel (meaning a certain percent increase across the board for last minute fares would result in 1/10 the percent decrease in demand), and approx 2.4 for advance purchase travel. Since then, fares have gotten lower, gas has gotten more expensive, interstates more crowded and people have gotten significantly richer. therefore, P.E of D has undoubtedly gone down significantly for Advance purchase travel. A recent study that includes data from the high fare days even estimates the P.E. of D. as approx .64, or a 10% increase in fares only decreases demand by approx 6.4%, and revenue would RISE. Undoubtedly, more current (post 911) data would show even LOWER P.E. of D.

http://gsbwww.uchicago.edu/research/worksh...rMarch22005.pdf

Ironically, the study also concluded that (drumroll please) the airlines that BENEFIT the consumer are all the LCC, UNITED and DELTA. The airlines that HURT the consumer are AMR, CAL, and U. In other words, the destruction of UAL would hurt consumers to the tune of approx $7.5 BILLION a year, while the destruction of AMR, CAL or U would BENEFIT the consumer. Some of the behaviors that make the point: when Comp leaves a market, UAL ADDS capacity to make up the ASM shortfall, while AMR, U and CAL CUT capacity to jack up prices. According to the Data, UAL has been one of the top three airlines to contribute to consumer surplus for the entire period (approx 20 years) and even led the way for a good chunck of it.

 

[Busdrvr]

Next we can add a chapter on dominate firm/ competative fringe and the implication of game theory and appropriate pricing in a market where an LCC is attempting to make inroads post 911

 

[Rico]

Network carriers will never be able to get their costs to that of the LCC's.

That might be the case, but in reality the LCCs are being forced to offer a better ( and more expensive) product as the price differential narrows to the point where passengers are not as willing to "go without".

Even now carriers like Air Tran offer a business class. Carriers like jetBlue offer inflight entertainment, Carriers like Southwest upgrade their cabins with more space and leather seats...

The "Bar" is being raised on a continual basis, in which to attract the high load factors needed (to make a profit with a low yeild business model, and remain competitive with other LCC's), they must add costly changes to their operations to "keep up"

Look to jetBlue and Air Tran going to multiple fleet types. Look to SWA moving into high cost and operationally challenged airports like PHL rather than cherry picking from a hour's plus drive time away, Look to all of the LCC's starting to feel the same labor pressure that the network carriers have endured for decades...

So...? Well, you can already see the results, where the LCC's are making changes and going places that they never would have done before because they feel the need to chased new revenue sources that before would have been ignored becuase of the hassle or cost involved.

Eventually the industry emphasis will shift from cost alone, to revenue and customer service quality. For when the networks charged 2000$ for a trip that the LCC's charged 200$ for, passengers were more than willing to do without. But as the cost gap closes to where the savings are not as great, or the price is the same...

Then it will be a different game.

 

[usair_begins_with_u]

There is a big piece of the puzzle you guys are missing... Al Gores invention, The Internet. Price line, travelocity, hotwire, orbitz et al. Airlines used to make money off the ignorance of the traveling public. Now that virtually anyone with a pc can shop for the lowest fair, its really hard to screw people. Information favors the consumer. It never pays to have the highest fares.

And also, don't be so self centered. Cheap airline travel is good for society. Who cares if airline employees salaries are pushed down? A lot more people DONT work for the airlines than do. It is more proper to consider the benefit to society as a whole. I dont see you guys denouncing HMO's because they have led to the reduction of doctors salaries..

Maybe we should limit medical schools to get those doctor salaries back up again, and get those over worked pediatricians back on the golf course.

 

[Busdrvr]

And also, don't be so self centered. Cheap airline travel is good for society. Who cares if airline employees salaries are pushed down? A lot more people DONT work for the airlines than do. It is more proper to consider the benefit to society as a whole.

Ah, but then isn't subsidation an appropriate response to an industry with positive externalities?

 

[Bud8EE]

And also, don't be so self centered. Cheap airline travel is good for society. Who cares if airline employees salaries are pushed down? A lot more people DONT work for the airlines than do. It is more proper to consider the benefit to society as a whole.

Ah, but then isn't subsidation an appropriate response to an industry with positive externalities?

[post="274520"][/post]​

Bingo!

 

[funguy2]

Busdrvr: Not to sound arrogant or flippant here... But, if you have figured this out, why haven't the airlines? It would seem to me that increasing total revenue would help the airlines out... Demand decling slight would help marginally reduce costs as well. Increasing revenue + decreasing costs = increasing profits.

Perhaps the recent fare increases we've seen are the beginning of the "airlines figuring it out"? In particular, I've noticed LUV's bargain basement $29 and $39 fares have become $49. I initially thought that this was maybe a peak summer thing.

 

[BoeingBoy]

Technicality -- Braniff was the largest tenant at DFW when Wright was enacted. AA wasn't the largest tenant at DFW until 1982.

[post="274447"][/post]​

Whoops, forgot about Braniff

Thanks for the correction.

Jim

 

[BoeingBoy]

You've got to be careful here...

1. If airlines are generally full and capacity disappears, then some traffic must disappear.

2. If fares increase, demand decreases.

[post="274476"][/post]​

#1 - assuming 100% LF, true, although obviously every airplane isn't 100% full so some of that traffic could be diverted to off-peak times/days via pricing.

#2 - also true, although generally on the low end of the fare scale.

The only thing that I can see that you left out is the increase in RASM that would result. Increased fares lowers demand at the low end, which means your average fare is higher. Less capacity with lower demand could equal the same LF with higher average fares, thus higher RASM. Hence less loss or even (gasp) profit.....

Jim

 

[funguy2]

The only thing that I can see that you left out is the increase in RASM that would result.  Increased fares lowers demand at the low end, which means your average fare is higher.  Less capacity with lower demand could equal the same LF with higher average fares, thus higher RASM.  Hence less loss or even (gasp) profit.....

If you followed busdrvr's information, he suggests that exactly that is true. I have generally assumed, with no evidence either way, that the resulting total revenue increase would not result in more total revenue. Busdrvr's info suggests that the Price Elasticity of Demand (PE of D) at the low end of the scale used to be 2.4 - which means for every 1% increase in fare, there would be a 2.4% decrease in demand. Obviously, in this scenario, total revenue declines if you raise fares. Example:

100 pax @ $100 = $10,000 total revenue

increase fare 10% and reduce demand 24%
76 pax @ $110 = $8,360 total revenue - obviously less.

Busdrvr stated that the study linked (I'll admit I did not read), suggests a PE of D of .64. Or a 1% increase in fare results in a 0.64% decrease in demand... This would suggest that a fare increase would be revenue positive...

This time:

93.6 pax @ $110 = $10,296 total revenue.

This shows that if the PE of D is less than 1.0, as suggested, any fare increases would be revenue positive to the airlines. The question to me is: Is this true? It would seem to me that if it were, some of the fare increases would stick... Or at least the airlines would be able to average up fares through Revenue Management.

So I make the following observations:
~ If this is true, the we must begin to see fare increases stick (Industry RASM is up lately, I believe)
~ The PE of D is probably not equal all across the industry. So, some airlines/markets might see PE of D >1 and some <1. Thus not all fare increases are sticking for all airlines, depending on the individual markets in which they compete.
~ Irrational competitors could be preventing health of the overall industry, which should be able to take advantage of the PE fo D <1 (such as FLYI who has been clearly pricing its fares below its cost of production in order to establish themselves and maintain cash flow).

Also, what busrvr has failed to mention (and maybe I should review the article he provided to look into this) is that at the high end PE of D used to be 0.1... Very little lost demand with increased fares. I tend to believe this is not the case now. Given the fact that consumers now have more information and more access to LCC's, it would seem to me that the PE of D for the high end (i.e. last minute fares) must be much higher than 0.1. I'll see if I can't dig that out of the report.

 

[funguy2]

Ok after quickly reading through the report, a couple of things...

First, the PE of D is actually -0.64, not 0.64. The negative indicates that when price increases, demand decreases and vice versa. A positive would indicate that when price increases demand also inceases.

Second, in order to get PE of D at -0.64, the study included some "dummy" variables, such as seasonality, nonstop service in a market, alternate airports, the pricing power of a hub vs. a spoke, etc. The study said absent these dummy variables, the PE of D was -1.13. That supports my contention that all markets are not the same.

Third, the study did not discuss changes in high end fares vs. low-end fares. While busdrvr may be right in that the PE of D used to be very low (at -0.1), Today it is certainly much higher. We know anecdotally that airlines are simply not carrying the same amount of traffic at high fares, based on recent fare changes made by LUV (no fare over $300 one-way), DAL (no coach fare over $500 each way), and America West (lowered top end fares, increased bottom end fares, in order to increase the average).

Thus, I would not be surprised to see that the PE of D for high end fares at -2.4 levels mentioned.