Checkmate

[ngneer]

Stop hording the trust fund and bring the air traffic control system into the modern age.

[post="245189"][/post]​

The problem here is that the agency tasked with modernizing the air traffic control sytem this is the FAA and the FAA has shown over the past decades that they are too poorly run to do it. There have been many FAA modernization programs, but these programs typically wind up running way over budget and way behind schedule. Sometimes they just die after spending countless millions. For instance, back in the '80's the FAA was supposed to update the air traffic control system with a microwave landing system (MLS). After much expense developing it, a MLS unit was installed and demonstrated at JFK. But nothing ever came of it. The management at the FAA has to improve first otherwise we're just throwing money down a rathole.

 

[funguy2]

Already the incredibly stupid and arrogant Bush administration wants to slap more security taxes on airline tickets in an industry that already on it's back and has been shown that $10 more in ticket prices is unworkable.

Except that it's not. The issue, as has been discussed several times before, is that fares wouldn't be raised in concert, because it's not in everyone's best interest to do so. However, putting an additional $10 tax on every single ticket would affect all airlines roughly equally.

OK, but even if the total price to the passenger increases $10, demand drops, capacity will not drop in concert with the decrease in demand. This enhances the over-supply problem (because suppy stayed the same and demand dropped), and we all know what happens when there is additional over-supply... Say it with me... Prices fall.

Instead of adding the tax on top, getting a demand drop, then dropping the fares back, perhaps to a level lower than the start, the airlines in the past, have left the final pricing to consumers alone and taken the advantage or disadvantage.

Remember the tax roll back which occurred in 2002 I believe for a period of roughly 6 months? The airlines increased "base" fares just enough so that the final cost to the consumer was the same as the tax break. In otherwords, they took a higher percentage of each ticket sale. When the tax break ended, airlines reduced the base fare equally to the tax increase, thus keeping the price the same for the consumer, and just taking a smaller percentage of the total ticket price. (If you recall, the fed's did this partially retroactively, which resulted in a small cash infusion to all the airlines too, as the "overpaid" taxes were returned. I believe they did this in the Spring of 02 and made it effective for one year beginning in Sept or Oct 2001...)

If the government raises taxes on airline tickets by $10, the airlines will not raise fares... They can't, because you still have the basic supply/demand problem combined with an industry which only has catestrophic mechanisms to reduce capacity (i.e. BK/Chapter 7). So, if taxes go up $10/ticket, airline revenue goes down $10/ticket.

 

[FWAAA]

OK, but even if the total price to the passenger increases $10, demand drops, capacity will not drop in concert with the decrease in demand. This enhances the over-supply problem (because suppy stayed the same and demand dropped), and we all know what happens when there is additional over-supply... Say it with me... Prices fall.

Instead of adding the tax on top, getting a demand drop, then dropping the fares back, perhaps to a level lower than the start, the airlines in the past, have left the final pricing to consumers alone and taken the advantage or disadvantage.

Remember the tax roll back which occurred in 2002 I believe for a period of roughly 6 months? The airlines increased "base" fares just enough so that the final cost to the consumer was the same as the tax break. In otherwords, they took a higher percentage of each ticket sale. When the tax break ended, airlines reduced the base fare equally to the tax increase, thus keeping the price the same for the consumer, and just taking a smaller percentage of the total ticket price. (If you recall, the fed's did this partially retroactively, which resulted in a small cash infusion to all the airlines too, as the "overpaid" taxes were returned. I believe they did this in the Spring of 02 and made it effective for one year beginning in Sept or Oct 2001...)

If the government raises taxes on airline tickets by $10, the airlines will not raise fares... They can't, because you still have the basic supply/demand problem combined with an industry which only has catestrophic mechanisms to reduce capacity (i.e. BK/Chapter 7). So, if taxes go up $10/ticket, airline revenue goes down $10/ticket.

[post="245415"][/post]​

I agree completely. You said it much more clearly than I ever do.

Anybody who believes that airlines are able to pass along ticket taxes hasn't come to grips with the industry reality of oversupply and price elasticity.

If they could pass on the increased taxes, then they would successfully pass along fare hikes to cover expensive fuel. But it's plane as day they have been unsuccessful at that strategy.

I think you're a year off on the timeline - didn't the September 11 Security Fee (aka "Increase the Tax on Airlines at the Worst Possible Time in History") rollback happen in May 2003 and last until about September 30, 2003?

 

[whatkindoffreshhell]

Legacy carriers also have a huge revenue stream from cargo that just about all LCCs (except WN) lack.

Eventually all belly cargo will be banned, we're already on that slope.
Meanwhile this revenue advantage should be used.

 

[funguy2]

I think you're a year off on the timeline - didn't the September 11 Security Fee (aka "Increase the Tax on Airlines at the Worst Possible Time in History") rollback happen in May 2003 and last until about September 30, 2003?

[post="245431"][/post]​

You may be right... I know it happened in the Spring, gave most airlines an immediate cash infusion and then some ok summer profits. And I knew it was somehow connected to 9/11/01.

If the infusion of cash occurred 2Q03, wasn't that US Airways' one quarter of profitability too? That would seem to add up...

 

[mweiss]

OK, but even if the total price to the passenger increases $10, demand drops, capacity will not drop in concert with the decrease in demand. This enhances the over-supply problem (because suppy stayed the same and demand dropped), and we all know what happens when there is additional over-supply... Say it with me... Prices fall.

This is basic economic theory. And it's wrong. Well, no, it's not wrong; it's incomplete. It works in commodity markets when all suppliers have roughly equal costs, and the commodity is sold at a single price. That's not what we have here, on either the cost (i.e., supply) side or the price (i.e., demand) side of the equation.

For a more complete explanation, I suggest you read this post and some of the followups. No point in rewriting it.

 

[funguy2]

This is basic economic theory. And it's wrong. Well, no, it's not wrong; it's incomplete. It works in commodity markets when all suppliers have roughly equal costs, and the commodity is sold at a single price. That's not what we have here, on either the cost (i.e., supply) side or the price (i.e., demand) side of the equation.

For a more complete explanation, I suggest you read this post and some of the followups. No point in rewriting it.

[post="245467"][/post]​

mweiss... I've read your postings regarding why airlines cannot raise fares. I was purposefully being simple, so as to not write 10 pages of postings on why airlines cannot increase fares

However, after re-reading your post from the other thread, I can only conclude that a $10 fare increase, whether due to increased taxes for the gov't or increased revenue for the airline, would not affect all airlines equally. Why? Because it changes the demand curve. Or, perhaps, shifts the demand curve. We know that, absent a catestrophic failure, that system capacity will not be reduced, that doesn't mean that capacity won't be reduced in individual markets. As such, if the fare increase on all tickets reduces demand such that one producer with lower costs can force out a higher cost producer... Well, then, the outcome is not roughly equal. Particularly if the low-coast producer, such as Southwest, could squeeze out the high cost producer, such as US Airways, in multiple markets. If a high cost producer is forced out of several such markets, and cannot find successful redeployment of the aircraft, then this would indeed create the catostrophic failure.

But, and its a big BUT, the above paragraph does not apply to this situation at all. Because, as we have seen in this industry, the airlines WILL NOT be able to pass the additional cost to the customer, whether its fuel or tax. Thus, this becomes a $10/ticket kick in the pants to the airlines. If the airlines cannot get a $10 fare hike to work, why would the gov't be able to make it stick?

Similarly, a reduction in taxes to the airline ticket, would create a revenue surprise for the airlines. Prices would not drop, but the airline would keep a higher percentage of the sale price of every ticket.

And this $10/ticket tax will impact different airlines differently. It will affect short-haul, and specifically low-fare short-haul tickets more than long-haul tickets. Its a lot easier to aborb $5 tax hit on a $499 ticket than on a $29 ticket. And Southwest will have a lot more ability to work through the problem than US Airways, just because Southwest's cash position allows LUV to take the revenue hit for some time, where US Airways will have a hard time dealing with a revenue hit for any reason.

 

[mweiss]

I was purposefully being simple, so as to not write 10 pages of postings on why airlines cannot increase fares

Touché. But I figured it had to be done eventually...how on earth do you describe the elephant of the industry by talking about the rope, tree trunk, snake, or wall?

However, after re-reading your post from the other thread, I can only conclude that a $10 fare increase, whether due to increased taxes for the gov't or increased revenue for the airline, would not affect all airlines equally.

On a macroscopic level, it would affect them roughly equally. But on a microscopic leve, you're absolutely right.

Because it changes the demand curve.

Well, sort of. Depending on where you stick the taxes, it would shift either the supply curve or the demand curve (or both). Regardless, it would certainly shift both the microscopic and macroscopic equilibrium points.

We know that, absent a catestrophic failure, that system capacity will not be reduced, that doesn't mean that capacity won't be reduced in individual markets.

Depending on how the taxes would be applied, it may or may not have an effect here. For instance, if the tax is applied per segment, one would expect a slight increase in demand for nonstops relative to connections. If applied per ticket, that effect should be negated.

It's unlikely that other circumstances would reduce capacity in all but the shortest markets (e.g., Houston-Austin), where the competition is the car. Even then, the high gasoline prices are counteracting this effect right now, since the high fuel prices have yet to be reflected in the ticket prices (as we've noted several times).

As such, if the fare increase on all tickets reduces demand such that one producer with lower costs can force out a higher cost producer... Well, then, the outcome is not roughly equal.

Ahh, but there's the rub. You're not likely to force a competitor out of the specific market, since they have to move the metal somewhere else...where else are they going to move that has better results?

If a high cost producer is forced out of several such markets, and cannot find successful redeployment of the aircraft, then this would indeed create the catostrophic failure.

Exactly. That's traditionally been the end-game of deregulated airline down cycles.

Because, as we have seen in this industry, the airlines WILL NOT be able to pass the additional cost to the customer, whether its fuel or tax.

I'd caution you against this overgeneralization. Both can be passed on, depending on the economic forces at work. WN has thus far absorbed these, but they don't have to. And if they choose not to, the rest of the market will necessarily respond.

If the airlines cannot get a $10 fare hike to work, why would the gov't be able to make it stick?

Because it has to be in the interest of every airline individually, not all airlines collectively, to charge the extra $10. If the tax is applied to all airlines equally (on a per-ticket basis), it becomes in the individual and collective best interest to pass this along directly.

Similarly, a reduction in taxes to the airline ticket, would create a revenue surprise for the airlines. Prices would not drop, but the airline would keep a higher percentage of the sale price of every ticket.

That can be true, and it has sometimes been true in the past, but it is not always true.

And this $10/ticket tax will impact different airlines differently.

...in terms of percentage tax. A per-segment tax, which hits connecting fares more than through fares, would also affect the airlines differently. So would a per-dollar tax, which hits the higher fares (in dollars) more than the lower fares. "Equal" is in the eye of the beholder when it comes to taxation.

 

[funguy2]

Once again, the point is, that if the fare is increased, then demand will drop, yield will remain the same... This means total revenue will decline. This is not in the best interest of any airline right now, unless you make the case that one company is out to eliminate competitors, which in my mind, the government should not be a part of (gov't should encourage competition, not destroy it, even if its inept, let it destroy itself).

Furthermore, it would not affect all companies equally.

Lastly, and this is a new point, it is my opinion that security costs for aircraft should be incurred by all citizens. It should be included as part of your income tax, not a tax on airline passengers. Now that terrorists have decided to use commercial airplanes as weapons, even if you never fly on an airplane, you need it to be secure, so that one does not come barreling through your office building, home, nearby power plant, etc.

 

[mweiss]

Once again, the point is, that if the fare is increased, then demand will drop, yield will remain the same...

Yes, this is all true.

Furthermore, it would not affect all companies equally.

No tax model ever does; "equal" is in the eye of the beholder.

Lastly, and this is a new point, it is my opinion that security costs for aircraft should be incurred by all citizens.

[post="245526"][/post]​

Because it should apply equally to everyone...except that "equal," again, is in the eye of the beholder. Should the people in rural Kansas, who are highly unlikely to be as affected as those in the major urban areas, be responsible for as much of the cost? Should the tax come from the federal income tax, or some new tax applied to all citizens (as a flat tax)? How does one "equally" apply such a tax?

 

[Red Tail Bear]

But we are not playing in the International game. That's a completely different game - maybe like parchesi.

[post="245175"][/post]​

And the reason why WN will never be recognized as a legacy carrier. Only a second class cattle car shuttle system. So stay on the porch little dog and leave the real flying to the Big Dogs.A.K.A. Legacy Carriers.

 

[tornyhoad]

And the reason why WN will never be recognized as a legacy carrier. Only a second class cattle car shuttle system. So stay on the porch little dog and leave the real flying to the Big Dogs.A.K.A. Legacy Carriers.

[post="246033"][/post]​

Where shall I start? Your post is so funny....but also so sad. I feel sorry for you so I wont "piss in your wheaties". You keep on thinking what you're thinking, things MAY will get better for you guys, NOT.

BTW, big dogs seem to leave bigger piles of crap, and thats what you Legacy Carriers have been leaving after getting your fat arses kicked by us little LCC's...he,he,he. $hitting and getting, thats funny.

 

[funguy2]

Because it should apply equally to everyone...except that "equal," again, is in the eye of the beholder. Should the people in rural Kansas, who are highly unlikely to be as affected as those in the major urban areas, be responsible for as much of the cost? Should the tax come from the federal income tax, or some new tax applied to all citizens (as a flat tax)? How does one "equally" apply such a tax?

[post="245574"][/post]​

You cannot say that people in Kansas are unaffected. It probably feels that way, that is true. But if there is a nuclear reactor in Kansas, then people are at risk. Also, the people in Kansas benefit from our national economy. Air transportation helps drive that national economy. In fact, lots of people in Kansas build or assemble parts of airplanes. Therefore, any attack on the airline industry is important to them. They may not be affected "equally" as those people who perished on 9/11, but they are affected, and as such, in my opinion, should be required to foot part of the bill.

I think of air transportation security as part of national security. Your suggestion says that folks in "no-where" North Dakota should not pay for the army, or the FBI, or whatever because they are less likely to be attacked than a major city. However, part of the responsibility of being an American is to help provide for national security, whether or not you live in a "high-risk" zone.

 

[mweiss]

You cannot say that people in Kansas are unaffected.

Whoa, there, Nelly. Reread what I said. It's a question of degree, not a binary condition. It's all a question of perspective...and if you ask ten people how to tax fairly, you'll get twelve responses.

 

[whlinder]

In the same token, should part of my income tax go to FEMA who helps out the Kansans when their homes get swept away in a tornado? The chance of tornados directly affecting me is much less than them, however I help pay to protect them...