usair_begins_with_u
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- May 9, 2004
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maybe its time to re-regulate the domestic airline industry
Record Profits?
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PITbull
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mweiss,mweiss said:
Since you increased the SIZE of your point to emphasize what LOADS DON'T DO...I DO KNOW ONE ELEMENT THAT DOES HOLD TRUE AND THAT IS WITHOUT LOAD FACTOR INCREASES YOU CAN'T MAKE A PROFIT IN THIS BUSINESS!!!!
Maybe I'm missing something here. Since you intimate to be the only one who knows how to read......the article states that there is 5% less capacity that the customer is competing for.
Did you get that, or did that blow by you....
Way I see it, some airline needs to fill that gap, or the whole "lot" of them NEED to increase their fares.
Normally, I'd agree with this; I wouldn't compare Q1 against Q4 to look at overall industry trends. But why should the quarter behave differently for NW than for UA, CO, DL, and AA? I haven't seen this behavior before when comparing Q4 to Q1. Typically, the legacies move pretty much the same way (and all of the others did, with minor changes up or down).Cosmo said:
I believe the technology curve explains this. Milk, grain, and textiles have been used for thousands of years, and thus have had plenty of time to adopt technological improvements as they naturally appear. Thus, they will have occasional periodic shifts when a new technology comes on the scene, but not rapid wholesale improvements that would keep costs down over the long haul.funguy2 said:
Petroleum, on the other hand, is a relative newcomer. It was mostly considered a nuisance before the 20th century, and it wasn't until about the middle of the century that significant technological improvements were being developed for the extraction, processing, and delivery of petroleum products. We are now beginning to see the saturation point there as well.
For a different reason. People's threshold to purchase seems to be about $500. Various attempts at selling ones in the $100 range have failed, because people prefer the more feature-laden machines at the $500 mark. And, yes, that price was unheard of just ten years ago.
That's probably true, since the industry is becoming more competitive. An empty seat is wasted capacity, and wasted capacity is a disadvantage in a truly competitive industry. So, yes, ultimately the winners will be the ones who manage to get load factors in the 90s...a scary thought for those who spend much of their time squished in a coach seat.PITbull said:
You bet I got it. Less capacity only translates to increased yields if the demand curve remains unchanged. One thing we're seeing is a shift in the shape of the demand curve. This is evidenced by the relatively constant yields despite the decrease in capacity and increase in load factors. Or maybe...the article states that there is 5% less capacity that the customer is competing for.
Did you get that, or did that blow by you....
But I think that this would only work if the LCCs didn't consistently undercut those increased fares. In the short run, the legacies can try to make up the extra dollars by getting the high-price customers after the LCCs have already been filled up...maybe. It'd be an interesting experiment. But until the LCCs have filled their planes, the legacies can't sell (many) seats at a substantial (100+%) premium over the LCC fares.
TomBascom:
Interersting view. The traditional view in the industry, and one to which I subscribe, is that airline seats are perishable, the following manner...
Seat 15B on AA Flt 123 from JFK to LAX today. If this seat is not sold before departure, it cannot be "stored" for future sale. The seats can be viewed as "inventory" prior to departure, but at departure time, if the seat is not sold, it has "spoiled," sitting in the warehouse... Compare that to an orange picked in Florida today... If that Orange does not make it to a supermarket relatively quickly, it will "spoil," thus the effort in producing it has been wasted... Just like the unsold airline seats... Both industries include "spoilage" as a cost (indirectly), passed on the the consumers who do buy the product...
I cannot disagree that in some respects the "value" in traveling has declined... But, if most companies producing the lowered value product cannot do so profitably, one of two things will happen:
1. Unprofitable producers fail. Remaining producers increase prices to increase profit margin in an industry with less competition. The price increase does not HAVE to happen, but does most of the time. (Much like farmers who swictch crops or livestock as prices change over time.)
2. Prices rise such that unprofitable producers lessen losses and/or eventually reach profit/break-even.
3. Unprofitable firms lower costs in order to become profitable (although in a commodity market, you must have the lowest costs to survive).
One of these two things have to happen.
Now, while I believe the airline seats are a commodity-like market, I believe they will never be a true commodity because, unlike Oranges, there are some slight product differentiations which can be implemented and be successful. (I cannot tell the difference between California and Florida Oranges, but I can tell the difference between a seat on Midwest and a seat on ATA.)
Interersting view. The traditional view in the industry, and one to which I subscribe, is that airline seats are perishable, the following manner...
Seat 15B on AA Flt 123 from JFK to LAX today. If this seat is not sold before departure, it cannot be "stored" for future sale. The seats can be viewed as "inventory" prior to departure, but at departure time, if the seat is not sold, it has "spoiled," sitting in the warehouse... Compare that to an orange picked in Florida today... If that Orange does not make it to a supermarket relatively quickly, it will "spoil," thus the effort in producing it has been wasted... Just like the unsold airline seats... Both industries include "spoilage" as a cost (indirectly), passed on the the consumers who do buy the product...
I cannot disagree that in some respects the "value" in traveling has declined... But, if most companies producing the lowered value product cannot do so profitably, one of two things will happen:
1. Unprofitable producers fail. Remaining producers increase prices to increase profit margin in an industry with less competition. The price increase does not HAVE to happen, but does most of the time. (Much like farmers who swictch crops or livestock as prices change over time.)
2. Prices rise such that unprofitable producers lessen losses and/or eventually reach profit/break-even.
3. Unprofitable firms lower costs in order to become profitable (although in a commodity market, you must have the lowest costs to survive).
One of these two things have to happen.
Now, while I believe the airline seats are a commodity-like market, I believe they will never be a true commodity because, unlike Oranges, there are some slight product differentiations which can be implemented and be successful. (I cannot tell the difference between California and Florida Oranges, but I can tell the difference between a seat on Midwest and a seat on ATA.)
Ummm... Load Factors do not HAVE to increase to be profitable... Southwest is profitable, and their LF is around 65%... Meanwhile, some majors have been unprofitable at 80% Load Factors...PITbull said:mweiss,
Since you increased the SIZE of your point to emphasize what LOADS DON'T DO...I DO KNOW ONE ELEMENT THAT DOES HOLD TRUE AND THAT IS WITHOUT LOAD FACTOR INCREASES YOU CAN'T MAKE A PROFIT IN THIS BUSINESS!!!!
Maybe I'm missing something here. Since you intimate to be the only one who knows how to read......the article states that there is 5% less capacity that the customer is competing for.
Did you get that, or did that blow by you....
Way I see it, some airline needs to fill that gap, or the whole "lot" of them NEED to increase their fares.
Furthermore, if CASM is greater than RASM, your load factor could be 100% and you would be unprofitable. Now, generally speaking, if you could have a 100% LF, you should be able to revenue manage that situation into a reduced LF and increased Yield/RASM in order to become profitable... But in the last two years, the legacies have not been able to do this exact thing, despite increasing traffic and record load factors.
RASM needs to increase or CASM to decrease, in order to increase profit... Pretty simple, really.
I am not so sure this is universally true...mweiss said:
Just because a flight does not do well in September, does mean its not a winner in July.
The problem here is that demand in cyclical... But the airlines fleets and service is year-round.
If you have a half empty flight on the Sunday after Thanksgiving (busiest travel day of the year), you have a problem. If you have a half empty flight on a Tuesday in mid-September, it won't make money, but its not the end of the world, because on Tuesdays in September supply clearly outweigh demand. On the Sunday after Thanksgiving, demand should outweigh supply, but supply should not be to far from meeting demand.
BoeingBoy
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funguy,
To the above, you could add what could be called positioning flights.
The last flight from say PHL-ALB may have a 30% LF on Friday night but that airplane may be oversold the first flight of the next day.
In short, I don't think average LF's will ever reach 90% on an annual basis. There are just too many "slow days", positioning flights, etc that bring the average down.
Yes, you'll see 90+% on some days at some times of the year. And 100% on some flights. But it doesn't take to many 30%, 40%, and 50% flights to bring the average down. That's part of why I said sometime, somewhere that this is an industry of averages. It is impossible to figure the cost (and therefore the needed fare) on a given flight on a given day in advance.
Jim
To the above, you could add what could be called positioning flights.
The last flight from say PHL-ALB may have a 30% LF on Friday night but that airplane may be oversold the first flight of the next day.
In short, I don't think average LF's will ever reach 90% on an annual basis. There are just too many "slow days", positioning flights, etc that bring the average down.
Yes, you'll see 90+% on some days at some times of the year. And 100% on some flights. But it doesn't take to many 30%, 40%, and 50% flights to bring the average down. That's part of why I said sometime, somewhere that this is an industry of averages. It is impossible to figure the cost (and therefore the needed fare) on a given flight on a given day in advance.
Jim
I'm not so sure about that. True, in the past everyone was scheduling based on peak demands, and letting empties fly during the rest of the time. But what would happen if everyone scheduled based on the slow periods? During peak times, the airplanes would be full of nothing but Ys, with a mix of fares during slow times.
I suspect it won't happen, because the temptation to add service is too great, for a dozen different reasons. But if the only airlines that succeed in the long run are the ones who schedule that way, perhaps it's not too far fetched...
I suspect it won't happen, because the temptation to add service is too great, for a dozen different reasons. But if the only airlines that succeed in the long run are the ones who schedule that way, perhaps it's not too far fetched...
BoeingBoy
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mweiss,
That's where the averages come in. An airline shouldn't schedule just for the peak times or for the slowest times - it should schedule for the average and be able to respond to peaks by adding flights/shuffling equipment as necessary.
Scheduling for the peaks leaves a lot of unused capacity the rest of the time. Scheduling for the slow times leaves a lot of revenue behing in the busier times. The key is balance and the ability to adjust to day to day demands.
(The furniture market in my home town is a case in point - only happens twice a year and everything is full those two weeks. DAL and UAL bring 757's in during the market. What do we do - nothing).
Jim
That's where the averages come in. An airline shouldn't schedule just for the peak times or for the slowest times - it should schedule for the average and be able to respond to peaks by adding flights/shuffling equipment as necessary.
Scheduling for the peaks leaves a lot of unused capacity the rest of the time. Scheduling for the slow times leaves a lot of revenue behing in the busier times. The key is balance and the ability to adjust to day to day demands.
(The furniture market in my home town is a case in point - only happens twice a year and everything is full those two weeks. DAL and UAL bring 757's in during the market. What do we do - nothing).
Jim
You're right, but revenue isn't the goal; profit is. So start with enough aircraft to handle the slow times, and work your way up until adding another airplane is no longer profitable on average. And maybe choose to stop a few planes before that, so that external forces don't send you into a tailspin.BoeingBoy said:
Naturally, the incremental costs of additional aircraft are not uniform (e.g., at some point an additional hangar must be built, so it helps to amortize that cost over more aircraft). But that is essentially how one could build a business that is profitable in this industry.
The problem with this model becomes apparent when one's competitors come in and add capacity to a market that you serve. You may be optimized, but as soon as they add another 20% to the market, you're back to being unprofitable. If you cut your own service by that same 20%, your competitor keeps adding so that the total number of seats remains constant. Eventually, you have to leave the market entirely, and your competitor now owns it and can charge a premium.
BoeingBoy
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If someone were contemplating building an airline from scratch, building up would be the way to go. Look at what LUV has done over the years and what JBlu is doing now.
However, we're faced with the present situation at U (and by extension, the industry). Cutting back in markets (and pulling out of some) have allowed competitors to come in and now we either continue to shrink or find some way to compete. Additionally, the incremental cost of parking aircraft is the exact opposite of your example of adding aircraft. ASM's shrink faster than cost - which is partially why so far all the concessions have not lowered CASM significantly.
The answer? Other than the obvious of operating as efficiently as possible, I don't know.
Jim
However, we're faced with the present situation at U (and by extension, the industry). Cutting back in markets (and pulling out of some) have allowed competitors to come in and now we either continue to shrink or find some way to compete. Additionally, the incremental cost of parking aircraft is the exact opposite of your example of adding aircraft. ASM's shrink faster than cost - which is partially why so far all the concessions have not lowered CASM significantly.
The answer? Other than the obvious of operating as efficiently as possible, I don't know.
Jim
