Why Don't The Airlines Just Raise Fares?

[mweiss]

Or in this case you could take a loss today to bring your labor costs down.

Well, first of all, bringing labor costs down is a means, not an end. The airlines are in the business to make profits, not to screw the ramper.

Secondly, there are far more efficient ways to bring labor costs down than to lose billions of dollars intentionally, enter bankruptcy, and drive financing costs through the roof.

Assuming of course that they have sufficient capacity to effect the price.

If they don't, then you have a monopoly. If you have a monopoly, then the pricing becomes the much simpler model I outlined two days ago.

Draining them of cash, or buying them, have been the preferred methods in the past. But usually not right away.

No, not right away. First you wait to see if they'll self-destruct. It'd save you the trouble.

Not only more routes but International routes that tend to be more lucrative.

You say that often, but it's worth looking at the TATL analysis that Unisys did about three years ago. They found that most airlines were, astonishingly, losing money on TATL. CO was the most profitable, and DL was losing the most. AA roughly broke even, IIRC.

Inexpensively? You mean like the new $1 billion terminal at JFK that will add around three more gates when its done?

AA didn't spend a billion to add three gates. They spent a billion to replace an outdated facility that had long since been fully depreciated, in order to attract more business passengers. Do you remember when the new terminal broke ground?

Adding capacity is relatively cheap because you get to add employees at the low end of the payscale.

Another thing is that one way to increase capacity is to go to larger aircraft, but that adds another whole new set of costs.

Well, duh. Add a new type to the fleet and you add a tremendous set of new costs. So you add more of the same type instead. That just goes to show that adding capacity is relatively cheap, unless you're stupid.

(Fortress hubbing is...)Another reason to take a loss to reduce your labor costs.

And how, pray tell, is that the case?

If you believe that you'll reduce your costs soon enough that you lose less in the meantime than you would by exiting and re-entering the market, then it makes sense to stay in, even at a loss.

Yet another reason to take a loss to reduce labor costs.

You've put the cart before the horse. You take a loss if you think you'll be able to reduce costs. You don't take a loss in order to reduce costs.

 

[mweiss]

In the airlines we always said (business travel) was the first to go down and the last to come back up.

Yeah, but the business models didn't match the words.

(Leases must be paid) Unless they go BK.

Yes, that can be done. It's not smart to do it unless times are truly desperate, since it kills your ability to get money at decent rates.

That of course assumes that experience and skill have no value. It assumes that a new worker is as proficient as an experienced worker.

Absolutely not. As I said many, many times before, the wages should rise with experience. However, they rise faster than the increase in productivity. And, even if they didn't, if you left AA tomorrow for DL, you'd start at the bottom. So much for the match between your wage and your experience, eh?

Ramping down can mean leaving one or more markets altogether, with the aforementioned re-entry costs later.

If they are re-enterred at all.

Well, yeah. If you're pretty sure you're gone for good, then by all means leave the market rather than taking a loss. That's what US did on the West Coast, and what CO did in Denver. Just don't expect to go back without incurring massive costs. In other words, you'll be gone for a loooong time.

That is a big assumption, plus it assumes there are alternatives.

It's not a big assumption if there are alternatives. Loads won't fall through the floor, but I can assure you that businesses today are very particular about pushing their employees to the lower fares, even if it's only $10. And, yes, there are alternatives. As I noted, even at DFW you can take a connection. But I also noted that the value added by a nonstop would somewhat mute the effect, relative to outstation business.

Price is not the only reason why people fly, departure and arrival times, among other things, play a part too.

People don't usually choose to fly because there are departure times. Granted, if the airplane won't depart, they won't fly. But most people I know fly because they want or need to be at the destination.

 

[mweiss]

Well your whole arguement is based on textbook theories and broad assumptions.

Not theories. They work. There's plenty of evidence that they work. And your response to it is that they might be wrong. OK, where's your evidence that they're wrong?

Furthermore, the assumptions are anything but broad. In several places I made assumptions to simplify the discussion. I attempted to show in most cases what made the assumptions irrelevant. If you really need, I can prove that they're irrelevant, but given how much effort I've put in thus far, I'd far prefer that you prove that they're relevant. The proof ends up the same, either way.

You may have proven your knowledge of a theory but have not proven your case.

I didn't say I proved the case. I said I laid the foundation for discussion. Now we can discuss.

There are other factors which your theories dont even attempt to address such as politics and the broader economic impact that airlines have, or even the influence of creditors and other interested parties who may have interests in several carriers at the same time.

Yup. You're right. I'm ready to discuss them, too.

The fact is while education is a crucial assett, the foundation if you will, experience and practice in the real world is what really counts. The learning does not stop the day you got your degree, in fact it has only begun.

[post="238214"][/post]​

Yup. In my case, I had many years of business experience before I went to grad school. I have far more than book knowledge behind these posts. What grad school did for me was to give me a set of tools that more clearly articulate what I had already been seeing. In that regard, it's been a great help.

 

[Bob Owens]

The current situation that the airline industry faces is neither new or unique. Just because you haven't experienced it does mean its new or unique.

[post="238226"][/post]​

Not unique? You tell me when unionized workers ever took the concessions that we took. Tell me when unionized workers over an extended period of time took paycuts in an industry that was expanding and making record profits.

Funny thing is that usually the company and company union claims that this is unique, not like all the rest.

 

[Bob Owens]

Because I've read 13 pages of your mindless dribble and at this point its pretty obvious.

[post="238232"][/post]​

Mindless dribble?

Once again you make a statement with nothing to back it up. Could you be more specific?

 

[Bob Owens]

mweiss,Jan 12 2005, 04:37 AM]
Well, first of all, bringing labor costs down is a means, not an end. The airlines are in the business to make profits, not to screw the ramper.

If they can "screw the ramper" in order to make higher profits they will. Or do you believe that all corporations are good public citizens that would never exploit their own workers?

Secondly, there are far more efficient ways to bring labor costs down than to lose billions of dollars intentionally, enter bankruptcy, and drive financing costs through the roof.

Ok, maybe you should share your ideas with airline management then.

If they don't, then you have a monopoly. If you have a monopoly, then the pricing becomes the much simpler model I outlined two days ago.

Oh really? So if AA has 1000 seats a day from JFK to LAX and Jet Blue has 200 and 1100 people a day go to LAX does AA have a monopoly?

No, not right away. First you wait to see if they'll self-destruct. It'd save you the trouble.

Or you use them as a threat to your employees to convince them that if they do not agree to paycuts that you can not compete and will go ouut of business. You make the upstart the bad guy. "They are the reason why you had to take pay cuts, not us. But together we beat them!"


AA didn't spend a billion to add three gates. They spent a billion to replace an outdated facility that had long since been fully depreciated, in order to attract more business passengers. Do you remember when the new terminal broke ground?

Over $1 billion to attract a declining market? Break ground? Yea, aound 1994 or so, thats when they started moving the taxiway over to make room for the new terminal. The fact is that the terminal did as it was designed to do and the company had just dumped a ton of money redoing it only to start tearing it down.

Adding capacity is relatively cheap because you get to add employees at the low end of the payscale.

Once again, not putting any value on experience.Turnover also puts cheaper employees on the payscale however did you bother to factor in the hours spent in training where employees produce nothing, or the fact that flight may have been cancelled due to problems never encountered by inexperienced workers?

Well, duh.

Well duh? Tell me is this the type of vernacular you will include in your thesis?

And how, pray tell, is that the case?

Because hubbing is very expensive as far as labor costs. A huge amount of labor is required for those periods when the aircraft arrive and depart but then there is not much for them to do when they all leave until the next wave.

You take a loss if you think you'll be able to reduce costs. You don't take a loss in order to reduce costs.

Why not?

Six of one, half a dozen of the other.

If your goal is to reduce labor costs by opening up contracts and having your workers accept lower terms how likely is that going to be unless you are showing massive losses and the threat that the company will go out of business without them?

The more militant the union the more extreme the company would have to go in order to prove they need the cuts.

Perhaps they did not teach you this in Business School but airline workers pay a huge penalty by moving from one company to another. Experienced workers are treated as new workers, working at the lower wages that you cited earlier and losing all their seniority and accrued benifits. Seniority in this business is extremely important because the airline operate 24 x 7 x 365. So your seniority has a huge impact on your personal life.

Look at the terms these companies are seeking, USAIR is up to 2012. When they get them dont you think that all the other carriers would love to lock into such long terms? Now look at the history of the airline industry both before and after deregulation. Massive losses usually preceeded massive (by industry standartds) profits.

 

[Bob Owens]

mweiss,Jan 12 2005, 04:39 AM]
Yeah, but the business models didn't match the words.

Maybe the models did not match but the effects on the employees did. The first to get laid off and the last to come back.

Yes, that can be done. It's not smart to do it unless times are truly desperate, since it kills your ability to get money at decent rates.

Perhaps but how often do rates change? Compare that to labor costs which as we now see can be locked in for up to seven years.

Absolutely not. As I said many, many times before, the wages should rise with experience. However, they rise faster than the increase in productivity.

Prove it.

And, even if they didn't, if you left AA tomorrow for DL, you'd start at the bottom. So much for the match between your wage and your experience, eh?

Exactly, so the company is getting more than they are paying for arent they?

Well, yeah. If you're pretty sure you're gone for good, then by all means leave the market rather than taking a loss. That's what US did on the West Coast, and what CO did in Denver. Just don't expect to go back without incurring massive costs. In other words, you'll be gone for a loooong time.

Or like AA did in California? Buy Air Cal, then abandon all the routes, then buy Reno for the same routes again a few years later.

It's not a big assumption if there are alternatives.

Ok we disagree. I noticed the word "if".

Loads won't fall through the floor, but I can assure you that businesses today are very particular about pushing their employees to the lower fares, even if it's only $10.

If you were in school how could you assure me of what any business was doing let alone such a broad statement as the one you just made? Because its what you read in the papers?

And, yes, there are alternatives. As I noted, even at DFW you can take a connection. But I also noted that the value added by a nonstop would somewhat mute the effect, relative to outstation business.

Well if time is not the issue then take a train or drive right. I mean we can go back and forth all day (or week in this case) and keep changing priorites and both be right because there are so many variables. But we can agree to make an assumption that people fly because it saves time right?

People don't usually choose to fly because there are departure times. Granted, if the airplane won't depart, they won't fly.

To paraphrase you "Well duh". (By the way I'm just a grease monkey so my use of such language is merely shop talk and is therefore acceptable, however its dissapointing to see that a graduate of higher learning resorts to it) I'm sorry if the statement "departure and arrival times" was unclear. But people may choose to pay more to leave or arrive at a certain time of day so they can more efficiently use their time. They may even be willing to pay more to go at a certain time as opposed to waiting for another time.

But most people I know fly because they want or need to be at the destination.

And they need to be there within a more specific time frame than a day.

 

[Bob Owens]

mweiss,Jan 12 2005, 04:41 AM]
Not theories. They work. There's plenty of evidence that they work. And your response to it is that they might be wrong. OK, where's your evidence that they're wrong?

Did I say that they were wrong? Or did I say that your claim that the airlines cant raise prices was wrong?

I didn't say I proved the case. I said I laid the foundation for discussion. Now we can discuss.
Yup. You're right. I'm ready to discuss them, too.

Yup (another example of Graduate school vernacular or are you trying to "lower yourself" to your audience?) Go right ahead.

Yup. In my case, I had many years of business experience before I went to grad school. I have far more than book knowledge behind these posts. What grad school did for me was to give me a set of tools that more clearly articulate what I had already been seeing. In that regard, it's been a great help.

Tools like "well Duh and Yup?

 

[mweiss]

If they can "screw the ramper" in order to make higher profits they will.

Which means you agree that the concessions are a means, not an end.

Oh really? So if AA has 1000 seats a day from JFK to LAX and Jet Blue has 200  and 1100 people a day go to LAX does AA have a monopoly?

No. But that's because if B6 has 200 seats, AA has 1000 seats, and there's demand for 1100 people (your example, of course, speaks as if the demand were completely inelastic, a scenario that you earlier said was impossible), then B6's capacity has a substantial impact on capacity. In other words, they have sufficient capacity to affect price...which was the point you were refuting.

Or you use them as a threat to your employees

Reno Air was used as a threat in their first year of operations?

You make the upstart the bad guy. "They are the reason why you had to take pay cuts, not us.  But together we beat them!"

Well, duh. It's generally hard to rally the troops with "It's all my fault, but if you give me what I ask, you can help me fix my mistake."

Over $1 billion to attract a declining market? Break ground? Yea, aound 1994 or so, thats when they started moving the taxiway over to make room for the new terminal.

Ahh, 1994. That year of incredible declining markets. Somehow, my recollection is a bit different. I seem to recall the greatest increase in business mode demand in the history of aviation occurring beginning at exactly that time. It was a great time to make such investments.

The fact is that the terminal did as it was designed to do and the company had just dumped a ton of money redoing it only to start tearing it down.

So it did what it was designed to do. Perhaps it needed to do more? And what exactly is it that you are suggesting that the building was designed to do?

Because hubbing is very expensive as far as labor costs.

Of course it is. But hubbing wasn't created in order to increase labor costs in order to screw the ramper. Hubbing was created in order to increase revenue more than the increase in labor costs associated with hubbing. It worked for about two decades.

Why not?

Well, let me rephrase. You don't take billions in losses in order to cut costs by millions. Have you not noticed that the wage cuts are dwarfed by the losses, particularly at US?

If your goal is to reduce labor costs by opening up contracts and having your workers accept lower terms how likely is that going to be unless you are showing massive losses and the threat that the company will go out of business without them?

If your goal is to make more money, how does it make sense to lose orders of magnitude more money than you'll be able to extract by opening up the contracts?

Perhaps they did not teach you this in Business School but airline workers pay a huge penalty by moving from one company to another.

Hmmm...I should have thought about that. Oh, wait. I did. It was in one of my posts yesterday.

 

[mweiss]

Maybe the models did not match but the effects on the employees did. The first to get laid off and the last to come back.

That's one of the effects of seniority-based union contracts.

...but how often do rates change?

Every time your credit rating changes. And the credit rating drops significantly when you're losing a billion a quarter, as UA was. This makes it harder to get financing, and whatever financing you get is at nearly usury rates.

Prove (that wages rise faster than productivity).

Fair enough. How 'bout we start with AA mechanics' pay scale. Post it here. How much does someone doing what you do make from year 1 until they top out. We'll start there, and I'll take you to that proof.

(If I move to DL tomorrow) the company is getting more than they are paying for arent they?

Yup. But for the purposes of layoffs, they contractually can't differentiate between you and some snot-nose who just got his license. That's what the union negotiations produced. And, incidentally, it's also why you won't move to DL tomorrow. So it becomes self-reinforcing.

Or like AA did in California? Buy Air Cal, then abandon all the routes, then buy Reno for the same routes again a few years later.

Something that was pretty much universally considered to be a mistake. AA's re-entry into the California market has hardly proven to be a good move.

It's not a big assumption if there are alternatives.

Ok we disagree. I noticed the word "if".

Which was immediately followed by evidence that the "if" condition was met. Show me those huge monopoly markets that AA has.

 

[mweiss]

If you were in school how could you assure me of what any business was doing let alone such a broad statement as the one you just made?

Because...

• I was in graduate school for only one year
• Prior to entering graduate school, I was in the business world, working on a project with about a dozen other companies, and we were comparing corporate travel policies
• I have returned to the business world, where the policies are more draconian than when I left
• I have kept in touch with the people with whom I used to work on that project, and they confirm what I see at my place of business
• And, yes, even the newspapers confirm it.

Now, what's your evidence that I'm wrong?

Well if time is not the issue then take a train or drive right.

Right. Make a connection, and you're talking on the order of, say, five extra hours in the round-trip. Compare that to driving or taking the train, and we're talking about orders of magnitude of difference for most business travel. OBTW, businesses are also pushing people to switch to driving or taking the train if the distance is small enough and the fare is high enough.

But we can agree to make an assumption that people fly because it saves time right?

For business, we can agree to make an assumption that people fly beause it saves money. This is an important distinction. Yes, time is money, but it's not infinite money.

people may choose to pay more to leave or arrive at a certain time of day so they can more efficiently use their time. They may even be willing to pay more to go at a certain time as opposed to waiting for another time.

Of course they will, provided that the increase in airfare doesn't exceed the cost savings realized by getting there closer to their needed time.

they need to be there within a more specific time frame than a day.

[post="238342"][/post]​

Sometimes that's true. Certainly it's true for day trips. It's not true for longer business trips.

 

[mweiss]

Did I say that they were wrong?

You seemed to imply that the optimal pricing equations don't work. But here's your chance to be crystal clear. Do you agree that they work?

Tools like "well Duh and Yup?

[post="238343"][/post]​

No, I had those before I went to grad school. Anyway, this is an Internet bulletin board, not the Wall Street Journal. Vernacular in such a conversational environment is generally considered to be both acceptable and expected.

 

[Bob Owens]

Which means you agree that the concessions are a means, not an end.

Of course. I'm not saying that they are screwing their workers for the hell of it, it is a means to an end, the end being more money for the owners of the company.

Reno Air was used as a threat in their first year of operations?

No. They already had long term concessionary contracts in place from Labor.

Well, duh. It's generally hard to rally the troops with "It's all my fault, but if you give me what I ask, you can help me fix my mistake."

Exactly.

Ahh, 1994. That year of incredible declining markets. Somehow, my recollection is a bit different. I seem to recall the greatest increase in business mode demand in the history of aviation occurring beginning at exactly that time. It was a great time to make such investments.

Sure if they felt it was sustainable, but even back then some saw that business travel would inevitably decline somewhat as other technologies became more effective and people became more aclimated to using them.

So it did what it was designed to do. Perhaps it needed to do more? And what exactly is it that you are suggesting that the building was designed to do?

Be a point of recieving and dispatching of passengers.


Of course it is. But hubbing wasn't created in order to increase labor costs in order to screw the ramper.

Well duh.

Hubbing was created in order to increase revenue more than the increase in labor costs associated with hubbing. It worked for about two decades.


Well, let me rephrase. You don't take billions in losses in order to cut costs by millions.

No you take billions in losses over the short term, some of which easily recoverable like goodwill, to get billions more in savings over a longer term.

Have you not noticed that the wage cuts are dwarfed by the losses, particularly at US?

Well there are several points you are not considering. First of all the claimed savings are very much undervalued, the savings are much more than the airlines claim, and the real losses are much less. If they claim that their routes and their Logos lost value however they did not sell them then they actually lost nothing. You are also failing to take into consideration the compounding effect those savings will the the company. Besides USAIR is probably on its way out anyway, I thought we were talking about AA here?

If your goal is to make more money, how does it make sense to lose orders of magnitude more money than you'll be able to extract by opening up the contracts?

Again you are making assumptions.


Hmmm...I should have thought about that. Oh, wait. I did. It was in one of my posts yesterday.

Was it? Or did you only mention one aspect of it in passing?

 

[Bob Owens]

mweiss,Jan 12 2005, 03:55 PM]
That's one of the effects of seniority-based union contracts.

Well perhaps I should have added that even non-union airlines utilize the seniority sytem as well.

Every time your credit rating changes. And the credit rating drops significantly when you're losing a billion a quarter, as UA was. This makes it harder to get financing, and whatever financing you get is at nearly usury rates.

And those ratings can go right back up again in a short time couldnt they? Short being less than the term of a labor contract.

Fair enough. How 'bout we start with AA mechanics' pay scale. Post it here. How much does someone doing what you do make from year 1 until they top out. We'll start there, and I'll take you to that proof.

The problem with your proof is you assume that mechanics are getting what they are worth and not making an investment hoping that it will pay off in the future. Instead simply look at mechanics pay vs CPI on the thread of that same title.

Yup. But for the purposes of layoffs, they contractually can't differentiate between you and some snot-nose who just got his license. That's what the union negotiations produced.

Most large non-union airlines follow the same process. Look at Delta, did they follow seniority for layoffs or not?

And, incidentally, it's also why you won't move to DL tomorrow.

Another assumption on your part.


Which was immediately followed by evidence that the "if" condition was met. Show me those huge monopoly markets that AA has.

Arent you the one that claimed it had to be a monopoly?

 

[mweiss]

Reno Air was used as a threat in their first year of operations?

No.

Exactly. Reno was ignored until it reached a point where it needed attention.

Sure if they felt it was sustainable

It didn't have to be indefinitely sustainable. Just sustainable for long enough to cover the cost of the building, minus the tax savings and the value of the increased facility longevity that comes from new construction.

And what exactly is it that you are suggesting that the building was designed to do?

Be a point of recieving and dispatching of passengers.

If that were all, then the building should have been replaced with portable buildings. That's not what the building was designed to do.

No you take billions in losses over the short term, some of which easily recoverable like goodwill, to get billions more in savings over a longer term.

A funny thing happened on the way to the forum, though. The losses that were used to justify concessions have always exceeded the amount of savings garnered by the concessions. In other words, if your allegation is true, it's the worst method of increasing profits that has ever been devised.

First of all the claimed savings are very much undervalued, the savings are much more than the airlines claim, and the real losses are much less.

OK, now, that's a nice, easy claim to test. Show us the evidence.

If they claim that their routes and their Logos lost value however they did not sell them then they actually lost nothing.

Not using a route authority does generate an accounting cost. So does loss in brand value, though I'd be curious to know under what circumstances you've heard AA claim to have lost brand value.

You are also failing to take into consideration the compounding effect those savings will the the company.

No, I am not.