Why Don't The Airlines Just Raise Fares?

[Bob Owens]

[/list]Now, what's your evidence that I'm wrong?

Did I say you were wrong? I aked a question.

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.

Or you take the direct flight and pay a little more.

So businesses would have their employees put in an extra five hours each, which might make them unusable the next day, to save $10 in airfare? $10 was the number you used.

For business, we can agree to make an assumption that people fly beause it saves money.

And time is money.

This is an important distinction. Yes, time is money, but it's not infinite money.

And we do not have infinite time either..

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.

OK.

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

And isnt it true that to the airline a long business trip is nearly indistingushable from a leisure trip? Isnt that why the airlines had Saturday night stays? In an attempt to distinguish between leisure an business travellers?So for the purpose of this part of the topic shouldnt we stick to a typical short term business trip? Or are you looking for a way to say yea you are right but,,,?

I think I already made the point that with so many variables that just about any generalization could be countered with "yea but".

 

[Bob Owens]

You seemed to imply that the optimal pricing equations don't work.

I think that I'm implying that they are not in use. Or if they are then something is wrong.

Vernacular in such a conversational environment is generally considered to be both acceptable and expected.

Acceptable, I guess, expected, well I didnt expect it after all the 50 cent words you started off with.

 

[BillLumbergh]

Wow. At this point why dont you just PM each other. I can see both of you are posting right now....

 

[mweiss]

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

Whatever. "Union" isn't the point. The point is that the nature of the wage structure inherently makes expansion a necessity in order to remain competitive.

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.

As you defined "short," yes. But they don't go up fast enough to bring financing costs down fast enough to offset the costs associated with intentionally pushing a loss cycle.

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.

Not at all. I'm illustrating the financial choices that face airline strategic planners. Given the wage structure in place, productivity per dollar is at its peak closer to (though not at) the bottom of the seniority list. It doesn't matter how that changes relative to the CPI. We're talking about where on the seniority list, right now, at this very moment, the most productivity per dollar is produced.

So, again I ask you, put the payscale right here in this thread. Let's tackle it here and now.

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

[post="238373"][/post]​

Um, no. I claimed that if AA does not have a monopoly, then the more complex pricing I described two days ago (I think) must be used in order to determine optimal price. You then said that the more complex pricing scheme I described only applies if the other players don't have sufficient capacity to affect the market. I responded that if the other players don't have sufficient capacity to affect the market, then you have a de-facto monopoly.

Either way, we have a model to illustrate optimal pricing. In fact, you could throw out the simpler model and stick with the more complex, because in a monopoly the more complex model becomes the simpler one.

 

[mweiss]

So businesses would have their employees put in an extra five hours each, which might make them unusable the next day, to save $10 in airfare? $10 was the number you used.

$10 was the number I used to compare connection to connection. I then said that the effect is different at a hub, specifically because of the value-add of nonstops.

And time is money.

As I said. But the issue is, how much money? The answer to that question is different for different people, which is precisely what defines the shape of the demand curve (see how we keep coming back to that?). However much those five hours are worth, that's the revenue premium that one can charge for a nonstop itinerary.

This is an important distinction. Yes, time is money, but it's not infinite money.

And isnt it true that to the airline a long business trip is nearly indistingushable from a leisure trip? Isnt that why the airlines had Saturday night stays? In an attempt to distinguish between leisure an business travellers?So for the purpose of this part of the topic shouldnt we stick to a typical short term business trip?

No. The purpose of this part of the topic is to nail down the characteristics of the business mode, which includes both types of business travelers. Naturally, we could subdivide the business travel mode into many different subcategories, but I'm afraid if we did that we'd end up far more ratholed than we already are.

I think I already made the point that with so many variables that just about any generalization could be countered with "yea but".[/color]

[post="238379"][/post]​

Which is why I'm trying to eliminate as many variables as possible from the discussion...because, in the end, most of them don't help in determining the effect of changing the airfares.

 

[Bob Owens]

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.

Have they? Isnt that yet to be determined?

In other words, if your allegation is true, it's the worst method of increasing profits that has ever been devised.

I agree. Probably one of the most immoral too.

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

Which one? There were two claims.

Not using a route authority does generate an accounting cost.

Define "accounting cost".

So does loss in brand value,

Once again, is there a real loss of money? Is the loss realized if they didnt actually sell it? Isnt it true that even though intangible losses can be claimed, and written off against the tax burden of the company that no actual cash was lost? If it cant be written off against the tax burden it can and is still reported on the forms filed with the SEC. Isnt it true that if those same devalued intangible assetts go up in value that as long as that increase in value is unrealized-not turned into actual cash, that they do not have to pay tax on it?

though I'd be curious to know under what circumstances you've heard AA claim to have lost brand value.

Well $988 million in "Goodwill" in 2003.

No, I am not.

Sure you are. You said that they are losing billions to only save hundreds of millions.

Sure a couple of hundred million from the pilots, a couple of hundred million from the mechanics, from the flight attendants, the baggage handlers, this year, next year, the next, the next ,the next,,,,,,.

So while the airlines claim huge losses in the billions, often a good part of it in losses against intangible assetts, those losses in turn help get concessions from workers that translate directly into very tangible cash.

 

[funguy2]

Wow. At this point why dont you just PM each other. I can see both of you are posting right now....

[post="238385"][/post]​

Because others are reading... like oneflyer and myself.

 

[mweiss]

Wow. At this point why dont you just PM each other. I can see both of you are posting right now....

[post="238385"][/post]​

This is an important discussion that should be had on these boards. It outlines many key issues that are too often glossed over out of expediency...but the airline industry is far too complex to be reduced to expedient levels.

If this discussion can be used as future reference, then it's time well spent.

 

[Bob Owens]

This is an important discussion that should be had on these boards. It outlines many key issues that are too often glossed over out of expediency...but the airline industry is far too complex to be reduced to expedient levels.

If this discussion can be used as future reference, then it's time well spent.

[post="238393"][/post]​

Well we better wrap it up quickly anyway because I'm starting to feel better than I was and I will be returning to work on Saturday if I continue to recover.

Congratulations Bill you did get us to agree that we should continue the discussion though.

 

[mweiss]

Have they? Isnt that yet to be determined?

They have to date. There's no reason to expect this time to be different.

In other words, if your allegation is true, it's the worst method of increasing profits that has ever been devised.

I agree.

And this is the crux of the argument.

I allege that a declining economy shrinks the business mode, which erodes the legacy airlines' pricing power in the business mode, which kills the legacy airlines' profitability, since the legacies are tuned to serve the business market.

If I understand you correctly, you allege that the legacy airlines feign a lack of pricing power in order to fool the unions into agreeing to concessions.

Which one? There were two claims.

OK, if you want to get pedantic, both of them. You claimed that the savings are much more than the airlines claim, and the real losses are much less. Show us your evidence.

Define "accounting cost".

A cost, as defined by GAAP.

Is the loss realized if they didnt actually sell it?

It's an unrealized cost. So what? It still has to show up on the books by law.

Isnt it true that even though intangible losses can be claimed, and written off against the tax burden of the company that no actual cash was lost?

Again, so what? Cash is a small part of the equation.

Isnt it true that if those same devalued intangible assetts go up in value that as long as that increase in value is unrealized-not turned into actual cash, that they do not have to pay tax on it?

I don't know. I'm not a CPA, and I don't do corporate taxes. Either way, I say again...so what? Why does it matter at all if the company shows a loss in intangible assets?

Well $988 million in "Goodwill" in 2003.

Do you know what the goodwill represented?

You said that they are losing billions to only save  hundreds of millions.

It's verbal shorthand. The point is that they are losing more than they are wringing from the concessions.

 

[FWAAA]

Wow. At this point why dont you just PM each other. I can see both of you are posting right now....

[post="238385"][/post]​

It's your board, but in my opinion, although the discussion primarily features just two posters at the moment, it has to be preferable to the typical "My union is better than yours (AMFA v TWU)" hatefests that tend to permeate this message board. And as others have said, it is interesting reading.

 

[funguy2]

On the issue of "time is money":

Here is an example... I priced a DFW to SFO roundtrip, leaving tonight (evening) returning tomorrow evening on the websites of both American and America West... Here is what I found:

AA: nonstop - $1018.40 was the fare, 3hr 45min going, 3hrs 23min returning - total travel time 7hrs 8min - or $145fare/hr

AA: connection via LAX (website offered) - $846.80 was the fare, 5hr 6min going, 7hr, 19min returning - total travel time 12hrs 25min - $67fare/hr

HP: connection via LAS - $604.80 was the fare, 4hrs 52min going, 4hrs 51min returning - total travel time 9hrs 43min - $62fare/hr.

If this is consistent over other markets (and I don't know if it is), then this implies that the "time is money" premium is around $80 of fare per hour saved.

 

[FWAAA]

If this is consistent over other markets (and I don't know if it is), then this implies that the "time is money" premium is around $80 of fare per hour saved.

[post="238406"][/post]​

Discounts offered to many of AA's corporate customers probably shrink the hourly difference in nominal terms, but the relative differences are still there.

Since many lawyers, accountants, consultants, etc. bill their time out at $300 - $500/hour, cogent arguments can be made supporting the nonstop as the most efficient option for these business travelers.

Nevertheless, I have seen examples of Fortune 500 companies ineffectively micromanage teams of outside lawyers by requiring that they drive 2-3 hours to alternate airports to save a few bucks on airfare.

Some people just can't see the big picture. B)

 

[mweiss]

And, the fact is that there is a market for whom the $80/hour is money well spent. At issue (in part) is whether that market is sufficiently inelastic that they'd also be willing to spend, say, $90/hour. Or even $82/hour. How many of them drop off as the price goes up?

And then there are the second-order questions. For example:

• How high can the fare go before it becomes attractive for FL to start offering DFW-LAX nonstops?
• How high can the fare go before it becomes a good political move for Texas Congressional Representatives to repeal Wright/Shelby?
• If we want to get really cynical...how high can the fare go before it costs more than the increased profits to successfully lobby the Texas Congressional Representatives to prevent repealing of Wright/Shelby?

 

[funguy2]

Since many lawyers, accountants, consultants, etc. bill their time out at $300 - $500/hour, cogent arguments can be made supporting the nonstop as the most efficient option for these business travelers.

Good point, but obviously the ability to set prices by profession is a lot more difficult than the "business vs. leisure" designation, which is rapidly evolving into the more correct, "I can book a month out vs. I cannot book a month out" designation.

Just imagine... A guy calls up American...

Guy: " I need to fly to SFO this afternoon"
AA Rep: "OK, then, what is your profession and employer?"
Guy: "I am an attorney for Dewey, Cheatem, and Howe"
AA Rep: "That will be $2500 roundtrip sir..."
Guy: "Never mind, I am really a station attendant for Texaco."
AA Rep: "Well, then, that lowers your fare to $198."

Now that would get someone in trouble.