Why Don't The Airlines Just Raise Fares?

[mweiss]

Interestingly, it wouldn't get anyone in (legal) trouble. The issue is that it's very cheap and easy for Dewey to figure out that if he says he's a station attendant, that the price is lower.

What the legacies tried to do is ascertain the behavioral characteristics that differentiated business travelers from their leisure counterparts. Once you can differentiate, you can price accordingly.

The thing is, you've got to be able to consistently differentiate. Now that businesses have begun to force their travelers to masquerade as leisure travelers, the legacies are left with two broad choices. One is to figure out a new set of rules that differentiate the two modes. The other is to price as if there were only one mode.

The LCCs are, essentially, pricing as if there were only one mode. While this would reduce one's revenues in a monopoly market, what it succeeds in doing in the competitive market is siphoning the upper mode away from the legacies. The theoretical eventual net result is a higher concentration of business travelers than in the industry as a whole...which allows the airline to profitably price between the two modes.

This is the fundamental theory behind DL's new pricing.

An interesting question to ask is what happens when the entire industry shifts to this mode of pricing. In such a situation, game theory would suggest that the advantage would quickly dissipate and average yields would drop.

If that's true, then this could mean that the long-term prognosis is more attrition of the higher-cost providers.

(Now, Bob, before you go attacking me...I wholeheartedly agree that those last two paragraphs are all speculation. I don't know of any good examples from which to draw to support it.)

 

[Hopeful]

Interestingly, it wouldn't get anyone in (legal) trouble. The issue is that it's very cheap and easy for Dewey to figure out that if he says he's a station attendant, that the price is lower.

What the legacies tried to do is ascertain the behavioral characteristics that differentiated business travelers from their leisure counterparts. Once you can differentiate, you can price accordingly.

The thing is, you've got to be able to consistently differentiate. Now that businesses have begun to force their travelers to masquerade as leisure travelers, the legacies are left with two broad choices. One is to figure out a new set of rules that differentiate the two modes. The other is to price as if there were only one mode.

The LCCs are, essentially, pricing as if there were only one mode. While this would reduce one's revenues in a monopoly market, what it succeeds in doing in the competitive market is siphoning the upper mode away from the legacies. The theoretical eventual net result is a higher concentration of business travelers than in the industry as a whole...which allows the airline to profitably price between the two modes.

This is the fundamental theory behind DL's new pricing.

An interesting question to ask is what happens when the entire industry shifts to this mode of pricing. In such a situation, game theory would suggest that the advantage would quickly dissipate and average yields would drop.

If that's true, then this could mean that the long-term prognosis is more attrition of the higher-cost providers.

(Now, Bob, before you go attacking me...I wholeheartedly agree that those last two paragraphs are all speculation. I don't know of any good examples from which to draw to support it.)

[post="238470"][/post]​

What you will have by year's end is ALL low cost carriers flying. The difference will be the former legacy carriers that survive will be larger LCC's. After this shakeup has been complete, the entrance of even more LCC's is unlikely.

Once they are done raping us completely, the airlines will have even higher load factors than now but they will be offering more destinations than the Jetblues and Southwests.

The passenger will have long since gotten used to no meals, bad morale, and mediocre service. Since the passenger only wants cheap fares, they can no longer complain. They will have given up their rights. When a plane ticket is the cheapest form of transportation, they must suffer the results of an industry that has demoralized its employees and beat them into submission.

And before anyone mentions the lovefest between Jetblue and Southwest and their employees, keep in mind, they did NOT have anything taken away from them so a passenger can fly an aircraft for the equivalent of cab fare.

Thsoe employees at the LCC's were hire fully aware of their employer's pay and benefit policy.

If AA is going to take my pension, GIVE to me and all employees what has been contributed in their name and let us control it in our own retirement accounts.

Tomorrow, they can have their 401k with a measley few % match.

 

[mweiss]

Hopeful, I think you're missing the other possibility. Retail consists of far more than Wal-Mart. Why should airlines have only one level of service and pricing?

 

[Bob Owens]

Whatever. "Union" isn't the point.

Well you were the one that threw that in.

The point is that the nature of the wage structure inherently makes expansion a necessity in order to remain competitive.

Couldnt that be said for just about any business? Dont even non-union, non-airline employees expect that over time their real income will increase or at least keep up with inflation?

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.

Well there again you are making an asumption. Its not like I feel that they went out and lost money in what would have otherwise been a good year. I feel that they failed to take steps to mitigate those losses until things got bad enough so they could take advantage of an unfavorable economic climate and score some long term victories as far as labor costs.

Given the wage structure in place, productivity per dollar is at its peak closer to (though not at) the bottom of the seniority list.


Theoretically, and that theory places no value on the proficiency and skill aquired through experience. Its makes an assumption that a brand new worker, because he is bottom pay rates is as productive as a top paid worker with years of experience. That may be true with imaginary widgets but is not true when it comes to getting aircraft off the gate.

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.

But how are you measuring productivity? In a theoretical sense or actually being able to produce revenue? Besides at this point we are all making the same pay, we are all at top pay.


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

I told you where to find it.

http://www.air-mechanic.com/screencap/pay_vs_cpi.jpg

 

[Bob Owens]

mweiss,Jan 12 2005, 05:36 PM]
They have to date. There's no reason to expect this time to be different.
And this is the crux of the argument.

No that is your arguement. Sure looking backwards you might see that but looking forward these airlines are locking employees in for very long terms at hugely concessionary rates where whatever increases there are, are less than half of the historic average rate of inflation. They have locked these workers in so they can not strike, so in effect they have neutralized the unions.

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.

Do we have a declining economy or one that the rate of "growth" has declined?


You claimed that the savings are much more than the airlines claim, . Show us your evidence.

Ok. AA claimed they needed concessions that could either be taken through concessions or reduced headcount. After getting the concessions they reduced the headcount beyond the figure needed to meet the number they gave, so in effect they double the figure they needed. Thats a start. AA also set the values of what each item is worth, now lets see what they claim those items will cost when we get rid of the TWU and ask for them back.

and the real losses are much less

In the 2003 10K the company had several items listed that contributed to their losses such as $988 million in goodwill, liability for aadvantage miles, prepaid leases etc. Unrealized losses, not real losses.

A cost, as defined by GAAP.

Why are you dancing around this? OK, give us the Generally Accepted Accounting Principles definition of "an accounting cost".

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

Thats right because the law is designed to protect the investor, not the interests of the workers. While this information is needed by the investor when delivered out of context to workers it can give them a misleading picture of what is going on.

Again, so what?

So what? You are the one who asked the question. I'm showing you that their "real" losses were not as high as the billions claimed. When the distinction is made between real losses and the loss of intangibles the picture, while still not rosy is quite different.
Cash is a small part of the equation.



Why does it matter at all if the company shows a loss in intangible assets?


Because you are claiming that they are losing more than they are gaining in concessions. They are losing intangible value and gaining cash concessions. You still do not see the difference?

I'll tell you what I'll give you an intangible asset in exchange for cash. From now on I will refer to the Brooklyn Bridge as the Micheal Weiss Bridge, such an honor should be worth at least $100. Do we have a deal?

Do you know what the goodwill represented?

Yes, unidentifyable intangible assetts.


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

Not over the long term.Not in real terms. The value of the intangibles is easily restored and the cash they recieve in concessions is tangible.

 

[Bob Owens]

mweiss,Jan 12 2005, 05:19 PM]
But the issue is, how much money?

Well now you are changing the subject, if we are changing it to "how MUCH money it first has to agreed that they can indeed raise fares because even if its just one penny then you are admitting that they could raise fares and your position that they could not is wrong. Are you prepared to admit that?

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.

The pupose over this whole thread was whether or not the airlines could raise fares. Now are you prepared to admit that they can and then take on the discussion of "How Much?

 

[Bob Owens]

(Now, Bob, before you go attacking me...I wholeheartedly agree that those last two paragraphs are all speculation. I don't know of any good examples from which to draw to support it.)

[post="238470"][/post]​

Have I "attacked" you yet?

 

[mweiss]

Couldnt that be said for just about any business? Dont even non-union, non-airline employees expect that over time their real income will increase or at least keep up with inflation?

Sure. But in every instance I've seen, you move up the ranks at a solid, steady pace, or your pay stops rising beyond some minimal token amount, or you are nudged in the direction of the door.

Well there again you are making an asumption.

I guess you could call it that. The SEC filings support it, though. What do you have to counter?

I feel that they failed to take steps to mitigate those losses until things got bad enough so they could take advantage of an unfavorable economic climate and score some long term victories as far as labor costs.

Pretty subtle distinction, and, better yet, something that can't be so readily proven or disproven. Good job!

But how, then, do you explain how perfectly the change in economic growth tracks with the change in profitability? I wish I could show you the graph...it's astonishing.

Based on what I'm seeing, I would agree that they've been taking advantage of the situation when it arises. But I don't see any evidence that they're pushing money out the door in order to beat labor. Now, if they did like Lorenzo and Icahn did, pushing the money out the door into their own pockets...that I could imagine. Even then, the labor thing is just an added bonus (if you want to look at it from the nefarious perspective).

Theoretically, and that theory places no value on the proficiency and skill aquired through experience. Its makes an assumption that a brand new worker, because he is bottom pay rates is as productive as a top paid worker with years of experience.

For some reason, this point remains lost on you, even after three different times saying it. Since the words aren't working, let's try numbers.

Let's keep this really simple. We'll be making assumptions here because the assumptions don't matter; they're using an example to illustrate the point, not to prove it.

Let's say that all you ever do is change aircraft tires. Nothing else. You're new on the job, and paid $10/hour to change tires. When you start out, you haven't done this much before, so you're only able to change one tire per hour. Each tire, then, costs $10 in labor to change.

(As a side note, in order to keep this discussion simple, we're assuming that there's no inflation...naturally, we could inflation-adjust any of these numbers, but they just make it harder to follow).

A few years later, we check in with you again. You've gotten raises along the way, and you're now making $15/hour to change tires. Fortunately, you've also gotten faster; your productivity has doubled...you're now able to change two tires per hour. Each tire, then, costs $7.50 in labor to change. Your wage increase is below your productivity increase. You're more valuable to the company than you were when you started.

Several years later, we check in with you once again. You've still been getting raises, and you top out this year at $24/hour. You've also still improved your productivity, and reached the fastest any experienced person gets...you're changing three tires per hour. Each tire change that you do now costs the company $8. You're less valuable to the company now than you were when you were getting paid $15/hour, even though you're faster.

As I said before, this is waaay oversimplifying things, because there are many factors outside the ones I list above. I'm using the example to illustrate the point, not to prove it.

But how are you measuring productivity? In a theoretical sense or actually being able to produce revenue?

Well, mechanics are a cost center; you don't produce revenue. So, in your case it's the amount of maintenance done. You could unitize that a number of different ways, as long as it's consistently applied in order to be able to make apples-to-apples comparisons.

Besides at this point we are all making the same pay, we are all at top pay.

If you're all TOS, then that reduces several of the barriers to shrinking. It also renders the produtivity per dollar argument moot in your case.

I told you where to find (the payscale).

That's not what I asked for. First of all, it doesn't tell me much. Does that line represent TOS? Secondly, I wanted to see what the seniority-based pay is for mechanics in the current contract. That graph tells me nothing about what I asked.

 

[mweiss]

... looking forward these airlines are locking employees in for very long terms at hugely concessionary rates where whatever increases there are, are less than half of the historic average rate of inflation.

Yes, they have. And this means that they can increase prices because...?

Do we have a declining economy or one that the rate of "growth" has declined?

We had a declining economy followed by one that has sputtered enough that the (inherently lagging) increase in business travel demand hasn't had a chance to gain traction. To make matters worse, the bimodal pricing structure is becoming increasingly intractable, in part because of WN's market growth and in part because of some irreversible business changes. So, even when the economy picks up steam, it's going to be much harder, if not impossible, to get away with the $2000 coach round-trips in the US again.

AA claimed they needed concessions that could either be taken through concessions or reduced headcount. (etc,. etc)

So you're talking about negotiation with the unions. OK, I'll be the first to admit that they play hardball. But that's not what I'm talking about. I'm talking about misrepresenting the numbers to the SEC. So perhaps we're just on different pages altogether here.

In the 2003 10K the company had several items listed that contributed to their losses such as $988 million in goodwill, liability for aadvantage miles, prepaid leases etc. Unrealized losses, not real losses.

Guess it depends on what you mean by "real." They aren't operating losses.

Why are you dancing around this? OK, give us the Generally Accepted Accounting Principles definition of "an accounting cost".

I'm not dancing around anything. You used a term that has a specific definition, and claimed that it was being falsified. I said that it's not, because the SEC requires that it show up in the books the way that it did.

If you'd like to see the definition of a "cost," according to GAAP, feel free to read it here.

SFAS 142 specifically covers the change in the way goodwill is handled, effective 2001.

Thats right because the law is designed to protect the investor, not the interests of the workers. While this information is needed by the investor when delivered out of context to workers it can give them a misleading picture of what is going on.

And a turn and bank indicator can give a misleading picture of what is going on if you don't know how to use it. What a surprise.

I'm showing you that their "real" losses were not as high as the billions claimed.

I mean this in the nicest possible way, but I hope you don't use this sort of argument in contract negotiation if you ever get to that point. It looks really bad.

Look at the operating profits and losses when you are trying to figure out how the airline is doing, from a sustainable perspective. Operationally, the legacies ranged from big losses to just about break-even since about the beginning of 2001.

...you are claiming that they are losing more than they are gaining in concessions. They are losing intangible value and gaining cash concessions. You still do not see the difference?

Yeah. You may well know what you mean to say, but you don't seem to know much about accounting, so I'm not sure what you really mean to say.

They are losing more money operationally than they gain in concessions. Moreover, the concessions are not cash. They can be treated as assets in a very limited number of circumstances, but cannot be treated as cash under any circumstances.

...(Goodwill represented) unidentifyable intangible assetts.

Nope. There is no such thing as an unidentifiable intangible asset. All intangible assets are identified. This one was associated with a very specific event in AA's history. And I can assure you that it will never increase in value.

 

[funguy2]

mweiss:

Don't let him get you on TOS salaries. While one airline may be TOS, the industry as a whole is not. Thus it becomes the burden of the airline with all TOS employees to become even more productive, when, as you illustrated, there may not be any realistic ways to become more productive. Meanwhile, since fare increases are a function of industry wide supply and demand, the fact that one airline is TOS is irrelevant to pricing, unless there is significant consolidation/monoplization of the industry.

Hopeful:

I think you miss the point about "the lovefest". If you have a choice between 2 airlines from LAX to BNA, for example, one Southwest and one American, and there is no difference in product (both offer all coach, no food, no inflight entertainment, same fare), then a serious differentiator becomes customer service... And by then, many people will not be used to "bad morale and mediocre service." I find when I experience these items from other services I purchase, I no longer use those companies. Furthermore, "productive" employees is not the same as "unhappy" employees. Look at ATA... They had very low costs, and yet the other ingredients for success were still missing.

 

[mweiss]

Well now you are changing the subject, if we are changing it to "how MUCH money

Nice try, Bob. I wasn't changing the subject at all. I was pointing out that the value of time to each individual is precisely what sets the demand curve for one flight relative to another...which is exactly what determines whether or not you can raise fares.

Taking my quotes out of context like that is bad showmanship.

it first has to agreed that they can indeed raise fares because even if its just one penny then you are admitting that they could raise fares and your position that they could not is wrong. Are you prepared to admit that?

This would be funny if it weren't sad.

 

[Bob Owens]

mweiss,Jan 12 2005, 11:00 PM]
Sure. But in every instance I've seen, you move up the ranks at a solid, steady pace, or your pay stops rising beyond some minimal token amount, or you are nudged in the direction of the door.

And do the starting pay rates never increase? Are your talking about blue collar jobs or management jobs? Maybe those workers need a union?

Are you aware that the starting pay for a title I mechanic at AA is lower today than it was 25 years ago?



I guess you could call it that. The SEC filings support it, though. What do you have to counter?

The SEC filings support what?


But how, then, do you explain how perfectly the change in economic growth tracks with the change in profitability? I wish I could show you the graph...it's astonishing.

Well what else would it do? What excuse could they use for losing money when everyone else is doing well? Why bother, there will always be another economic cycle.

Based on what I'm seeing, I would agree that they've been taking advantage of the situation when it arises.

Exactly.

But I don't see any evidence that they're pushing money out the door in order to beat labor. Now, if they did like Lorenzo and Icahn did, pushing the money out the door into their own pockets...that I could imagine.

Thats the difference between a corporate raider and people who may want to stay in the business for the long term.

Even then, the labor thing is just an added bonus (if you want to look at it from the nefarious perspective).

Yes a bonus that makes up a huge part of your costs.

For some reason, this point remains lost on you, even after three different times saying it. Since the words aren't working, let's try numbers.

Let's keep this really simple. We'll be making assumptions here because the assumptions don't matter; they're using an example to illustrate the point, not to prove it.

Dont bother, your illustration is pointless because the assumptions do matter. Look at the graph on the link I sent you. Top pay has been declining. Your example might be valid fot Jet Blue where all the company has is new hires but is not valid for a mature company like AA where the majority of employees are at top pay.

Well, mechanics are a cost center; you don't produce revenue.

Sure we do. Just as much as any other employee does. The labor we provide enables the company to make money.Thats just an old BS line that has been repeated so often that it is believed as fact. The fact is that ALL employees are in a cost center, unless they work for free. You can try and spin it anyway you like but the reason why we are here, ultimately, and this goes from everyone from the CEO to the janitors is because we provide some function that ultimately is needed in order to produce revenue.

That's not what I asked for.

Well now thats what you are getting.

First of all, it doesn't tell me much.

It tells you that real wages have declined over the last twenty years.

If you like I can forward you all the figures for the graph. Its in Excell.

The graph tells you plenty, just not what you are loking for. If you want to make an arguement you cant expect me to go and provide you with the ammunition. I'm sure you can find what you are looking for but I'm not going to do the looking. But if you get it this debate is going to go way, way off topic and I can assure you that you will get far less satisfaction going down that path than this.

Does that line represent TOS?

TOS is topped out salary? Then yes. If not identify what you mean by TOS.

 

[Oneflyer]

took paycuts in an industry that was expanding and making record profits.

what world do you live in? Record profits?

First of all the claimed savings are very much undervalued, the savings are much more than the airlines claim

As you would say prove it.

 

[Bob Owens]

mweiss,Jan 12 2005, 11:29 PM]
Yes, they have. And this means that they can increase prices because...?

Nice try.

We had a declining economy followed by one that has sputtered enough that the (inherently lagging) increase in business travel demand hasn't had a chance to gain traction.

When was the economy "declining"?

I'm talking about misrepresenting the numbers to the SEC. So perhaps we're just on different pages altogether here.

Aparently, I didnt say they misrepresented anything to the SEC.

Guess it depends on what you mean by "real."

Did you borrow that one from Clinton?

They aren't operating losses.
I'm not dancing around anything. You used a term that has a specific definition, and claimed that it was being falsified. I said that it's not, because the SEC requires that it show up in the books the way that it did.

Well you were the one who compared losses to concessions, apples to oranges if you will saying that it did not make sense to lose billions for hundreds of millions in labor cost savings.

And a turn and bank indicator can give a misleading picture of what is going on if you don't know how to use it. What a surprise.

And the average worker should know how to interpret financial reports? Well given todays climate I guess they do.

I mean this in the nicest possible way, but I hope you don't use this sort of argument in contract negotiation if you ever get to that point. It looks really bad.

I'm sure you do. It looks so much better to go back to your membbers get them to accept concessions many years into the future then when the company turns around and starts making record profits say "Well you voted it in".

Yeah. You may well know what you mean to say, but you don't seem to know much about accounting, so I'm not sure what you really mean to say.

So do we have a deal as far as my intangible asset for your $100 cash?

They are losing more money operationally than they gain in concessions.

That has not been determined yet. We would have to wait until these agreements have run their course to determine that.

Moreover, the concessions are not cash. They can be treated as assets in a very limited number of circumstances, but cannot be treated as cash under any circumstances.

Well they cant be treated as cash for accounting purposes by they most certianly will be saving real cash by paying people less until the next decade.

Nope. There is no such thing as an unidentifiable intangible asset.

Ok Drop the "unidentifyable" but leave intangible which means "incapable of being percieved by the senses".

All intangible assets are identified. This one was associated with a very specific event in AA's history. And I can assure you that it will never increase in value.

Well not by accounting methods anyway. But the fact is that some of these assetts can in fact be sold even after they have been fully amortized.

 

[Bob Owens]

Oneflyer,Jan 13 2005, 12:46 AM]
what world do you live in? Record profits?

I was referring to the 90s.

As you would say prove it.

I already made my case.