Why Don't The Airlines Just Raise Fares?

[whlinder]

aircon.org

[post="244057"][/post]​

Interesting.

I can understand your viewpoint; however I still do not believe that the carriers are colluding to hold fares down. If that organization had been founded in 2001, maybe I would believe your theory. But it was founded in 1971. Airlines have made money since then. UA used to make a billion dollars in a fiscal year. They weren't like 'oh crap, we can't be making money or else those pesky unionized employees will want raises.'

The ease of which fare information can be distributed to the consumer with the internet today has made the airline passenger extremely price sensitive. Game theory will tell you that in a market as competitive as the US market, raising fares collectively will be very difficult. As soon as only 1 airline is holding out, they see a massive competitive advantage come their way by having comparably lower fares. The competitors see their bookings slow and one rolls back and then they all roll back. How many times has it happened in the last couple of years? I'd say at least 10.

 

[Bob Owens]

Interesting.

I can understand your viewpoint; however I still do not believe that the carriers are colluding to hold fares down.  If that organization had been founded in 2001, maybe I would believe your theory.  But it was founded in 1971.  Airlines have made money since then.  UA used to make a billion dollars in a fiscal year.  They weren't like 'oh crap, we can't be making money or else those pesky unionized employees will want raises.' 

The ease of which fare information can be distributed to the consumer with the internet today has made the airline passenger extremely price sensitive.  Game theory will tell you that in a market as competitive as the US market, raising fares collectively will be very difficult.  As soon as only 1 airline is holding out, they see a massive competitive advantage come their way by having comparably lower fares.  The competitors see their bookings slow and one rolls back and then they all roll back.  How many times has it happened in the last couple of years?  I'd say at least 10.

[post="244113"][/post]​

Well its the other way around, they have rolled back the fares as a means to roll back labor costs.

By having low fares they can claim thats its competeition that is creating the need to lower labor costs. Then once they feel that they have lowered wages or "reset" them as the CEO of NWA stated they will raise them. In the meantime they will have us all locked into long term contracts.

If you look at the 1990s you will see that the airlines were making record profits right after they all got long term concessionary contracts put in place. The swing in profits was a lot more than the savings in labor costs.

Basically its a modified replay of what happened in the 1990s.

 

[mweiss]

Well its the other way around, they have rolled back the fares as a means to roll back labor costs.

You've said that several times. Show the evidence. Put up or shut up.

By having low fares they can claim thats its competeition that is creating the need to lower labor costs. Then once they feel that they have lowered wages or "reset" them as the CEO of NWA stated they will raise them. In the meantime they will have us all locked into long term contracts.

Interesting theory. Why didn't they do it in 1996? What was so special about 2004?

If you look at the 1990s you will see that the airlines were making record profits right after they all got long term concessionary contracts put in place.

And it's just pure coincidence that the economy was booming? No, wait, let me guess...the concessionary contracts caused the economic boom?

 

[NewHampshire Black Bears]

"JESUS",
This thread is going to break a record for longevity !!!!!!!!!!!!!!

NH/BB's

 

[Bob Owens]

mweiss,Jan 31 2005, 05:57 PM]

You've said that several times. Show the evidence. Put up or shut up.

Ok let me clarify that. The airlines were facing a downturn anyway, so they made it even worse so they could capitalize on it and set themselves up with long term concessionary contracts.

Prove me wrong. Put up or shut up.

Interesting theory. Why didn't they do it in 1996? What was so special about 2004?

Because in 1996 most of the airlines already had locked in long term concessionary contracts and they were making record profits.

And it's just pure coincidence that the economy was booming?

Thats what we said. You forget that in the early 90s the airlines claimed they lost more money than they made in it entire existance. They were all once again claiming the end of the industry as we know it, BK carriers hurting healthy carriers, SWA and other LCCs taking over etc. In 1994 UAL got huge concessions and the employees became "owners". In 1995 the TWU outdid the IAM and gave concessions plus a 6 year-6 percent contract, all of a sudden there was a miracle!!!

No, wait, let me guess...the concessionary contracts caused the economic boom?

No the concessionary contract left us out of the boom. It was the best of times for everyone else, we were going backwards. If anything the lesson should have been NEVER agree to a long term contract during bad times.

 

[Buck]

W,

Could you tell me what a fair wage is for a mechanic that works for American Airlines?

 

[Winglet]

You're worth whatever you're willing to work for.

And we know what U employees think they are worth . . . . except the pilots . . . they got a sweet deal compared to everyone else.

 

[eolesen]

Could you tell me what a fair wage is for a mechanic that works for American Airlines?

[post="244289"][/post]​

No matter what it is, they'll always want at least 5% more than whatever they're currently making, and customers will want to pay at least 5% less for their tickets.



The End.

 

[seed]

Shame on anyone wanting to earn more, even 5% more, than they are currently earning! BTW, what is the current cost of living annually? To think, the audacity of the mechanics wanting to at least stay even with the COL, it's truly not fair, or should I say "fare"?

 

[mweiss]

You forget that in the early 90s the airlines claimed they lost more money than they made in it entire existance.

And it was true, in a sense. They used a bit too much shorthand, so it wasn't entirely accurate, however.

They were all once again claiming the end of the industry as we know it, BK carriers hurting healthy carriers, SWA and other LCCs taking over etc.

Right. And, back then, EA was negatively impacting the other legacies because of a need to price low enough to attract business. The effect of US/UA today is a bit muted, relative to the early 90s, because of LCCs already pricing at those levels.

Take a look at 1991. LCCs didn't really have a significant impact on the market yet, except for the areas of WN's expansion during that time. But the most interesting comparison to today's market would be 1991 on the West Coast. Alaska and America West had no ability to run, so they had to re-engineer their companies to compete effectively. Both of them have done an admirable job. They are examples that the others should be following if they wish to survive.

In 1994 UAL got huge concessions and the employees became "owners". In 1995 the TWU outdid the IAM and gave concessions plus a 6 year-6 percent contract, all of a sudden there was a miracle!!!

Perhaps you should examine the details of this "miracle." Ever hear of the World Wide Web? I could go on for ages about what drove the boom of the late 90s.

No the concessionary contract left us out of the boom. It was the best of times for everyone else, we were going backwards. If anything the lesson should have been NEVER agree to a long term contract during bad times.

[post="244277"][/post]​

Fair enough. I'll be happy to discuss intelligent negotiation of union contracts elsewhere. The topic at hand, once again, is the ability for the airlines to raise fares.

Ok let me clarify that. The airlines were facing a downturn anyway, so they made it even worse so they could capitalize on it and set themselves up with long term concessionary contracts.

Prove me wrong. Put up or shut up.

You made the assertion. Back it up. Here, I'll help you. BTS has all of the information you need. Tell us a route where AA priced below what they should have. Tell us what the fares should have been, and explain why they should have been at that level.

I've been backing up my assertions. Your current assertion, if I understand correctly, is that the airlines are colluding to depress fares in order to magnify losses in order to gain long-term concessionary contracts. What's your evidence? Your move.

 

[mweiss]

Please, can we keep this thread to fares and not go into wages here? It's already a long enough discussion without getting sidetracked.

 

[BillLumbergh]

Exactly. Are you two done yet?

 

[mweiss]

Apparently not.

Like you said its "possible" but you did not prove anything regarding the subject at hand.

No. See, you have a real problem with reading comprehension. I proved the following:

• It is possible to determine a demand curve
• It is possible to know the supply curve
• With both of those known, it is possible to determine the optimal price (defined as the price at which profits are maximized) in a monopoly market

Then I went on to explain how to extrapolate that into a competitive marketplace, and how it results in those with the lowest costs being the ones who are able to set the prices for the entire market.

In other words, I proved each step along the way, which leads to the conclusion. Your claim was that it's not possible to do. I showed that it is, and showed how you do it.

And a "market" is a city pair at a specific point in time right?

Not really. That's a gross oversimplification. Choose a particular city pair at a specific point in time, say, LAX-JFK next Monday, departing at 8:00 AM. Would you exclude 8:05AM from that market? How about 8:30? 10:00? 3PM? Similarly, would you exclude LGB-JFK? How about LAX-EWR? LAX-LGA? Would you only include nonstops between LAX and JFK, or would connections also be within the market? How about interline connections?

So, no, a "market" is not a city pair at a specific point in time.

And without [losing so much money] how else would they have been able to reduce labor costs to such a degree?

See, this is where your logic escapes me. You don't lose money to cut labor costs, you cut labor costs because you're losing money. You're so focused on the universe revolving around you that you don't even realize that you're just a bit player.

The fact is that this industry, as long as we are flying still generates huge revenues for other industries.

And so, of course, everyone in upper management at AA is cheerfully willing to fall on their swords for GE and ExxonMobil. The funny thing is that you keep wanting to find conspiracies in places where the market fundamentals explain the behaviors perfectly well. Where was the conspiracy in 1999?

By losing money, racking up debt and eliminatinmg unencumbered capital it will keep a downward pressure on wages and allow these other interests to maximize thier take from what this industry provides.

Actually, GE does far better when the market is robust. Right now, GE has to choose between making a little money on their aircraft, and shutting US down entirely, thus making nothing on the aircraft. There are too many used airplanes in the market right now.

If you look back to 1999, GE was making a killing off of these same aircraft. Demand outstripped supply, and GE was able to lease them at much higher rates.

Nobody wins in a recessionary market. GE has just managed to lose a little less.

Am I [confusing macro and micro]? Both points were a summation of the industry, not any particular industry.

Yes, you are. One refers to a handful of players (losing money), while the other refers to the overall industry (growing). What you're seeing is a market that, in a macro sense, is roughly balanced, but with widely disparate levels of efficiency among the different players at a micro level.

The legacy airlines have, on the whole, roughly broken even since deregulation.

Now who is confusing micro and macro? How can you lump all the "legacy carriers" into one when each one has had different results?

The difference is in degree.

Not really, because I've seen this twice before, once in the early eighties and again in the early 90s. While not exactly the same there are similrities in that all the experts were claiming that this represents a permanent change in the industry but within a few short years, right after concessions were won, the legacies rebounded and those LCCs that went head to head with the majors dissapeared.

There are similarities, but there are also some key differences. First of all, one LCC never went away. WN has grown to the point where it cannot be purchased, and can no longer be ignored. Secondly, the current group of LCCs are, to varying degrees, much more intelligent in design than the past ones. Third, the war chests that were used in the past to outlast the LCC startups are much smaller this time.

Having said that, I have no doubt that at least a couple (most likely four) legacy carriers will survive this cycle. But it's a war of attrition, and the long-term prognosis for the legacies is not good.

Not really. The money has to come from somewhere. Not enough has come from your pocket to justify it from that angle.

 

[mweiss]

Once again we can go back to the fact that much of what the airlines claimed to have "lost" was not real cash losses.

So what? So ignore the intangible losses. The real losses are still massive.

In the case of AA it was clear that $988 million was from "Goodwill" that could have been written off over time to reduce tax liabilities in the future. The same goes for the AAdvantage miles liability.

Oh, really? What rules in GAAP would have permitted AA to do either of these?

The 10 k also mentions "prepaid leases" and the company may have also accellerated depreciation.

You clearly don't understand accounting very well.

Lets not forget that this would not be the first time that the airlines exaggerated their distress, remember in the early 90s when they claimed the industry lost more in that period of time than they made in their entire previous existance?

Depending on how you looked at the numbers, they did. But it doesn't matter. You're making a much more powerful claim than simple hyperbole. You've claimed that the legacy carriers are deliberately losing more money by artificially lowering fares. Don't try to confuse the issue by tossing in accounting issues, particularly ones that you don't understand.

Whether [the losses] were fabricated or not does not change the fact that our concessions were unneccisary.

The necessity of concessions is for another thread. The topic of this thread is the claim that airlines (AA in particular, since you work there and since this is the AA board) would generate greater profits if they raised fares. I'll be happy to discuss the need for concessions elsewhere.

 

[Bob Owens]

mweiss,Feb 22 2005, 04:53 PM]
Apparently not.
No. See, you have a real problem with reading comprehension. I proved the following:

• It is possible to determine a demand curve
• It is possible to know the supply curve
• With both of those known, it is possible to determine the optimal price (defined as the price at which profits are maximized) in a monopoly market

Then I went on to explain how to extrapolate that into a competitive marketplace, and how it results in those with the lowest costs being the ones who are able to set the prices for the entire market.

Not exactly, you claimed to have proven your point, and the subject being debated was whether or not an increase in fares could increase profits. Now you are claiming that to proved something was possible but you did not ever prove that by increasing fares the airlines would not increase profits. Another thing that your arguement did not address is predatory pricing which while technically being illegal is hard to enforce.

In other words, I proved each step along the way, which leads to the conclusion. Your claim was that it's not possible to do. I showed that it is, and showed how you do it.

Not really. That's a gross oversimplification. Choose a particular city pair at a specific point in time, say, LAX-JFK next Monday, departing at 8:00 AM. Would you exclude 8:05AM from that market? How about 8:30? 10:00? 3PM? Similarly, would you exclude LGB-JFK? How about LAX-EWR? LAX-LGA? Would you only include nonstops between LAX and JFK, or would connections also be within the market? How about interline connections?

So, no, a "market" is not a city pair at a specific point in time.

Ok, then define the market in question.

See, this is where your logic escapes me. You don't lose money to cut labor costs, you cut labor costs because you're losing money. You're so focused on the universe revolving around you that you don't even realize that you're just a bit player.

Well if you are losing money anyway then why not take full advantage of what losing money can do for you? I'm not saying that they choose to lose money but I am saying that they exaggerated those losses in order to get labor, not just me, but the other 100,000 employees also, and collectively we are not just "bit platers" to agree to long term concessions. The fact is that they could rebound within a year and be making profits that were large enough to support higher pay rates but now they wont have to. Just like back in 1995.

And so, of course, everyone in upper management at AA is cheerfully willing to fall on their swords for GE and ExxonMobil.

Well how often do we see these guys bounce from one company to the next? They dont fall on their swords, they get the employees to do it.

The funny thing is that you keep wanting to find conspiracies in places where the market fundamentals explain the behaviors perfectly well. Where was the conspiracy in 1999?

Are you saying that the airlines do not conspire to lower wages? Ever hear of Aircon.org? On their old web page they claimed that they were formed by the airlines in the early 70s to control labor costs.


Actually, GE does far better when the market is robust. Right now, GE has to choose between making a little money on their aircraft, and shutting US down entirely, thus making nothing on the aircraft. There are too many used airplanes in the market right now.

Thats not what the papers said. Did the Judge impose new, reduced lease rates on GE over at USAIR?

If you look back to 1999, GE was making a killing off of these same aircraft. Demand outstripped supply, and GE was able to lease them at much higher rates.

Do you know what the rate are or where?

Nobody wins in a recessionary market.

Hmmm.I'll have to save that little gem. The fuel companys certainly have not done all that bad, especially when you consider that they are largely to blame.

GE has just managed to lose a little less.

Yes, you are. One refers to a handful of players (losing money), while the other refers to the overall industry (growing). What you're seeing is a market that, in a macro sense, is roughly balanced, but with widely disparate levels of efficiency among the different players at a micro level.

Which handful of players? I meant the industry -as a whole- for both points, you read what you wanted into it, again. Probably so you could counter what I said. I did not say anything that would imply that I just meant a handful of players lost money.

The legacy airlines have, on the whole, roughly broken even since deregulation.

The difference is in degree.

In other words you were wrong.

There are similarities, but there are also some key differences. First of all, one LCC never went away. WN has grown to the point where it cannot be purchased, and can no longer be ignored.

Yes but SWA does not really serve the markets that the "legacies" serve. They did not go head to head with the majors (although the fight over Love Field is an interesting developement). If the start to then they too will pay the higher landing fees, rents etc that the legacies pay and with their higher labor rates they will no longer be a LCC will they?

Secondly, the current group of LCCs are, to varying degrees, much more intelligent in design than the past ones.

In what way?

Third, the war chests that were used in the past to outlast the LCC startups are much smaller this time.

Yes but most of the legacies are much larger.

Having said that, I have no doubt that at least a couple (most likely four) legacy carriers will survive this cycle. But it's a war of attrition, and the long-term prognosis for the legacies is not good.

No different than what we heard in the early 80s and 90s.