FN FAL
Freight Dawgs Rule
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Airline Overcapacity Warning
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FN FAL said:
I don't think you could technically call whats going on (at least in the US) "overcapacity" when every airline is running at %80 + load factors. Anything more than %72 or so is really full, because you have to subtract out all the red-eyes, and those repo flights at 5am where they sell tickets.
I think what you have is too much insanity. Check it...JetBlue has the lowest CASM of the large aircraft carriers, and THEY can't make money at the current fares? I mean, no dig at JetBlue, but WTF?
Look at SWA...they only made money because of the hedges (we can argue about this, but lets just say things would be MUCH worse for them). They could make serious bank (and probably should get while the getting is good) by raising fares. Could it be that they are acting a preditory nature? Maybe, but the other thing to consider is that the the demand is so price sensitive as to be artificially generated.
Point is, if even the bottom cost carriers were to raise their fairs just to cover their costs, much of the post 9/11 demand would evaporate (because then the trailer park crowd has to choose between the trip to the mouse or smokes), and they know it. But everyone is trying to outlast everyone else. It's a huge game of chicken, perpetuated by GE Capital and other big money lenders because they don't want to see airplanes parked.
Nu
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Big Duke Six
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Nu, you hit it right on the head in your last paragraph. But in the first paragraph you say there is no overcapacity, as evidenced by the fact that many flights are full. With all due respect, there is a huge disconnect in your argument.
For the sake of this discussion I'll just take your word for it that "every airline is running 80% full" (the number really doesn't matter). The thing is, if we sold tickets for $1, I'd bet we'd fill up every flight, don't you agree? Does that mean we would then go out and buy more airplanes, to handle the hordes of people clamoring for tickets at the ticket counter? No. So it doesn't follow that because the seats are full, supply equals demand.
If airlines can't make money and are giving away seats below cost just to fill seats on an airplane that's going to fly anyway, there is overcapacity no matter how you slice it. The hard truth is that if a person cannot afford to buy a ticket for at least what it costs to get that seat from A to B, then that person should not be flying. They should be on a bus. That's just an economic reality.
We can't make it up in volume. Yet, here we are, as you put it so well, just because the GE Capitals of the world have too much to lose.
For the sake of this discussion I'll just take your word for it that "every airline is running 80% full" (the number really doesn't matter). The thing is, if we sold tickets for $1, I'd bet we'd fill up every flight, don't you agree? Does that mean we would then go out and buy more airplanes, to handle the hordes of people clamoring for tickets at the ticket counter? No. So it doesn't follow that because the seats are full, supply equals demand.
If airlines can't make money and are giving away seats below cost just to fill seats on an airplane that's going to fly anyway, there is overcapacity no matter how you slice it. The hard truth is that if a person cannot afford to buy a ticket for at least what it costs to get that seat from A to B, then that person should not be flying. They should be on a bus. That's just an economic reality.
We can't make it up in volume. Yet, here we are, as you put it so well, just because the GE Capitals of the world have too much to lose.
smellthejeta
The plane I solo'd in
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Big Duke Six said:
Well...
My air travel is discretionary. That means if the ticket costs too much, I don't go. I also made more (W2 wise) than the average household in 2005 or some crap like that. If I can't afford more than $400 for a plane ticket for myself, then there's no way the dude can take the family of four on a trip any more than once or twice a year.
What's happening is that the consumers have determined that they can pay $xxx for a ticket. The airlines KNOW that they either deliver a product at that price or they don't deliver a product at all. No product = no sales = no jobs. The people who can afford to pay for luxury do so -- keeping the 91 corp, 91k, the 135 guys, and me employed. Oh, and my company actually handed out some decent pay raises too. Nobody's come looking to cut my paycheck either.
That whole "over capacity" thin, IMHO, is a sham. If we had capacity to match demand, there would only be CRJ's, ERJ's, and the like. Why? Say that on any given flight, only 50 people are willing to actually pay their CASM costs. What do you do? Do you put them in a 50 seat RJ that breaks even, or do you put them in a 130 seat 737 that loses money? People paying high fares hate RJ's. We all know that the CASM on an RJ is higher than that of a 737, but if the 737 can't fill EVERY seat with CASM rate payers, it will lose money.
paid4training
Missing my family
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TrafficInSight
mmmm.... doooonuuuut.
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Big Duke Six
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Smell said:
If you do the math, selling a seat for CASM x-fuel is not that hard. The problem is that fuel has gone through the roof and so actual CASM is much higher than what the people will pay. If airlines charged what it cost, seats would go empty, so there is overcapacity. CASM trends downward as number of seats goes up, to a point, so the CASM on a 737 is less than with your RJ. You call it a "sham" then make my arguement for me. But the problem is that there are too many airplanes out there flying (you've heard of it, it's called "scheduled service", where you are required to fly whether you sell a ticket or not) below break-even loads. So, the airline loses money because they can't sell the seats for cost. The number of potential passengers are further reduced because of the inexorable negative impact of high gasoline costs on a family's bottom line.
Airlines are reluctant to just shed airplanes and labor during these times, preferring to weather the storms, take losses temporarily and come out the other side intact. During short downturns it causes pain but is not crippling. During protracted crises like these, it is a different matter. It becomes a game of attrition. To stay alive, costs must be cut before cash runs out. It hurts but the only other option is to park more airplanes and furlough more crews.
Now, why mgmt doesn't lead and share the pain with labor rather than handing out bonuses and high-fives to each other as they extract concessions from labor is the topic of another thread. I'm tired so I'd rather not start on that one.
If you do the math, selling a seat for CASM x-fuel is not that hard. The problem is that fuel has gone through the roof and so actual CASM is much higher than what the people will pay. If airlines charged what it cost, seats would go empty, so there is overcapacity. CASM trends downward as number of seats goes up, to a point, so the CASM on a 737 is less than with your RJ. You call it a "sham" then make my arguement for me. But the problem is that there are too many airplanes out there flying (you've heard of it, it's called "scheduled service", where you are required to fly whether you sell a ticket or not) below break-even loads. So, the airline loses money because they can't sell the seats for cost. The number of potential passengers are further reduced because of the inexorable negative impact of high gasoline costs on a family's bottom line.
Airlines are reluctant to just shed airplanes and labor during these times, preferring to weather the storms, take losses temporarily and come out the other side intact. During short downturns it causes pain but is not crippling. During protracted crises like these, it is a different matter. It becomes a game of attrition. To stay alive, costs must be cut before cash runs out. It hurts but the only other option is to park more airplanes and furlough more crews.
Now, why mgmt doesn't lead and share the pain with labor rather than handing out bonuses and high-fives to each other as they extract concessions from labor is the topic of another thread. I'm tired so I'd rather not start on that one.
smellthejeta
The plane I solo'd in
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Six, my point with the pricing is that the airlines know what people are willing to pay for a ticket. Either the airlines deliver a product at that price, or they don't sell it. If they want to remain in business they MUST get their costs inline with their revenue.
You talk about ex-fuel CASM costs. What's the point? You have to pay the fuel bill to get the plane in the air.
The reason I called overcapacity a sham is because people act like removing the capacity will actually drive up fares. I don't think it will, because I'm fairly certain the price point has already been established. People won't pay the high fares, and the airlines need the lower-CASM larger aircraft in order to keep expenses below revenues.
You talk about ex-fuel CASM costs. What's the point? You have to pay the fuel bill to get the plane in the air.
The reason I called overcapacity a sham is because people act like removing the capacity will actually drive up fares. I don't think it will, because I'm fairly certain the price point has already been established. People won't pay the high fares, and the airlines need the lower-CASM larger aircraft in order to keep expenses below revenues.
AA717driver
A simpler time...
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smelljet--The one point I kind of disagree with is that joe six-pack won't spend the bucks to go to W.W. My wife worked at a bank in a small Midwestern town for several years. People would come in just before Spring Break and gut their savings account--just cash it all out. Why? They're going to Vegas/W.W./a cruise. And they'd do it every year. (This happened from the early 90's on. Low fares, IMO, weren't a factor.)
Never underestimate the public's propensity to blow their saving on crap.
TC
Never underestimate the public's propensity to blow their saving on crap.
TC
smellthejeta
The plane I solo'd in
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AA717driver said:smelljet--The one point I kind of disagree with is that joe six-pack won't spend the bucks to go to W.W. My wife worked at a bank in a small Midwestern town for several years. People would come in just before Spring Break and gut their savings account--just cash it all out. Why? They're going to Vegas/W.W./a cruise. And they'd do it every year. (This happened from the early 90's on. Low fares, IMO, weren't a factor.)
Never underestimate the public's propensity to blow their saving on crap.
In my first post on this thread, I think I mentioned that if fares went significantly up, most discretionary/leisure travellers would only travel once or twice a year (okay three -- turkey day or xmas, and summer vacation). I think your spring break example fits the bill perfectly. That person is also me -- at $350 a ticket (or less!) I get on an airplane once or twice a month. If those same tickets ran me $600+ which they should if I had to pay CASM costs for my transcon tickets, then I'd probably be on a plane three or four times per year. The airline actually gets more money out of me this way.
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