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HalinTexas

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Feb 14, 2004
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Does Obama Want to Own the Airlines?

Welcome to government for the benefit of government officials and their hangers-on.

By HOLMAN W. JENKINS, JR.

Article

Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry last year. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession. United Airlines last week mortgaged its spare-parts inventory to raise cash at a usurious 17% interest rate.

Yet the Obama Justice Department has come out of the blocks trying to scuttle a promising experiment to stabilize the chronically unprofitable U.S. airline sector. The new administration seemingly won't let companies fail, and won't let them succeed either.

The airline industry's self-help solution has been an evolving trio of international alliances, partly blessed with "antitrust immunity" by the U.S. Department of Transportation. One, the Star Alliance led by United and Lufthansa, is currently poaching Continental from a rival alliance, SkyTeam. DOT was set to approve their application last week when Justice belatedly intervened with a 58-page complaint about why the pact should be restructured.


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To anyone drilled in the antitrust mindset, Justice's argument won't seem outlandish. It frets about reduced competition on this or that international route, and sees little chance of competitive entry by new carriers despite fat profits that presumably would be on offer. It argues, in a fashion typical of antitrust these days, that nonstop flights are a market unto themselves, so connecting flights on the same routes don't count.

But the real fulcrum is Justice's insistence, or plea, that DOT should set a high bar for antitrust immunity, because antitrust enforcement has been such a gosh-darn boon to consumers.

Justice offers no supporting evidence for this proposition, which has resisted academic verification. And in dismissing the "putative" benefits of immunized airline alliances, Justice fails even to acknowledge the one benefit that Obama Transportation Secretary Ray LaHood has emphasized: "These alliances are life savers for airlines. That is the premise from which we start. We believe it. The airlines believe it."

In part, such alliances are substitutes for international airline mergers (which are prohibited under U.S. law), but are more interesting than mergers, thanks to the flexibility with which carriers can enter and exit cooperative agreements with each other.

The antitrust mindset naturally sees such cooperation as always harmful, inflating prices and gouging consumers. But then why does organized labor oppose the deals? Shouldn't workers favor alliances if they reduce competitive pressure on wages? Yet Justice's intervention came after United's pilots ran a full-page ad in Roll Call attacking the company's own deal.

And why do carriers lobby against each other's pacts? Shouldn't they favor anything that leads to oligopoly pricing? And what to make of Continental's decision to jilt SkyTeam and jump to Star, shifting the competitive balance on the North Atlantic?

Obama antitrust chief Christine Varney doesn't have much good to say about her Bush predecessors. But she praises their record of cartel-busting. She might examine that record for what it actually says about the incentive to collude.

It shows, for one thing, that companies are inclined to snuggle up mainly to share losses and preserve capacity in a downturn or to curb the free-riding of powerful customers. When profits are available, on the other hand, they quickly go back to competing to maximize their respective shares rather than colluding to limit their individual upsides.

These incentives would very likely prevail in the highly flexible airline alliances. Such alliances are no miracle cure for what ails the domestic carriers, but they would open a window to let us see beyond antitrust's indiscriminate prejudice against cooperative acts by competitors.

Of course, this would fly in the face of Ms. Varney's agenda, which is to expand the bailiwick of the Washington antitrust bar. Even now, she has turned her attention from airlines to the mobile-phone business on the theory that any industry that hasn't collapsed into government receivership must be doing something wrong.

Mr. Obama blabs about the evils of lobbying, but his administration is fast becoming the greatest fillip to lobbying ever seen. Ms. Varney has now horned in on the DOT's action, forcing the airline business and all its camp followers to come and pay tribute. Her choice of targets is obviously designed for political effect. Airlines and mobile-phone operators both touch the public in ways that leave the public frequently annoyed.

What we're seeing here and elsewhere from the new administration is not some rebirth of thoughtful liberalism, but a spastic descent into machine liberalism -- government for the benefit of government officials and their hangers-on. Mr. Obama, however, may not be so pleased with the result if it means he must soon add the airlines to the collection of failed industries being run out of the White House.
 
...Mr. Obama, however, may not be so pleased with the result if it means he must soon add the airlines to the collection of failed industries being run out of the White House.

Best line of the article. Airlines have been pretty much failing or already gone for what? 25 years now?

I'm not sure what color glasses this schmuck is wearing but they sure as hell aren't clear. (and for the record, I'm no fan of Obama).
 
This article was the most incoherent out lash of malarkey I have ever read. I didn't find one sentence in this reading any bit factual or understandable other than "Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry last year. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession." And even here, the last sentence is a classic example of corporate and political ignorance and stupidity. Have these people been to an airport terminal let alone a Fu@#ing gate in the last year? They're packed and oversold with plenty of demand for additional aircraft. Who spiked this writers morning joe with ground peyote.
 
And even here, the last sentence is a classic example of corporate and political ignorance and stupidity. Have these people been to an airport terminal let alone a Fu@#ing gate in the last year? They're packed and oversold with plenty of demand for additional aircraft.

The demand for airline travel is not that simple. The question is not, "is there demand for airline travel;" the question should be, "is there enough demand for airline travel that passengers are willing to pay enough to allow the airlines to make a profit?"

Here's how it works: Airlines own a set number of airplanes and employ a fixed number of workers. So the capacity is fairly fixed (barring very disruptive capacity cuts). The price of each seat then varies based solely on the demand for travel. If massive numbers of people have plenty of disposable income, demand will exceed supply and airlines respond by raising fares until demand equals supply. If, on the other hand, we are in a recession and few can afford to spend discretionary income on air travel, demand will be less than the supply of seats. Airlines have long realized that selling an empty seat for even $1 represents one extra dollar of revenue, compared to it leaving empty ('cause it's going anyway). So they reduce prices until every seat goes out with a body in it, and then demand equals supply again. But they're not making any profit. Of course, they have little choice, hoping to ride out the recession, preserving market share until good times return.

So a casual observer would think that since they see lots of people at the airport, and every seat is full, there must be great demand for air travel. Well, yes, but only at peanut fares, which doesn't do the airlines any good. Think about it: even in the worst depression you could imagine, if every airline seat cost travelers 50 cents, you could add an unlimited number of airplanes, every plane in the sky would be full, and you could say that there is a huge demand for air travel. Yes, but only at 50 cents a seat, not at higher prices necessary for airlines to actually cover their costs. So is there really a huge demand for air travel?

Moral of the story: Be careful of the "corporate and political ignorance and stupidity" statement. I'm just sayin'....
 
I actually thought it was quite an informed article considering it came from the non-aviation media. The airlines are in trouble there is no denying that. There is not enough demand to support the current capacity in the system. IF there WAS a lot of demand none of us would be laid-off and there wouldn't be this downard pressure on wages.
 
Short-term thinking?

Airlines have long realized that selling an empty seat for even $1 represents one extra dollar of revenue, compared to it leaving empty ('cause it's going anyway). So they reduce prices until every seat goes out with a body in it, and then demand equals supply again. But they're not making any profit. Of course, they have little choice, hoping to ride out the recession, preserving market share until good times return.

I agree, that's why they sell below-cost tickets, but I think they would be better off letting those seats remain empty. The reason is that all customers find out about the cheap fares and become unwilling to pay more than that in the future, even though they were formerly willing to do so. The perceived value of the product has been reduced, so discretionary travelers will balk at fare increases even when "good times return". Once they become used to crowded flights and poor service, they will complain but won't pay to improve these things. I also think that "preserving market share" is far less important than it used to be, back when passengers had "brand loyalty". Computerized fare modeling enables airlines to squeeze out the last available dollar from today's customers, but ignores the loss of pricing power with tomorrow's customers.
 
Actually, it's a backwards pricing model to start with. People should pay the most for booking in advance, with last minute seats being liquidated close to departure. Every flight is like a going-out-of-business sale, because once the flight is closed, there is no more ticket revenue (but if you get 'em on board, you can sell 'em more crap, they're a "captive audience".
 
Actually, it's a backwards pricing model to start with. People should pay the most for booking in advance, with last minute seats being liquidated close to departure. Every flight is like a going-out-of-business sale, because once the flight is closed, there is no more ticket revenue (but if you get 'em on board, you can sell 'em more crap, they're a "captive audience".

That makes sense on one level, but that removes the incentive to book early, and the airlines would have a difficult time predicting loads. Eventually most pax would end up not reserving at all, just showing up at the airport like a non-rev, hoping to get on the next empty flight to their destination. Then it would really be like greyhound!
 
I agree, that's why they sell below-cost tickets, but I think they would be better off letting those seats remain empty. The reason is that all customers find out about the cheap fares and become unwilling to pay more than that in the future, even though they were formerly willing to do so. The perceived value of the product has been reduced, so discretionary travelers will balk at fare increases even when "good times return". Once they become used to crowded flights and poor service, they will complain but won't pay to improve these things. I also think that "preserving market share" is far less important than it used to be, back when passengers had "brand loyalty". Computerized fare modeling enables airlines to squeeze out the last available dollar from today's customers, but ignores the loss of pricing power with tomorrow's customers.

I disagree. Think about how you purchase anything. There is one main consideration: if you want to buy something, can you afford the lowest price you can find for the product you want? Other than making you a little angry, it doesn't really matter what you paid yesterday.

Also, it would be pointless for airlines to try to hold back empty seats. The airline across the concourse would still dump their empties on the market, so until price collaboration becomes legal, they have to sell all the seats. (You don't really want illegal price fixing, do you?)

I would actually give the airlines credit for the way they price their seats. The model is so complex, and prices change so often, that consumers can't figure it out, and usually just end up paying whatever the price is when they're ready to buy (assuming they can afford it). The airlines, meanwhile, benefit from constanly being able to charge the most possible for the current perceived demand. It's actually a beautiful example of the free market at work, just like the stock market.
 

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