Turbulence Ahead For Discount Airlines

[Dennis Miller]

Rude Passenger: I pay your salary!

Today's Airline Employee: I subsidize your cheap ticket!

 

[skykid]

Too bad the US Government is stuck in a "socialist" mindset somehow thinking that bailing out ailing airlines is a good thing. I guess someone forgot to remind the powers-that-be that we live in a "capitalist" society.


I see this written a lot on this board. Remind me now, which airlines didn't get money from the Feds on 2 occasions after 9/11? It was just the ailing ones, right? There is no way an airline not getting creamed by lack of international passengers used the money to further expand domestically, right?

 

[skirt]

The reason many legacy airlines try to add a "fuel surcharge" but then retract it, is that it can be a money losing proposition. Sure, add $10 to every ticket, but in the end if you lose money doing it, how smart is that?

What do I mean? Lets take a 200 seat aircraft and charge $99 per seat average. Let's assume a 75% load factor. That means 150 butts in the seats for a total revenue of $14,850.

Now let's add a $10 surcharge, so the tickets are $109. In the customer's mind, there is a BIG difference between $99 and $109. Some customers will still pay, some will go to an LCC, but some won't fly at all. Even if the entire industry DID collude and all airlines charged $10 (including LCC's), you would still lose customers. Let's say you lose 20 customers. So now you have 130 butts in the seats. Guess what, your revenue is $14,190. You raised fares and lost money. Bummer.

It's an inexact science to figure out how many customers an airline would lose by increasing fares. Therein lies the dilema. The "raise fares" rant is not as simple to act on as you think. You may lose in the end with this rant.

Skirt

 

[Daddy]

Elasticity of demand

What skirt just described is known among the econ types as "elasticity of demand"....the concept that applies here is that any change in price has a high impact on top line revenue. Thus, if you raise fares even by a small amount...believe it or not...there is an unacceptable drop in demand/revenue. That is why you see these companies introduce higher fares for a few days and then immediately see the dropoff and say, "Holy Shnikees! Look at the loss of revenue! Rescind it now!" Believe me, if they could get those higher fares, they would...everyone would, but until there is an increase in demand or a dropoff in supply to shift the curve one way or the other, it will continue to suck for all players. Eventually, companies will either adapt or die off and shift the supply curve and make things better for everyone else. At least that's how I remember it from my economics class in college...of course that was an 8:00 class....

 

[Publishers]

markets

Companies jumping after a lucrative market until the market is not so lucrative. Nothing new here. Is this not part of the ebb and flow of business? If there is a problem in this industry, it is that the wounded live too long.

They can exist and due to the nature of cash flow, continue ot influence even the healthy carriers future until they too have to go on life support. Pretty soon we will have the Airbus Airline and the Boeing Airline and they can fight it out.

It is a dirty, nasty, tough, business and not for the feint at heart.

 

[philo beddoe]

For better or worse, I predict in ten years the elimination or severe cutback of defined benefit plan, and the failure or consolidation of at lest two majprs and LCC's.


See you in ten years, I'm buying if I am wrong.

 

[jetflyer]

philo beddoe,

You're buying if you're WRONG, but you better buy if you're RIGHT TOO!

There will be a lot of us without jobs if you're right, so we won't be able to afford that drink!!! I'll take a Miller Lite

Jet

 

[climbhappy]

i read recently mortgage financing has tailed off, way off and the it has been the only source of cash americans have used to finance this recovery. real income growth has declined.

having said that, can the american consumer, one who loves cheap airline tickets to take vacations and spend more on their credit card, keep these discount airlines' seats full?

 

[jetflyer]

Climbhappy,

If the consumer does have less cash to spend, the scary thing is, they're gonna KEEP looking for the LOW TICKET PRICE and some will stop flying.

This is gonna not ONLY be bad for the LCC but also for the LEGACY carriers. We all know the airline industry has too many players right now, and soon there will be the new Virgin! Let's all hope not too many airlines go Chapter 7 during this weeding out process.

Jet

 

[FL510GV]

airline economics

One of the basic tenents of airline economics is that to keep costs "lower" you must grow. This is because of the seniority based salary system. The more "junior" employees, i.e. the more employees at the bottom of the salary ladder, the lower your average employee salary. SWA is adding seats as fast or faster than anyone, why is it then "counter-intuitive"?