UAL Files CH 11

[PCL_128]

"However, if all the airlines fail as a consequence of the unfettered "competition" and free market that have produced prices below cost of the product airlines could go the way of the passenger railroad in the US."

While this statement sounds intelligent and well thought out, it has one huge, glaring fallacy.

Free markets cannot, by their nature produce prices below the cost of a product.

I wish I lived in your magical fantasy world where companies can't go bankrupt. In affect, that's what you're saying with your statement. If companies couldn't charge less than the cost of their product, then there would always be profits at every company in the country. That obviously isn't the fact.

Companies consistently charge less than the cost of the product for one main reason in this industry: to snuff out competition through price wars. They've gotten themselves between a rock and a hard place. They've forced fares too low to make a profit, but they can't raise them because the other airlines will keep their fares low to keep the pax from going back to your company. As I've said before, endless cycle. Your statement that it's impossible for a company to charge less than the cost of the product show your complete lack of understanding about how business is run in this country.

What the heck would be wrong with 3 or 4 SWA look alikes flying all over this country, with totally refundable fares at and below $300...and...the companies actually growing, hiring, and making money?

I fail to see how

a. lower fares
b. flexible fares
c. profitable airlines (i.e. airline stocks that actually appreciate in value)
d. stable, secure, good (not excessive) paying jobs

are bad things for the American public or airline employees.

"Unfettered" competition has done exactly what is is supposed to do.

It has produced companies that can offer a safe and reliable product at a reasonable price.

What's wrong with it is exactly what Surplus said, when SWA is faced against real competition eventually, they will not be able to continue to prosper as they now are. When there are 4 SWAs instead of one, SWA will finally have to compete. They really have no competition right now. AirTran and JetBlue operate on different routes mostly. When there are 5 SWA-like airlines competing, just like there are 5 majors competing now, then the same results will come to bear. These companies will resort to price wars of their own which will bring fares down to as low as $90 maybe! As a result, SWA will not be making a profit and will be in the same mess that UAL is now. Granted, this is all decades down the line, but it took almost 30 years for deregulation to bring down UAL and US Air also.

 

[PCL_128]

US Air did not see its "demise," nor will "UAL." They are using bankruptcy to get out from under crushing bills from their failed business model. They are and will continue to fly, and hopefully become profitable...much as Berthune did with CAL after their bankruptcy.

Much as Eastern emerged from bankruptcy, right? Oh, wait, that didn't turn out so well did it? Yes, CAL is doing fine after their half dozen bankruptcy filings but it doesn't always work out that way (i.e. Eastern, Braniff, Pan Am, etc...). Chapter 11 is a wonderful thing when it works. It helps companies to reorganize into what will hopefully become profitable businesses again. Unfortunately, it doesn't always work. Sometimes deregulation has screwed up an airline so much that they just can't survive dispite the protection of chapter 11. We all know what comes then: chapter 7 (liquidation).

All of your free-market rhetoric sounds good now, but wait until an airline like UAL liquidates and tens of thousand of employees are out on the street. These are people with families and responsibilities. They should not be cast aside so we can test your "survive in the free market or die" beliefs. Do you have any idea how much of an effect a UAL liquidation would have on the American economy? It won't just affect the people of UAL, it will affect every corner of the country. Every city that UAL serves will have people with lost jobs. This is why the gov't needs to get involved.

 

[goldentrout]

PCL128

Where did you study economics?

A UAL bankruptcy is not a "market implosion." It is a company with a bad business plan that can no longer be competitive.

Even if UAL eventually fails...other airlines will still be around. They will fill the market void left behind by UAL

Did the failure of Eastern or Pan Am cause a "market implosion."

No...other airlines picked up their routes and the industry went on.

You say

"All of your free-market rhetoric sounds good now, but wait until an airline like UAL liquidates and tens of thousand of employees are out on the street. These are people with families and responsibilities. They should not be cast aside so we can test your "survive in the free market or die" beliefs. Do you have any idea how much of an effect a UAL liquidation would have on the American economy? It won't just affect the people of UAL, it will affect every corner of the country. Every city that UAL serves will have people with lost jobs. This is why the gov't needs to get involved."

Listen to yourself...the government needs to get involved to save a bankrupt company with a failed business plan...how can you call yourself a supply side conservative?????????????? The above statement is as socialist as it comes!!!!!!!!

If UAL goes under...

1. There is a huge airline market out of the UAL hub areas...Denver..Dulles...Chicago...San Fran.

2. Within months if not weeks, other airlines that have a cost structure allowing them to make money on the former UAL routes will swoop down and snatch them up.

3. These airlines will need employees for this growth. While these new jobs may not have the bloated salaries that UAL had...they will be jobs...and they will have compensation packages that allow the new airlines to make money.

4. If a UAL baggage handler who made $40/hr at UAL won't take a baggage handling job at SWA or Comair for $15 an hour...that's too bad for him.

Your theory is plainly disproved by history...when Braniff...Eastern...Pan Am went under...the industry didn't "implode."

Life went on...Santa Clause still came at Christmas...the flowers still bloomed in the spring......the economy did not crumble ito recession...and the Braniff/Eastern/Pan Am employees and their kids didn't starve to death.


Thousands of businesses fail all over this country every year. IT is how a capitallist economy.

What you're advocating is a socialsit system where the citizen/taxpayers subisdize unprofitable businesses so that "people can have jobs."

I've give hundrds of dollars to charities every year to help those in need.

However, as far as my tax money goes...I don't want a dime of it to go to UAL or any other business.

A business is just that...an organization that exists to provide a service or sell a product "TO MAKE MONEY."

 

[goldentrout]

PCL 128 says

"Companies consistently charge less than the cost of the product for one main reason in this industry: to snuff out competition through price wars. They've gotten themselves between a rock and a hard place. They've forced fares too low to make a profit, but they can't raise them because the other airlines will keep their fares low to keep the pax from going back to your company. As I've said before, endless cycle. Your statement that it's impossible for a company to charge less than the cost of the product show your complete lack of understanding about how business is run in this country."

Somebody help me here please to explain this to PCL128!!!!!!!

Yes...you're exactly right...UAL/US Air/NWA/AMR/DAL are in a rock and a hard place because they have a failed business plan!!!

SWA/Frontier/AirTran/JetBlue are in a good place...they have a successful business plan.

SWA/Frontier/AirTran/JetBlue are obviously not charging less than the cost of their product or they wouldn't be making money!!!

And if some day all that's left is SWA/Frontier/AirTran/JetBlue competing against eachother and ticket prices go even lower...great!! That's exactly how our economy is supposed to work.

Ticket prices will never go lower than the operating cost of an airline...otherwise the airline will cease to exist because it can't pay it's bills!!

The only way there will never be an airline operating and making moeny is when there is no longer a market for air travel.

As long as people decide to use an airplane rather than a car or a bus or a train to go to weddings or meetings or vacations or whatever...there will always be an airline around to provide the service.

It may not have $40/hr baggage handlers and $200/hr pilots...but it will exist...it will make money.

Yes, pilots may only be making $50,000 a year...but if the American consumer can get reliable, safe air travel for $100 a ticket...outstanding! That's the way our capitalist economy has and is working for hundreds of years...

and has made the USA the most economically powerful country on the face of the earth!!!!!

Please remind me to never take classes at the university where you learned your "supply side economics."

Maybe the government should bail out World Com..it's not FAIR that thousands of World Com employees lost their job

Maybe the government should bail out Intel and Micron computer chips and AMD and Gateway computers and every other technology business that has failed or is losing millons upon millions in the last two years...it's not FAIR that these people lost their jobs

Maybe the government should bail out Enron...it's not FAIR that all those employees lost their jobs and their retirement (dumb dumb for putting one's whole portfolio in one stock)

Maybe the government should bail out Emery Freight after they lost the US Postal contract to FEDEX...it's not FAIR that those crewmembers and other employees lost their jobs.

Maybe the governmet should have bailed out Vanguard airlines...it's not FAIR...it was just a fledgling airline...how could it compete with the other airlines.

Where does it end...when under your system does the American taxpayer have to stop paying for incompetent managers and unions that can't put together a successful business plan!!

Somebody help me please get this through to PCL128!!!!!!

 

[PCL_128]

You say that the employees can just go get new jobs. If only it always worked that way. You see, if UAL goes under, the economy will take a big hit (largely due to lack of consumer confidence) and unemployment will skyrocket. When the economy takes a hit, unemployment goes up. No one, liberal or conservative, will argue with that. That's why unempoyment is now at 3 points higher than the late 90s. Yes, some of the people will get new jobs, but many will not for a long time.

You're right that the industry didn't implode after EAL went under. However, a deep recession followed less than a year later. I know many pilots that were never able to get decent flying jobs after they lost their jobs at EAL. Due to the onslaught of available labor coupled with the bad economy of the early 90s they could not find jobs right away. As we all know, airlines want to hire pilots who are current, so when hiring picked up again these pilots had not flown since 1989 in many cases and were not even considered for employment. Years went by and they were slowly able to pick up the occasional job flying freight, but we all know how often freight startups go under so they were out of job again. Again, WAKE UP TO THE REAL WORLD AND STOP LIVING IN YOUR FANTASY WORLD OF THE FREE MARKET ALWAYS WORKING!!! There are exceptions to every rule, and the airlines are exceptions to free market system.

 

[PCL_128]

PCL 128 says

"Companies consistently charge less than the cost of the product for one main reason in this industry: to snuff out competition through price wars. They've gotten themselves between a rock and a hard place. They've forced fares too low to make a profit, but they can't raise them because the other airlines will keep their fares low to keep the pax from going back to your company. As I've said before, endless cycle. Your statement that it's impossible for a company to charge less than the cost of the product show your complete lack of understanding about how business is run in this country."

Somebody help me here please to explain this to PCL128!!!!!!!

Yes...you're exactly right...UAL/US Air/NWA/AMR/DAL are in a rock and a hard place because they have a failed business plan!!!

SWA/Frontier/AirTran/JetBlue are in a good place...they have a successful business plan.

SWA/Frontier/AirTran/JetBlue are obviously not charging less than the cost of their product or they wouldn't be making money!!!

And if some day all that's left is SWA/Frontier/AirTran/JetBlue competing against eachother and ticket prices go even lower...great!! That's exactly how our economy is supposed to work.

Ticket prices will never go lower than the operating cost of an airline...otherwise the airline will cease to exist because it can't pay it's bills!!

The only way there will never be an airline operating and making moeny is when there is no longer a market for air travel.

As long as people decide to use an airplane rather than a car or a bus or a train to go to weddings or meetings or vacations or whatever...there will always be an airline around to provide the service.

It may not have $40/hr baggage handlers and $200/hr pilots...but it will exist...it will make money.

Yes, pilots may only be making $50,000 a year...but if the American consumer can get reliable, safe air travel for $100 a ticket...outstanding! That's the way our capitalist economy has and is working for hundreds of years...

and has made the USA the most economically powerful country on the face of the earth!!!!!

Please remind me to never take classes at the university where you learned your "supply side economics."

You aren't listening!!! If prices drop lower than what SWA is currently charging, then NO ONE can make a profit. I don't care what your business model is, an airline cannot survive charging less than $100 on a ticket unless aircraft become 100% more efficient real quick.

According to you it would be great if SWA had a lot of competition and prices dropped even more. Let's look at theory:

SWA 20 years from now is competing with 5 other LCCs that are now the major airlines in the country. Heavy price wars ensue to grab the largest market share. The LCCs charge less than what it costs to turn a profit because they think they can gobble up the market share and put the other airlines out of business (the exact same thing that happened right after deregulation). As a result the airlines all put themselves heavily into debt. After about 10 years of this several of the LCCs go out of business. By this time fares are aroung 60 dollars and no one is making any money, but everyone refuses to increase prices because they don't want to lose market share. There are no new upstarts because no one can compete with $60 fares. The gov't realizes that they have to step in and help or the industry will completely self destruct itself. Their answer: a gov't owned airline similar to AmTrak! Afterall, that's what most countries have, and it seems to work for them. (I'm certainly not endorsing this. I think the old system of regulation with the CAB is a much better system.)

Is this what you want? Because this is what will eventually happen if we continue with your line of thinking that lower prices are always better, no matter what.

 

[414Flyer]

99% of the flying public would not even notice if fares went up 50 dollars. It's a big stretch to say that 50 bucks would cause the number of pax to drop off. A friend of mine bought a ticket this summer from MIA to LAX on United with a stop in DEN I believe. This ticket sold for 290 dollars! How are we supposed to make profits when tickets to go cross-country are selling for under 300 dollars? If you had a 757 completely full at this price, the flight would pull in about 50k in revenue. That doesn't even come close to paying the operating cost of the a/c, let alone paying for ground support, landing fees, employees, etc... This is out of hand. I don't care what you say, most people would gladly pay a little more for this ticket than to do a 3 day drive to get there and then another 3 days back.

Well the laws of economics due apply to aviation too. You might think people will not notice 50 dollars more, but it would certainly have an impact to some degree. Its just a basic law of ecomomics that when the price does up, demand will drop.

That is just a short term solution anyways.

Getting costs under control is what will make or break the airline. You can only just increase ticket costs for so long until you have no customers left.

 

[goldentrout]

PCL 128

Your whole theory is based on the the totally absurd assumption that no CEO or airline management group can figure a business model where overhead is not more than their revenue.

Secondly, your assumption rests on the premise that the airlines will compete themselves to death, which is totally ridiculous.

Name me one other industry where this has happened, and another business didn't step in and take ove the demand for a product or service?

How about this theory (which any is currently backed up by every aviation business analyst and the Wall Street Journal Analysts and many airline managers themselves)

This is how a free market works.

1. Didn't you ever see a supply/demand curve in your economic courses?

What's happening right now is over supply for the current demand for airline travel.

2. For the price of tickets to come back up...either supply has to drop to meet demand, or demand has to drop to meet supply.

3. There is currently not enough demand, and probably won't be for a long time, to support the current supply of airlines.

4. Ergo...the # of airline travel options has to go down...and that's exactly what's happening as US Air and UAL are going bankrupt.

5. When they emerge from bankruptcy, maybe they'll be able to compete with AirTran and SWA, maybe they won't...that remains to be seen.

6. CAL successfully emerged from bankruptcy and has been somewhat competitive/profitable, by lowereing their cost. Braniff and Eastern and Pan Am did not successfully emerge from bankruptcy...them's is the breaks of doing business in the USA.

7. Eventually, market forces will bring the supply and demand curves together...and that is the price that a ticket will sell for.

If you don't believe me (and why should you...I'm just a pilot with some basic economic knowledge), call your local university economic's department and ask him to explain a supply and demand curve, and how it applies to the current airline industry.

If you don't believe him/her, here's some independent research for you to look at

http://biz.yahoo.com/rf/021212/airlines_ual_liquidation_1.html

and

http://biz.yahoo.com/djus/021210/1833000778_1.html

(as you read this this article, remember what I said about other carriers filling in where UAL will not be)

and

http://biz.yahoo.com/rf/021210/airlines_airtran_1.html

(as you read this this article, remember what I said about other carriers filling in whre UAL will not be)

and

http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20021213/bs_dowjones/200212130025000010
(remember what I said about UAL and the other major airlines having to lower costs as you read this)

and

http://story.news.yahoo.com/news?tmpl=story&u=/ap/20021213/ap_on_bi_ge/united_airlines_74

and

http://www.csmonitor.com/search_content/1209/p03s01-usec.html

and finally...pick up a copy of the 6 Dec 2002 Wall Street Journal.

If you have the time to read these articles...I promise to read any articles supporting your position...if you can find any.

 

[goldentrout]

PLC128

Please see below...as I said, don't take my word for it...talk to and seek wht the experts are saying.

Excerpt from a recent news article

http://www.csmonitor.com/search_content/1209/p03s01-usec.html

"United will absolutely emerge from bankruptcy and they'll come up leaner and meaner as a competitor," says Aaron Gellman an aviation expert at Northwestern University in Chicago. "And the other airlines will have to compete with them."

US Airways - already in bankruptcy - is negotiating with its unions for a second round of wage and work-rule concessions. American Airlines has also put its unions on notice that if United's workers are forced to make deeper concessions, it will ask the same of its employees.

Antiquated business plans

United and the other network carriers must also come up with a creative alternative to their current business model. For more than a decade, they have depended on business travelers paying as much as five times more for a seat than leisure travelers. Since the recession hit in 2000, experts have been warning that it's outmoded because businesses are loath to pay the kind of premiums they once did - especially when low-cost carriers such as Southwest offer a cheaper alternative.

But airline executives have balked at making major changes, hoping against hope that the economy would rebound, bringing back business travelers. So far that hasn't happened."



I can't explain it much better than this.

 

[TXCAP4228]

From Surplus:

I would agree that market forces should define, to the extent possible, those who succeed and those who do not, but there must be limits; particularly in essential services such as food production, transportation, utilities, education and law enforcement to name a few of many. As one example, if the agrarian portion of the economy was left to true market forces we might still have food but few of us would be able to buy it and certainly not from American farmers.

On the first part we agree, then. I think its funny that in the United States, market forces have driven the technological advances in agriculture so far that not only do we feed ourselved but many others around the world. The agrarian example you use to support your "more regulation and less competition" (my paraphrasing) premise is precisely the example that I would have otherwise chosen to refute your premise. However, I think my reasoning is accurate when I say that this is a good example of how market forces have historically increased productivity and efficiency.

Transportation is another example.

Law enforcement is not a private enterprise and I don't think it fits with your other examples.

Also from Surplus:

Of the two systems, regulated capitalism is by far superior.

On this we agree. However, I imagine that I would support less regulation than you.

The often used example of SouthWest's success ignores the fact that SWA essentially has little or no competition. They operate in a nationwide niche. When other carriers duplicate the SW business model and produce real competition, the consequence of too many players in the same market will come to light again, just as it now has in the hub-and-spoke conventional airline model. Meanwhile, our international services will all go to the socialist modeled foreign competition.

I disagree. Lots of airlines fly similar routes. That means there is competition, even if its not one big airline competing on al routes directly. On this I think you are wrong.

SWA is successful precisely because they have identified a need and fulfilled it. If other airlines try, the competition will increase, but that doesn't mean there isn't competition now.

My summary would be that more competition is better than less competition. The market place is better for the consumer and the competition drives advances in technology just to give a few reasons.