Delta and Northwest have merged, and now United and Continental are merging. So naturally someone raises the specter that airfares are going to go up. “Concentration in any industry leads to higher prices,” says someone who claims to have analyzed the airline industry for 40 years.
I don’t know what industry they have been analyzing, but it isn’t the one I’ve observed over the past 40 years. The problem for the airlines is that the cost of starting a new airline is low. Sure, the planes are expensive, but you can lease those. Once you have those, you don’t have to pay for air space, you don’t have to build airports, and you don’t have to build your own air traffic control system. As a result, for every airline that disappears through bankruptcy or merger, another one springs up.
Though not relevant to the rest of this post, this plane is not only painted like a salmon, it is a piece of pork. As a favor to the Alaska fishing industry, Alaska Congressman Don Young wrote a half-million-dollar earmark into the 2005 transportation bill to paint this plane to advertise Alaska salmon. Photo courtesy Alaska Airlines.
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Once you’ve started an airline, the cost of expansion is really low. As Montie Brewer, the former CEO of Air Canada, points out, increasing your airline’s capacity by 3 percent might add only 1 percent to your costs. For example, Alaska Airlines, my local carrier, has recently expanded to Boston, Newark, DC, Houston, Austin, Orlando, and six other eastern cities, not to mention all four of the Hawaiian islands.
The result of the facts is, as Brewer points out, air travel has become a commodity. When I went to Nashville earlier this week, I flew United, but I returned on Delta. The fares were exactly the same, down to the penny; the planes and on-board services were virtually indistinguishable; and the flight times were almost identical. In fact, I sometimes find myself selecting airlines based more on the quality of the airports where I’ll have to change planes than on the airlines themselves.
Brewer frets that this means that the industry will never be profitable, and the blog that cites him seems to hint that government should stabilize the industry by re-regulating enough to reduce competition a little bit. But that’s unfair to consumers who have enjoyed the increased mobility from lower airfares.
The real solution is to let the market work. Southwest Airlines has been consistently profitable because its business model is very different from those of the older carriers. Jet Blue, which is based on the Southwest model, is also profitable. Airline executives who think they can restore profitability by merging two companies who both have obsolete business models are fooling themselves — or, more likely, just trying to fool the public. Eventually, someone will figure out a way to improve upon Southwest and Jet Blue and those airlines may fall by the wayside. In the meantime, there is plenty of competition and no need to fret over a threat of higher airfares.
“The real solution is to let the market work.”
I remember in the 90’s when I was living in Denver and doing a lot of shorter trips (by air travel standards) there were many small airline start-ups that provided the service I needed for a reasonable price. Denver to Cheyenne, Denver to Grand Junction or Montrose, etc. United an Continental saw this as a threat so they started flying the same routes for insane bargain prices. No way they were making a profit.
As a result the small carriers went out of business. United and Continental subsequently quit this service, or marked it up beyond belief (You can fly United from Denver to Gunnison for something like $700). I guess the market worked, just not very well.
Once you have those, you don’t have to pay for air space, you don’t have to build airports, and you don’t have to build your own air traffic control system. As a result, for every airline that disappears through bankruptcy or merger, another one springs up.
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Actually they pay fuel taxes, corporate taxes, landing fees, other fees and rent which in turn pays for those things. Leasing an aircraft isn’t as simple as you make it sound either.
Southwest Airlines has been consistently profitable because its business model is very different from those of the older carriers. Jet Blue, which is based on the Southwest model, is also profitable. Airline executives who think they can restore profitability by merging two companies who both have obsolete business models are fooling themselves — or, more likely, just trying to fool the public.
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Southwest is profitable because they are a younger airline and have a simplified fleet, but being younger is catching up to them and you can see it in their unit costs. Southwest must grow to survive and they are running out of places sufficient in size to support their business model – but a talking head like the one you mention won’t tell you that because they don’t understand that. If everyone operated like Southwest, you wouldn’t have service to any city with less than 1 million people, and the system would have failed by now. By the way, if their business model is obsolete, then how did Delta, United and Continental just turn a profit in the last quarter and why are they on track to profit going forward?
Airlines don’t merge for the sake of merging anymore; they only merge if it makes sense. The last bad merger was US Airways, everyone else took note.
As Montie Brewer, the former CEO of Air Canada, points out, increasing your airline’s capacity by 3 percent might add only 1 percent to your costs.
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That’s because airlines are an economy of scale. Adding capacity is usually done through increased utilization of assets (planes or gates) spreading the fixed costs over more passengers which in turn reduces unit costs. Nevermind each generation of aircraft is about 20% more efficient than the one ahead of it ultimately providing continual downward pressure on fares.
Anyone who suggests re-regulation of the airline industry in any form is needed should be ignored, and they should have their head examined. In fact, it should be deregulated further by getting rid of archaic a protectionist international route and ownership laws, and silly “Buy America” provisions DC is so proud of that suck the US airline industry dry of potential global revenue streams.
“If everyone operated like Southwest, you wouldn’t have service to any city with less than 1 million people, and the system would have failed by now. ” – PlanesNotTrain
Tell that to Reno, Omaho, Boise, Albuquerque, Spokane, El Paso, Jackon, Amarillo, Tulsa, Ft Meyers, Lubbock, Midland and Odessa. 😉
Of course it’s a moot point since not everyone is going to try to operate like Southwest. They’re going to try for different markets or with different twists. Like Allegiant flying to places like Casper, WY, Grand Fork, ND adn Hunington, WV.
Tell that to Reno, Omaho, Boise, Albuquerque, Spokane, El Paso, Jackon, Amarillo, Tulsa, Ft Meyers, Lubbock, Midland and Odessa.
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The only reason those markets are served by Southwest is because the supposedly “out of date” operating model used by the network carriers to access markets with fewer than 1 million people allowed them to develop, otherwise, they wouldn’t exist which was my point. Until demand is stimulated to a sufficient level by the other carriers, Southwest doesn’t budge. If no one else was in those markets, Southwest wouldn’t be either. The one exception is the new Panama City/Bay County market where Southwest is being paid by a private company to fly there.
Same goes for Allegiant. They are skimming leisure Pax out of small markets once or twice a week. It’s an interesting way of doing business, but they do in on the backs of small market airports that really can’t afford to give away revenue as Allegiant insists they do. In a way, Allegiant does a disservice to the small markets because of the passenger skimming which translates to decreased demand at the network carrier. They lose Allegiant, and odds are they’ve lost two airlines because the network carrier pulled the market due to a decline in demand.
So anything that doesn’t fit an overly broad assertation really doesn’t show that the assertation was incorrect but somehow proves it right?
You suggested Southwest served small markets on their own. They don’t. Reno, Boise, Spokane, and Ft. Meyers are served because other airlines developed the markets. Had they not, Southwest would never have entered the markets on their own. The remaining markets you mention are byproducts of the Wright Amendment and have nothing to do with market demand or the population base.
http://en.wikipedia.org/wiki/Wright_Amendment