Route to Air Travel Discomfort Starts on Wall Street
nytimes.com
nytimes.com
It's easy to blame the public market system, but when exceptions like this are readily found, it's worth investigating whether there are other factors in play than the income statements alone.
They also cherry pick routes (smart).
They will eventually revert to the mean.
You may be thinking of a time long ago.
Their only real advantage was a speculative bet on fuel prices.
Again, they are already reverting to the mean and will continue to do so.
First, it's a hard market to get into for new carriers (regulation, high capital costs for planes, etc.). Airports also only have a certain number of gates, and until expansion of the airport, it can be hard to accommodate new flights. This is how we get to the 'hub and spoke' model of airline carriers, where it can be cheaper to fly through their hub city on a longer flight with 2 planes, than to fly direct.
And if you're not competing with another airline, you're competing with yourself. This means lowering costs and trying to increase your margin, knowing it's a race to the bottom and people will have to fly anyway, no matter how bad it is.
Basically, you may or may not be on a route that has competition between two cities. Or another way to put it, if Southwest does great (and I do love Southwest), why aren't they in every airport and on every route stealing market share by doing it better?
BUT - the reason Southwest was the "low fare" leader was because they locked in fuel prices back before we had the massive spike in prices in the early 2000s. That gave them a tremendous advantage over the other airlines given fuel is such a massive part of their overall costs. That combined with standardizing on a single plane (less impactful but still helpful) allowed them to both claim and honor the "low-cost leader" title.
Now that fuel prices have returned to a more "normal" state, their prices had to revert to the mean. They may be cheaper on some legs, but it's not universal anymore.
When oil prices went up, Southwest got to make record profit. When oil prices went down, Southwest got to make record losses.
Southwest also just offers no service to many unprofitable markets. If Southwest were the only carrier, many smaller airports would shut down. There would be maybe 40 larger airports, with high volume flights.
So, if by record losses you mean lower profit than normal then sure they got hammered in 2008.
A simple example suppose if price of commodity increases by x your company fails and that has say a 10% chance of happening. If you usually profit 10 billion per year and you can hedge for say 1 billion per year then money wise it seems like a break even. However, failure costs not just this years profits, but every year after that. So, your expected profit over the next 10 years increases even if the hedge does not save you any money over that same 10 years.
Well I mean it's implemented that way (buying long-term futures) but it's really just locking in a set price. Oil prices skyrocketing doesn't make them infinite money, because they have to either take contract delivery at the price they originally bought at, or use their futures profits to buy at the spot market. In the same way, falling oil prices doesn't cost them huge amounts of money, they just won't be able to take advantage of the fall in prices like a non-hedged carrier would.
I assume they try their very best to hedge to actual predicted usage and not try to profit from swings either way. If they could do that they'd be better off running a hedge fund.
In part, this helps each employee have a deeper investment in each and every event that happens in relation to a flight -- they work harder and more efficiently, get better turnaround times, more on-time flights, and better customer satisfaction.
When I fly, I choose to fly Southwest whenever that is possible. If that's not possible, then I might fly JetBlue, because they usually also do a decent job in these areas. I loved Virgin America as a second choice, before they got bought by Alaska Airlines.
But ever since my first flight on Southwest many years ago, they have been my favorite airline.
This is a similar argument to "this year is cooler than the last year so climate change is a hoax." Taking a single exception as a stand-in for the mean IS an invalid argument. At best, it points out that the world is more complicated than explanation X, but it certainly doesn't invalidate X for the sample it is predictive for.
If you're claiming that overall temperate (or energy content etc) of the atmosphere is on an upward trend because of specific drivers, then one anomalous year doesn't refute that (so long as the rest of the years and samples are in line with the claim/theory).
If you're claiming that a certain ubiquitous dynamic exists that forces all providers in one market to do X to stay profitable, then it would refute that claim to point to one provider that is able to consistently, year after year, stay profitable without doing X.
I'd imagine if X explains a good fraction of what you're talking about, you'd want to pursue X as an explanation over chasing explanations that effect the exceptions.
Not listing your fares on any channel other than your own, for example. People assume you're the cheapest, even when you aren't. And, no big fees to pay the sellers.
Picking only profitable airports and routes. They avoid airports with high fees and slow procedures that keep aircraft on the ground. And they avoid routes that don't support fares or load factors they want.
There's only so much space for other airlines to do the same. Sure, things would correct over time, but no airline has been willing to try it and bleed cash waiting for the normalization.
My favorite airline is awful. Uncomfortable, slow, frequent delays, etc. But it's also cheap enough that I would never fly anything else. So I am the problem, but there's no way I'm paying an extra $50/flight.
Airline crap bothered me a lot less once I realized this. I still shop almost exclusively on price, but now that I've internalized that tiny seats are ultimately my choice, it's less annoying.
Blaming Wall Street doesn't make sense to me. Companies would still want to make more money regardless of Wall Street. Blame the customers. Airlines are just giving us what we want! Ask the typical airline passenger what they want and they'll probably say they want a double-wide seat with 6ft of legroom and a free filet mignon meal, but when you watch what they buy it's obvious that they much prefer a cheaper seat that they can barely fit into. Turns out I prefer that too.
And if it's on the company's dime, many (most?) companies won't.
Personally, I fly only in business or first on long flights, and buy economy on short flights. It's worth it to me to avoid the jet lag and be able to bear the amount of travel I do (in the past year I've probably done over 40 flights >5h and close to 100 flights total). Flying domestically in economy becomes a lot more comfortable if you give a legacy airline your loyalty. e.g. I get upgraded to first two third of the time and always get the best seating, priority lines, free drinks & food onboard, and lounge access as a United 1K frequent flyer.
Of course I want bigger seats and great food while still paying the rock-bottom prices we currently have for cattle-class tickets. But that's not realistic.
If you say you want X, but always choose Y because it's cheaper, then you have no room to complain about how bad Y is.
What stops the "race to the bottom" in company-provided hotel accommodations? Do corporate policies say something like "2 star hotel less than X minutes from where business will take place..."?
Effectively, yes...that's why corporate travel booking tools exist...policy management. Your example is doable in those tools.
What they usually do is negotiate corporate rates with specific chains, and limit bookings to those places. With some additional policy to keep you in the basic rooms.
Most of the times when I look for flights, one or two airlines (with nearby hubs) cost half or third of other airlines. When AA and Delta cost $800 for a flight while United costs $300, it is pretty much a no-brainer. Only rarely do I even see comparable prices ($25-$75 differences) between multiple large airlines for the same flight paths / dates.
So even if consumers become more price inelastic, they still do not have enough power to vote with their money because the choices are not always comparable. If every AA flight cost x% more than every United flight, consumers could show United that they care more about service than a few dollars. But since there is such a high variability in the fares, there's no easy way to send a message within the market.
If you are a very frequent business traveller, I can see how you might have enough familiarity with the different airlines to know what their brands mean, but all I've got to work with is "never fly United".
I don't fly US domestic routes but for a transoceanic flight it'll typically cost you twice the price of standard economy (and in turn business is about 2x eco+, and first 2x business).
Really? As I recall, Delta and United premium economy are normal economy seats in the forward half of the airplane. It saves you a few minutes deplaning, but does nothing for the comfort level in flight.
On United it is the same economy seat, but it does have more legroom due to increased separation between rows of seats, compared to standard economy.
We have seen it in the past. I remember when JetBlue launched many would take a higher priced seat, for the in flight entertainment. Or Virgin for the service and seat room.
Sleeper economy: Something that will let me lie flat that isn't 4x the price, for trans-pacific 12 timezone flights that take 12+hrs. I would be totally fine with beds that stack, it's too bad it doesn't exist.
If a flight is waking hours long then economy or economy+ is good enough for most people.
Air New Zealand tried that with their "SkyCouch" concept, though, where you could join 3 economy seats together into a flat couch/bed thing. It failed and they're removing it from their fleet, however.
Now introducing "coffin economy" - once you climb into our sleek new fully reclined seatboxes, you'll wish you were dead!
One thing the article doesn't point out is that oil prices have been on a tear lower, which allow the airlines to get more profitable. We'll see how long that lasts. There's a reason why the P/E multiples of the airlines is well below that of the rest of the S&P
umm that means they're discounted right? you're suggesting contradictory things
On the other hand, for a "growth" company, a high P/E might be justifiable, because in a few years they will have higher earnings.
Until aircraft get completely redesigned, someone is going to be sitting in the middle of a row. Why shouldn't they pay a lower price?
http://philip.greenspun.com/flying/unions-and-airlines is a compelling explanation of why the pilot's unions have the industry by the throat. I can't imagine investing in a business where every labor negotiation is an unconditional surrender because saying no means you have to shut down indefinitely.
http://airhollywood.com/aviation-sets/narrow-body-737/
...you can see how the aisle is much wider than a typical aircraft.