Why is the airline industry in such big trouble? (1 Viewer)

[RobertR]

No thanks. It would be ridiculously expensive to build (you can bet the builders would demand plenty of taxpayer-funded subsidies), would not be able to compete price-wise with well-run airlines (notice I said well-run), and would take twice as long to get anywhere.

I have no sympathy for poorly managed companies demanding subsidies. Get better or die.

 

[Brian Perry]

Another advantage Southwest has created for themselves is only flying one type of airplane.

One of the things that really puzzles me, and Philip touched on it, is the role that hedging with commodity futures plays (or I should say, doesn't play). In theory, these airlines could have their fuel costs pretty much locked in for the next year and be completely immune to any increase in oil prices.

What I think is happening is that most airlines are not buying oil futures to a large degree because while they can lock in a price for a certain period of time, they must fear that if the price of oil stays flat or goes down, other (less prudent) airlines will be able take advantage of the lower fuel prices and reduce fares.

Or who knows, maybe these airlines are fully hedged with futures but simply choose to cry poor to what they see as an ignorant public. After all, I bet less than 1 in 10 people have any concept of hedging and most figure that if the prices at the pump are higher for their car, then airlines are in the same boat, even though they don't have to be.

 

[Philip_G]

hedging can work towards and against you. What if you hedge your fuel at 1.90 and costs go down to 1.25? That puts you at a disadvantage.

 

[Philip_G]

Who did united buy?

 

[Brian Perry]

I guess that's my point. The airlines must feel that price is by far the main determinant for people in choosing a carrier.

Compare that to something like breakfast cereal. Both Kelloggs and General Mills use the same type of oats and wheat and are thus equally susceptible to fluctuating grain prices. They would seem to be more likely to use futures to provide cost certainty because they know that if their competitor chooses not to, and lucks out with falling prices, consumers won't change brands due to price alone. Taste is more important. Airlines, on the other hand, seem to be perceived as equal in most respects and are held hostage to one thing: ticket prices.

So something like oil futures, which would undoubtedly be a good thing for the industry as a whole to use, are eschewed. (Of course, I don't know for a fact they are not using futures, but I take their daily whining about rising crude oil prices as an admission that they are exposed to the daily movements of the commodity.)

 

[Chris]

I know they bought up the micro that went from St. Louis to Joplin, MO, and one that went from Hot Springs to St. Louis, just as an example. There was an Article in Forbes I think in 1998 about several of the "micro" airlines that were either completely bought up or that United put a vested interest in..

 

[Philip_G]

Did they invest in them, or are they just a codeshare like oh, great lakes, or skywest or one of the other 50 million codeshares?
it doesn't make sense for united to buy someone that small, it's much cheaper for them to run them out of business, and smaller routes like that aren't terribly profitable for a large airline to run large, inefficient (for that use) jets on. You'll see a lot of longer haul routes being serviced by codeshares with CRJ jets now a days.

it should be mentioned that these regional airlines like ASA, ACA, Comair, Piedmont, horizon, great lakes, mesaba etc are all doing pretty well as a whole. Piedmont just hired a proverbial assload of pilots. Many of them are ditching their turboprops and buying CRJs or Avros

 

[Chris]

My understanding, since all the planes were repainted and labeled "United" in Joplin was that it became United.

 

[Philip_G]

united, or united express? big difference.
more than likely they're a codeshare. Doesn't cost united a dime.

after a bit of research the only service in/out of joplin MO is on an american airlines codeshare, trans states mostly. an interesting carrier, they codeshare with united, us airways, and AA. You can see their airplanes painted in all 3 companies colors on their homepage, http://www.transstates.net/
they want 1500 hours total time and 500 of multi for pilots, too bad I don't quite have that.




joplin has a nice airfield, and older design, wonder what the history is. CRIKEY 3.47 a gallon for fuel. That's over 1 dollar more than here.

 

[ChristopherDAC]

Passenger airlines as we know them are a creature of Government subsidies, as heavily subsidized as the Interstate Highway System. Municipalities or regional authorities build the terminals in the [generally deluded] belief that they will be "engines of economic growth". A fruit basket of other subsidies, direct [e.g. mail payments], contingent [e.g. loan guarantees], and indirect [e.g. jetliner export subsidies] keep them in business. The rationale is twofold: first to provide swift, easy transportation all over the country and overseas at a price affordable to the average person [surely a laudable goal but might be achieved in other ways], second as a National Security measure [airliners could be taken over in case of a war for transport aircraft, and the ever renewed orders for their product keeps the Boeing bomber factory open]. Deregulation has, ironically, basically destroyed whatever structural efficiency the airlines used to possess by permitting the accumulation of excess capacity, and airline management is more often like sports-team management than sane, sound business management -- if you fly into Phoenix you will notice immense numbers of jetliners parked out in the desert because management wanted to get shiny new planes. The airlines are still paying for these retired aircraft, which were bought largely on 20 or 40 year terms because that is the plane's service life. Just remember: the only airline which ever had a chance of winning its freedom from subsidies was the German Zeppelin Line, which was on its way to paying back its Government-guaranteed loans when Hindenburg burned in 1937.

 

[Philip_G]

you're on crack.

 

[LewB]

Fuel prices go down ? Now, who's on crack?

 

[Chris]

It's United Express My bad, I thought they were (=)

 

[RobertR]

If management makes stupid decisions, they should pay the consequences, rather than be protected from them. Deregulation has saved passengers an enormous amount of money, which is the bottom line. What's needed are fewer bureaucratic controls on market entry and innovations, not more.

 

[AjayM]

Of course, if these jetliners were still able to service customers why wouldn't the airlines sell them instead of putting them in a boneyard? A plane is like an everyday item we use, for the most part it is a consumable, you use it up and throw it away (ie the cost to fix/repair/maintain exceeds the costs of a new one).

Andrew

 

[Philip_G]

Sometimes older aircraft aren't cost effective to operate.
newer aircraft cost less in maintenance, use less fuel, the general public hates old airplanes, operating multiple platforms is more costly etc.
NWA has one of the oldest fleets, their DC9s are ancient, 60's models?

I'd find it hard to believe the airline is still paying for any of these aircraft, they'd let them get reposessed before they'd park it and still pay the lease or payment. Hell, united has brand new airplanes they mothballed because they don't want to make the payments right now or don't have a use for them

 

[Brian Perry]

Not only that, but United pulled a pretty scummy (albeit desperate) move by demanding to renegotiate (or threatening to default on) the leases it had with the planes' owners, some of which are companies you'd never think would be in the plane owning business, such as Disney and Philip Morris.

The airline industry as a whole, under the current system, is not viable without subsidies. In the history of air travel, the combined losses of airlines greatly exceed the profits. Think about that -- the entire industry is a net loser since its inception (and obviously the losses have accelerated since deregulation).

 

[Malcolm R]

Sounds like Amtrak. We keep throwing money down that bottomless pit, too.

 

[RobertR]

Yes, it's unfortunate when industries are structured around political considerations instead of market ones.

 

[Chris]

This is largely, though, not do to an industry that can't make it, it's due to really poor management. Several airlines have made money (Southwest, Swiss Airlines, and a few others)

Even terrible carriers can have a quarter or two of profit (American had a "small" profit in it's last quarter) to be continously profitable, though, they need to rethink there model, which at some point means the govt. needs to not bail out airlines, let them collapse, and follow the ones that succeed..