Why Don't The Airlines Just Raise Fares?

[mweiss]

And do the starting pay rates never increase?

In the non-union private business world, starting pay rates are negotiated between employee and employer.

Are you aware that the starting pay for a title I mechanic at AA is lower today than it was 25 years ago?

Doesn't matter in terms of talking about cost reductions. We can discuss the issues of declining pay in another thread. The only reason the topic came up at all was in the context of options that airlines have at their disposal in down times to reduce capacity.

The SEC filings support what?

The argument that the concessions are smaller than the losses that cause the airline to demand them in the first place.

Well what else would it do? What excuse could they use for losing money when everyone else is doing well? Why bother, there will always be another economic cycle.

Not just the timing. The graph tracks the magnitude as well.

Your example ... is not valid for a mature company like AA where the majority of employees are at top pay.

It's only invalid if all of the employees in the class are at top pay.

Sure we do (generate revenue).

Fine. Depending on how you look at it, you could make such a claim. It doesn't matter in describing the ramifications of shrinking the airline during times of decreasing demand.

Well now thats what you are getting.

So I get a graph that doesn't answer my question, and a snotty response. This must be my lucky day!

If you want to make an arguement you cant expect me to go and provide you with the ammunition.

Whatever. It still doesn't matter in the end, because the bottom line is that shrinking an airline during down times causes increased unit costs. It's one of the two big factors that lead to the oft-repeated statement that airlines don't shrink to profitability.

To bring this back to the core topic...in a down economic cycle, an airline can shrink, but doing so increases unit costs and necessitates exiting markets in many cases. Do you agree with this crucial point?

 

[mweiss]

When was the economy "declining"?

2000 for sure, regardless of the economic indicator used. Depending on the indicator, you can include 2001 and 2002 as well.

Did you borrow that one from Clinton?

No. You used a word that has no meaning in the context of accounting. Since I can't read your mind, I didn't know what you meant by it.

Well you were the one who compared losses to concessions, apples to oranges if you will saying that it did not make sense to lose billions for hundreds of millions in labor cost savings.

Because it doesn't. Had I known that you were going to be unable to recognize the difference between operating losses and net losses, I would have been more specific.

And the average worker should know how to interpret financial reports?

Nope. Just those who expect to represent the average worker.

That has not been determined yet. We would have to wait until these agreements have run their course to determine that.

Actually, no, we don't. The minute the agreements are ratified, we can calculate within a very small margin how much will be saved.

Well (intangible assets can) not (increase in value) by accounting methods anyway. But the fact is that some of these assetts can in fact be sold even after they have been fully amortized.

You're in way over your head here. Goodwill is an asset that cannot be sold, except if the entire company is sold with it.

Come on, it's time to be honest with the others around here. You don't have a clue what goodwill is, in the context of accounting, do you?

I'm not trying to beat up on you. It's just that there's no point in having this conversation if you're going to pretend that you understand things that you don't. I'll be happy to take the time to explain them to you if you're sincerely interested in understanding them.

And, ya know what? If, once you do understand them, you are able to produce evidence that increasing the price of airline tickets would increase profits, I'll be happy to concede. My goal isn't to be right; I'm happy to learn new stuff. But if you come out here with a whole lot of hand-waving, blowing smoke about numbers that you don't understand, you're only going to succeed in making yourself look foolish.

 

[Bob Owens]

In the non-union private business world, starting pay rates are negotiated between employee and employer.

I didnt ask you that. With a union they are also, in theory, negotiated between the employee and the employer. But do people in the non-union business world get increases in pay or not?

Doesn't matter in terms of talking about cost reductions. We can discuss the issues of declining pay in another thread.

Well you were the one who claimed that pay increases exceeded productivity increases. Now when confronted with the fact that real pay has in fact declined you say it does not matter.

The argument that the concessions are smaller than the losses that cause the airline to demand them in the first place.

Thats because the SEC statements would not reflect future savings would they? Would the losses exceed what they saved last year? Sure, but there are a lot more factors that caused losses than the cost of labor.


It's only invalid if all of the employees in the class are at top pay.

As they are now.

Whatever. It still doesn't matter in the end, because the bottom line is that shrinking an airline during down times causes increased unit costs. It's one of the two big factors that lead to the oft-repeated statement that airlines don't shrink to profitability.

Lots of statements are oft-repeated, it does not make them right. But airlines dont usually shrink to profitability they shrink to preserve cash and stem their losses till demand returns and they can once again expand.


To bring this back to the core topic...in a down economic cycle, an airline can shrink, but doing so increases unit costs and necessitates exiting markets in many cases. Do you agree with this crucial point?

Sure, but once all the people who are not at top pay are gone labor is no longer a factor in increasing those unit costs.

 

[Bob Owens]

mweiss,Jan 13 2005, 02:50 AM]
2000 for sure, regardless of the economic indicator used. Depending on the indicator, you can include 2001 and 2002 as well.


Hmm, isnt that around the same time that AA ran full page ads highlighting the $7 billion that they were dumping into things like fancy firsat class modules, larger overhead bins, MRTC and they actually broke ground for the start of contruction of two new terminals?

No. You used a word that has no meaning in the context of accounting. Since I can't read your mind, I didn't know what you meant by it.

I believe that the statement surrounding the word made it obvious.


Because it doesn't.

Well it depends on how easily those losses can be recovered and how long the savings can be realized. Its like saying it doesnt make sense to buy a house and spend $300,000 for a place to live when you can rent for $1500 a month. Instead of spending 18,000 you spent $300,000. Sure the year you bought the house you spent way more than you would have if you just rented but over time it will be a better deal. When you file your taxes it will appear that your taxable income has decreased.

Had I known that you were going to be unable to recognize the difference between operating losses and net losses, I would have been more specific.

Its doesnt matter, because what I said is true either way.


Nope. Just those who expect to represent the average worker.

Fair enough. So you are saying that they should elect financial analysts to represent them or that their representatives should hire someone to interpret them?

Actually, no, we don't. The minute the agreements are ratified, we can calculate within a very small margin how much will be saved.

Well you believe you can. Then again it depends on what you consider to be a very small margin.

You're in way over your head here. Goodwill is an asset that cannot be sold, except if the entire company is sold with it.

Did I say that Goodwill could be sold or go up in value? I believe I referred to intangible assetts. Goodwill is only one type of intangible assett, are you saying that intangible assetts can not be sold? When someone buys the rights to Pan Ams logo, what have they bought?When we bought TWAs London routes what did we buy?

Come on, it's time to be honest with the others around here. You don't have a clue what goodwill is, in the context of accounting, do you?

Goodwill comes about when the company purchases another company or some other assett for more than its book value. The difference between the price paid and what it is worth on the books is placed on the books as "goodwill." That means that if a company pays $700 million for another company(TWA), and the purchased company's book value is $500 million, the goodwill is $200 million.

Now the question is why would the company make such purchases (pay more than book value) during a time of decreasing demand(your claim)?

 

[mweiss]

But do people in the non-union business world get increases in pay or not?

Sure they do. They're called "merit" increases, because you earn them through doing more than just showing up every day. Moreover, you're looking at how pay will rise over time. That has almost nothing to do with the decision to keep the current level of capacity or shrink.

Well you were the one who claimed that pay increases exceeded productivity increases. Now when confronted with the fact that real pay has in fact declined you say it does not matter.

Either I'm not being very clear or you're being very obtuse...I can't tell which.

You're talking about a single employee over time. I'm talking about a collection of employees at a single time. The former doesn't matter when deciding whether or not to shrink; the latter does.

Thats because the SEC statements would not reflect future savings would they?

They don't have to. It's easy to determine from the terms of the contract what the future savings would be. After all, you already know exactly how many future dollars you're giving up when you agree to a concession. Just add it up for everyone who agreed to the concession, and you know how much the company's future savings is.

Would the losses exceed what they saved last year? Sure, but there are a lot more factors that caused losses than the cost of labor.

So, in other words, you are claiming that management is intentionally creating just enough additional operational loss to garner a particular concessional contract. Is that correct?

airlines dont usually shrink to profitability they shrink to preserve cash and stem their losses till demand returns and they can once again expand.

Exactly. And how much they shrink is determined by how much incremental cost savings can be obtained per unit of shrinkage, salted with the projected cost of re-entering markets that they expect to return to after a recovery.

Sure, but once all the people who are not at top pay are gone labor is no longer a factor in increasing those unit costs.

Agreed. But you really didn't have to fight me every step of the way to arrive at that conclusion. Had you simply said that up front, I would have agreed immediately...and saved you a lot of trouble.

 

[TWAnr]

Michael,

This thread is beginning to resemble the debate between the Evolutionists and the Creationists.

Some people will not change their beliefs no matter what the proof is.

 

[mweiss]

Hmm, isnt that around the same time that AA ran full page ads highlighting the $7 billion that they were dumping into things like fancy firsat class modules, larger overhead bins, MRTC and they actually broke ground for the start of contruction of two new terminals?

Pretty close. But those were all trains that left the station before it became clear that the end of the economic boom was nigh.

I believe that the statement surrounding the word (loss) made it obvious.

Well, clearly your belief is wrong, because it wasn't obvious. "Loss" is an overbroad term.

Well (the sensibility of taking losses in order to gain savings) depends on how easily those losses can be recovered and how long the savings can be realized.

Exactly. And I'm speaking in aggregate over time. These losses have dwarfed the savings from concessions.

(The difference between net losses and operating losses) doesnt matter, because what I said is true either way.

Here's where it matters. You claim that the airline's negotiators are pretending to lose money by writing down intangible assets, when the airline is really operationally profitable, and that they are doing this as a means of convincing the union to accept concessions.

I claim two things. First, I claim that the legacy carriers have not been operationally profitable for the past four years. The SEC filings make this clear. Secondly, I claim that any union negotiator unable to recognize the difference between a net loss and an operational loss has no business sitting at the table; he's doing a disservice to his constituents.

So you are saying that they should elect financial analysts to represent them or that their representatives should hire someone to interpret them?

To do otherwise is the equivalent of representing oneself in a court of law. You know what they say about such people.

Well you believe you can (calculate the savings from concessions within a very small margin of error). Then again it depends on what you consider to be a very small margin.

Small enough that it would be drowned out by rounding errors on a 10-K.

Did I say that Goodwill could be sold or go up in value? I believe I referred to intangible assetts.

And so you did. Goodwill was the one you were suggesting was written down speciously in your example. But you've got another shot...tell us what intangible assets AA has that have been improperly written down in the past five years.

are you saying that intangible assetts can not be sold?

Absolutely not. Patents, copyrights, trademarks, slots, and route authorities are all examples of intangible assets that can be sold.

Goodwill comes about when the company purchases another company or some other assett for more than its book value.

Well done. There's hope for you yet! 😉

Now the question is why would the company make such purchases (pay more than book value) during a time of decreasing demand(your claim)?

There are several different answers to your question. I'll give a few.

First of all, why pay more than book value? Because it is rare to be able buy a public company for book value. This is because you have to buy a majority of the shares, and not all of them will be sold at market price. It's like when people figure out that a large corporation wants to build a factory and has to buy a bunch of adjacent plots of land. If the purchase has to be made public (as a public company acquisition must), then there's typically a group that will hold out for more money, because they can. Making a tender offer at a premium is designed to stop that from happening.

Secondly, why make any acquisition at all during a time of decreasing demand? Well, the offer was made when it wasn't yet obvious that demand was going to be decreasing (though if you were able to go back to PlaneBusiness and look up the posts from around that time, many of us were warning that it was imminent).

It could also be viewed as a defensive maneuver. If one has an expectation of the future airline market to look much like the past one, picking up another hub is a good thing. Your competitors picking up another hub is a bad thing. Therefore, if you can add another set of markets in which to extract monopoly rents, you jump at the chance. This was part of the justification for the acquisition.

But the truth of the matter is more complex than simply not seeing the writing on the walls. Carty's ego had a lot to do with it. Like most CEOs, he wanted to leave his indelible mark on the company, and this seemed (to him) to be a great way to do it. It sure left an indelible mark...😛

 

[mweiss]

TWAnr, you may well be right. But I'm trying to keep from getting stuck in the traditional quagmire...so let's see if we can move on.

Bob agreed that an airline incurs higher unit costs (often, though not always, due to higher average labor costs) by shrinking. There are clear elements of economies of scale and scope that are lost when shrinking an airline.

In other words, for the airline industry, the supply curve can and does actually rise to the left. This is a hugely important point!

Traditional economics classes will show a nice, simple X on a graph, with the downward-sloping line representing the demand curve and the upward-sloping line representing the supply curve. The demand curve always has a negative slope (although theoretically can have a zero slope as well...but this has yet to be seen). The supply curve usually has a positive slope, but for the airline industry it is shaped more like a bowl. That is, keeping the business model constant, increasing the number of ASMs causes an increase in CASM...but so does decreasing the number of ASMs!

Now, as I said, this is "keeping the business model constant." There are factors that can help mitigate the increase in CASM that comes from growing ASMs, such as rolling hubs, increasing point-to-point flying, etc., etc. But these methods all require fundamental changes in the business model...and they lower costs even if you don't increase ASMs! In other words, such changes in the business model can shift the entire supply curve down, but they don't change the shape of the curve itself.

Now, here's some food for thought. In traditional economic theory, when you have that X-shaped graph, the market equilibrium is where the two lines intersect. But what happens if you have a bimodal demand curve, and a bowl-shaped supply curve that sits neatly above and between the two modes? In other words...what do you do when the two lines simply do not intersect?

Bob implicitly agreed that there is justification to take an operational loss under several scenarios. Might this be one such scenario? Could this scenario exist in the real world? Is it, in fact, precisely the scenario that we're seeing today for the legacies?

 

[scot]

17 pages on this now, lets see if we can get a conclusions since it appears to not be going very far, or take it to PM as an alternative. Thanks.

 

[mweiss]

Scot,

This takes a long time. It's not a simple industry. If you prefer, Bob and I could make the conversation short with:

"They can raise fares.'

"Can not!"

"Can too!"

"Well, your mother's ugly!"

etc....

But then it would look like far too many of the other conversations that go on around here. Why bother posting at all at that point?

Besides, it didn't get to be really serious until around page 7, so we're talking about more like ten pages. Ten meaty pages...and, we're actually making progress (even if you haven't noticed yet).

 

[whlinder]

This is a great discussion, imho, and I am thoroughly enjoying reading it. I don't understand why there is such a great desire to close it? It sure as heck beats the usual union bickering or Mr. Fish trying to rile up the UAL employees....

Please leave it open and let the thread take its natural course.

 

[Bob Owens]

.

You're talking about a single employee over time. I'm talking about a collection of employees at a single time. The former doesn't matter when deciding whether or not to shrink; the latter does.

No its the opposite. Perhaps you should reread your post on the guy changing tires. You were the one who wanted to track how a single employee progresses along the payscale, and how "that" employee's productivity did not keep up with his pay increases, while I went with citing that Top pay for the whole group has lagged inflation.

If I recall you were the one who enterred the comments about the shrinkage, productivity and costs. It was not my intent to go off topic but these side comments about union rates, productivity, etc, invite reply.

They don't have to. It's easy to determine from the terms of the contract what the future savings would be. After all, you already know exactly how many future dollars you're giving up when you agree to a concession. Just add it up for everyone who agreed to the concession, and you know how much the company's future savings is.

You can approximate, not determine. The past is always more easily defined than the future.

So, in other words, you are claiming that management is intentionally creating just enough additional operational loss to garner a particular concessional contract. Is that correct?

Management did not take the neccissary actions early on to mitigate losses because they stood more to gain over the long run by not doing so. I believe that they also availed themselves of legal accounting maneuvers and business decisions in order to post as large a loss as they possibly could, maneuvers such as but not limited to accellerating depreciation, prepaying leases, fully funding executive golden parachutes, and not delaying or cancelling unneccisary capital expenditures.

Exactly. And how much they shrink is determined by how much incremental cost savings can be obtained per unit of shrinkage, salted with the projected cost of re-entering markets that they expect to return to after a recovery.


Well if thats the case, since as you say unit costs go up as airlines shrink, then airlines should never shrink, just continue to burn cash in order to keep unit costs down. My feeling is that when they shrink unit costs is not what they are primarily concerned with, rather preserving cash is the primary concern.

Agreed. But you really didn't have to fight me every step of the way to arrive at that conclusion. Had you simply said that up front, I would have agreed immediately...and saved you a lot of trouble.

??? Never mind go ahead.

 

[Bob Owens]

mweiss,Jan 13 2005, 05:10 PM]
Pretty close. But those were all trains that left the station before it became clear that the end of the economic boom was nigh.

Well they were certainly able to call back the train with all the labor contracts werent they?

Well, clearly your belief is wrong, because it wasn't obvious. "Loss" is an overbroad term.

I believe you are doing a little creative editing, adding words that I did not use to refer to replies that I made. Here is how it really went.

I referred to real wages declining.

You responded;
Guess it depends on what you mean by "real."

I responded;
Did you borrow that one from Clinton?

Then you said I wasnt clear and the word has different definitions or something to that effect to which I replied;

I believe that the statement surrounding the word made it obvious.


OK. I;ve had troble keeping track too.


Exactly. And I'm speaking in aggregate over time. These losses have dwarfed the savings from concessions.

OK is this a play on words here since we are using past tense and not future? If not lets look at the numbers then look to see exactly what the losses are made up of, if possible.

Here's where it matters. You claim that the airline's negotiators are pretending to lose money by writing down intangible assets, when the airline is really operationally profitable, and that they are doing this as a means of convincing the union to accept concessions.

No. I believe I already answered that question. See the prior post.

I claim two things. First, I claim that the legacy carriers have not been operationally profitable for the past four years. The SEC filings make this clear. Secondly, I claim that any union negotiator unable to recognize the difference between a net loss and an operational loss has no business sitting at the table; he's doing a disservice to his constituents.

Well then you could throw out the whole TWU team. And probably the Flight Attendants too. Nor do I think that it should be a major concern. Does Shell or Exxon look at how much profit the airline has before they set their price? Does GE determine their lease rates based upon the airlines profitability? They may want to ensure that they are not taking too much risk but I doubt they will lower their rates because an airline is poorly run.

And so you did. Goodwill was the one you were suggesting was written down speciously in your example. But you've got another shot...tell us what intangible assets AA has that have been improperly written down in the past five years.

Did I say they were improperly written down? However since you like your simplified examples here goes.

I have a small business.

I own $1 million worth of equipement that gets written down over the years.

However my employees want a contract and in order for me to get the best terms I need to convince them that I cant afford to give them much.

The contract will be for several years. I know ahead of time that we will start talking next spring so I tell my accountant that I dont want the company to look too good this year. So he suggests accellerating the depreciation on my equipement so I could show a bigger loss. While this was not the intent of the law allowing companies to accellerate depreciation since labor costs make up such a hige part of my operational expenses I use it to my advantage.

So now comes negotiations, I truthfully tell show the employees the financial statement of the company that shows that we lost money. So they agree to concessionary deals.

Now I just won concessionary deals for the next several years, however my savings will extend way, way beyond the next several years because I have permanently reset my labor costs. Even if they do well on the next contract they are doing well relative to the concessionary one.

 

[mweiss]

Well if thats the case, since as you say unit costs go up as airlines shrink, then airlines should never shrink, just continue to burn cash in order to keep unit costs down. My feeling is that when they shrink unit costs is not what they are primarily concerned with, rather preserving cash is the primary concern.

[post="238905"][/post]​

Exactly! Or, put another way, airlines shrink only when they absolutely must.

Note: the remainder of this message has nothing to do with pricing. It is all about refuting Bob's claim that airline management is feigning bigger losses in order to negotiate labor contracts from a position of greater strength.

Well they were certainly able to call back the train with all the labor contracts werent they?

Some contracts are easier to renegotiate than others. Construction contracts tend to be especially difficult. Aircraft leases and employee contracts tend to be much easier. It's all dependent on who has what leverage on whom.

OK is this a play on words here since we are using past tense and not future? If not lets look at the numbers then look to see exactly what the losses are made up of, if possible.

The past is easier to use than the future here, because those numbers are more readily available to me. If you have the future numbers, by all means bring 'em in.

...any union negotiator unable to recognize the difference between a net loss and an operational loss has no business sitting at the table; he's doing a disservice to his constituents.

Well then you could throw out the whole TWU team. And probably the Flight Attendants too.

And probably should. They have access to the information, and should use it to their advantage in negotiations. If they don't, then they're leaving money on the table.

Does Shell or Exxon look at how much profit the airline has before they set their price?

I can tell from your question that you think the answer is "no." You'd be wrong. Now, they don't set the price in the same way that the union can, but that's because the AA has more of a choice in fuel suppliers than it does mechanics. In other words, TWU should be negotiating from a greater position of strength than it is, if it's missing the information contained within the financials.

Does GE determine their lease rates based upon the airlines profitability?

Absolutely. Not solely based on the airline's profitability, but they'd be fools if they didn't take it into account.

They may want to ensure that they are not taking too much risk but I doubt they will lower their rates because an airline is poorly run.

"How well the airline is run" is not equivalent to "how profitable the airline is." GE gave more favorable payment terms to US (though less favorable interest terms), because the airline is in trouble and they're trying to reduce their loss exposure.

[Deleted example of showing an inflated loss]
Now, since that example would show a bigger net loss, it would have no impact on operating loss, which is a number also publicly available to you. If I were on the other end of that negotiation, I'd see right through that in a heartbeat. If your union leadership doesn't know how to recognize this, they need to be replaced by people who do. Otherwise, they're getting suckered, and, in turn, so are you.

Accelerated depreciation (such as through MACRS) exists as a means of corporate welfare. OK, I'm editorializing. It's there as a tax break, allowing a company to pay less in taxes today at the expense of paying more in future years. That's a good deal for businesses because they effectively get an interest-free loan from the feds.

 

[UAL_TECH]

This is a great discussion, imho, and I am thoroughly enjoying reading it. I don't understand why there is such a great desire to close it? It sure as heck beats the usual union bickering or Mr. Fish trying to rile up the UAL employees....

Please leave it open and let the thread take its natural course.

[post="238857"][/post]​

I agree, this at least an intellegent discussion on issues that affect 'us'.
Please leave it open.

Thanks,
UT