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Why Don't The Airlines Just Raise Fares?
- Thread starter FWAAA
- Start date
Did you happen to read this article Mike?
http://yahoo.businessweek.com/bwdaily/dnfl..._1870_db016.htm
"The Fairfield (Conn.)-based giant owns about 1,300 aircraft and a massive aircraft-engine unit, and it has more than $29 billion in loans and leases to airlines."
"Airlines may be entering their fifth consecutive year of losses, but for GE, the good times keep on rolling. "
Now GE keeps these airline limping along, as they are raking in the money but how do you think they would react if all of a sudden they were likely to get all their airplanes back because the airline workers went on strike?
The fact is there is more afoot here than what your graphs or formulas can explain.
http://yahoo.businessweek.com/bwdaily/dnfl..._1870_db016.htm
"The Fairfield (Conn.)-based giant owns about 1,300 aircraft and a massive aircraft-engine unit, and it has more than $29 billion in loans and leases to airlines."
"Airlines may be entering their fifth consecutive year of losses, but for GE, the good times keep on rolling. "
Now GE keeps these airline limping along, as they are raking in the money but how do you think they would react if all of a sudden they were likely to get all their airplanes back because the airline workers went on strike?
The fact is there is more afoot here than what your graphs or formulas can explain.
=mweiss,Jan 15 2005, 03:38 AM]
I see. Well, no. I'm trying to get some civil discourse going.
Sure, and I bet you always "discourse" that way.
Absolutely true. It comes from gut feel that is built by years of firsthand experience.
So is "gut feel" considered a scientific method now? To me it sounds more like you are saying its an aquired or perfected skill, hard to quantify, like an art. Your data are your pastels and the graph your canvas. Your peers could be given the same materiel but come up with slightly, but importantly, different results.
They do. You just forgot what my position was. To refresh your memory, you can look here. Former ModerAAtor showed you an example of why raising the fares can result in lower revenue, and you rudely dismissed him. In particular, you dismissed the very idea that a maximum revenue fare can be accurately predicted.
Based on get feelings.
I dismiss the application because I feel that the enviornment in which the assumptions made for the approximations that result from them is not reality.
I came in to show you how it can be done, and how airlines can lose money, be maximizing profits, and still not break the model. That, Bob, is what I came into this thread to do.
Was that the topic of the thread?
Somewhere along the way, you decided that I was out to prove that the airlines can't raise fares.
No I thought you were out to prove that if they did raise fares, a very general statement, that it would not help the airlines finances because less people would fly.
It's interesting that you bring that up. See, we haven't even begun to discuss how the airlines figure out the shape of the demand curve. The methods they use, while imperfect (e.g., you couldn't have predicted that SARS would hit when and where it did), work often enough to be quite effective.
And explain how your curve would take into consideration the motives of GE.
What's great about the demand curve is that you don't need to predict precise human behavior. You just need to predict average human behavior, and since you have enough humans, average is good enough. It's the same reason why the automobile insurance industry works.
It may be good enough but only if your base assumptions are correct.
I think that the GE story reinforces may claim that there is more here than competition and demand that can be explained away with a few graphs. That as workers we need to take action that will stop the industry cold, so that companies like GE cant sit back and profit off our demise. As the airlines are cutting each others throats and the workers are bearing the brunt of it GE and the oil companies (and many others I'm sure) are sitting back raking in the money. If we were to stop working the cash flow to them would also stop, and the economic effects of a grounded air transport system would cause a crisis which would drag a lot more interests into the fray besides airline workers. At that point we could make demands as a condition to return to work and put an end to this madness. Its not just the airlines that rely on our labor but every industry related to it and the people and things we move too.
Just imagine what things would be like at GE when $65 billion dollars worth of aircraft that they own are about to be thrown back on their doorstep because the workers wont fill em , fix em or fly em!!
And this has exactly what to do with the ability of the airlines to raise fares?Bob Owens said:Now GE keeps these airline limping along, as they are raking in the money but how do you think they would react if all of a sudden they were likely to get all their airplanes back because the airline workers went on strike?
[post="243345"][/post]
I do wish to make one point clear. The industry as a whole would generate more profits if they, in concert, raised fares. However, for those with the lowest costs, it is against their best interest to do so acting alone...and they have to act alone.
Always? No. Often? Yes.Bob Owens said:Sure, and I bet you always "discourse" that way.
No. It's the only way to add focus to the last components of error that remain after the hard data get you 99% of the way there. If you use gut from the start, you end up wrong as often as right.So is "gut feel" considered a scientific method now?
So if the assumptions are wrong, explain which ones are wrong and provide evidence that they are. I'm willing to have my mind changed. Are you?I dismiss the application because I feel that the enviornment in which the assumptions made for the approximations that result from them is not reality.
Was that the topic of the thread?
I wasn't, but I can be. Well, let me clarify. Combining pricing models with game models, I can prove that it is only beneficial for everyone to raise fares collectively, while it is detremental for some players to raise fares if they must do so independently.No I thought you were out to prove that if they did raise fares, a very general statement, that it would not help the airlines finances because less people would fly.
From the airlines' perspective, GE's behavior has no impact on the demand curve. It only changes the supply curve. From GE's perspective, the behavior is perfectly rational, but it has almost nothing to do with air travel demand.And explain how your curve would take into consideration the motives of GE.
Show evidence that they're not.(Modeling average demand behavior) may be good enough but only if your base assumptions are correct.
If you understood (believed?) more about the models of supply and demand, you would probably recognize that there are only two ways you can make that happen...and you're not doing either of them.I think that the GE story reinforces may claim that there is more here than competition and demand that can be explained away with a few graphs. That as workers we need to take action that will stop the industry cold, so that companies like GE cant sit back and profit off our demise.
L
luvn737s
Guest
And how would you know this? No airfare increase has stuck more then a day or two. 3-6% loss in LF would make headlines, but it's the best kept secret in the industry.Former ModerAAtor said:It's a fact that customers will fly someone else to save $5 in airfare.
When we raise the price just $5, we lose about 3 pax out of 100. Go up $10, and we lose 5 or 6 per 100.
100 seats at $200 = $20000
97 seats at $205 = $19,885
94 seats at $210 = $19,740
Get the picture now?...
[post="235557"][/post]
mweiss,Jan 29 2005, 06:28 PM]
99%? I doubt that. If thats the case then how come it still seems like they are fishing for solutions?
In that case I would have to assume the assumptions wouldnt I? One of them would be that the airline industry is trying to make money instead of trying to kill each other off.
No, you can only prove that your result is supported by the theory. The only way to prove it, and it only applies to a particular example, is by applying it to something that happened in the past. You still can not precisely predict the future.
No but it does effect the finances of the airlines.
Show evidence they are.
Not yet.
No. It's the only way to add focus to the last components of error that remain after the hard data get you 99% of the way there. If you use gut from the start, you end up wrong as often as right.
99%? I doubt that. If thats the case then how come it still seems like they are fishing for solutions?
So if the assumptions are wrong, explain which ones are wrong and provide evidence that they are. I'm willing to have my mind changed. Are you?
In that case I would have to assume the assumptions wouldnt I? One of them would be that the airline industry is trying to make money instead of trying to kill each other off.
I wasn't, but I can be. Well, let me clarify. Combining pricing models with game models, I can prove that it is only beneficial for everyone to raise fares collectively, while it is detremental for some players to raise fares if they must do so independently.
No, you can only prove that your result is supported by the theory. The only way to prove it, and it only applies to a particular example, is by applying it to something that happened in the past. You still can not precisely predict the future.
From the airlines' perspective, GE's behavior has no impact on the demand curve. It only changes the supply curve. From GE's perspective, the behavior is perfectly rational, but it has almost nothing to do with air travel demand.
No but it does effect the finances of the airlines.
Show evidence that they're not.
Show evidence they are.
If you understood (believed?) more about the models of supply and demand, you would probably recognize that there are only two ways you can make that happen...and you're not doing either of them.
Not yet.
Boomer said:Bob Owens,
You are missing the fact that both parties consider lower air-fares as the ultimate goal versus a fair wage for those that fly and maintain their aircraft.
[post="243379"][/post]
No I'm aware of that, but Mike seems to think that we are all just paranoid and there is a mathematical reason for what we are seeing.
Who is "they" and what is the problem for which you suggest they're fishing for solutions?Bob Owens said:99%? I doubt that. If thats the case then how come it still seems like they are fishing for solutions?
If you look at the behavior of the airlines individually, it's obvious what the players are doing. It's all right in the financial statements.In that case I would have to assume the assumptions wouldnt I? One of them would be that the airline industry is trying to make money instead of trying to kill each other off.
Well, yeah, that's how proofs work, in part. Now, of course, I could sit here and tell you how things are likely to play out in the future as well. I've been doing that since the late 90s with a high degree of accuracy. You'd have to go back to PlaneBusiness to see it.No, you can only prove that your result is supported by the theory. The only way to prove it, and it only applies to a particular example, is by applying it to something that happened in the past.
I'm not a fortune teller. I can tell you what the result will be under a particular set of conditions. That's what these economic models do. They don't predict the future...they tell you what the results are of your actions today.You still can not precisely predict the future.
So what? That's not the answer to your question. You asked where GE's behavior fits into the customer's demand curve. I told you where it fits. Don't ask me a question and then tell me that I gave you the wrong answer to the question you didn't ask. Again, you're only making yourself look like a fool.No but (GE's behavior) does effect the finances of the airlines.
I did better than that. I showed evidence that they're irrelevant. So, you've got plenty of pages to read over. Find the assumptions I made that are relevant..."relevant" meaning that changing the values from the ones I provided change the outcome.Show evidence (your base assumptions) are (correct).
Well, what's stopping you? 🙄(I'm) Not (taking action) yet.
[post="243875"][/post]
mweiss,Jan 31 2005, 02:02 AM]
The problem of selling their product for a price that covers thecost of providing it.
The financial statements have limited disclosure and you know that.
You are the one who is looking foolish. Did I say that you gave the wrong answer or did I simply add a point? Your failure to see that and oversized ego makes you very defensive.
Did you? Sorry I must have missed it. So far you have not provided many particulars, just generalized theory.
What is this a test? Are you playing the Professor now?
There you go again altering statements to suit your purposes because otherwise they would not fit into your answer.
Who is "they" and what is the problem for which you suggest they're fishing for solutions?
The problem of selling their product for a price that covers thecost of providing it.
If you look at the behavior of the airlines individually, it's obvious what the players are doing. It's all right in the financial statements.
The financial statements have limited disclosure and you know that.
So what? That's not the answer to your question. You asked where GE's behavior fits into the customer's demand curve. I told you where it fits. Don't ask me a question and then tell me that I gave you the wrong answer to the question you didn't ask. Again, you're only making yourself look like a fool.
You are the one who is looking foolish. Did I say that you gave the wrong answer or did I simply add a point? Your failure to see that and oversized ego makes you very defensive.
I did better than that. I showed evidence that they're irrelevant. So, you've got plenty of pages to read over.
Did you? Sorry I must have missed it. So far you have not provided many particulars, just generalized theory.
Find the assumptions I made that are relevant..."relevant" meaning that changing the values from the ones I provided change the outcome.
What is this a test? Are you playing the Professor now?
Well, what's stopping you? :
There you go again altering statements to suit your purposes because otherwise they would not fit into your answer.
Boomer said:Bob Owens,
You are missing the fact that both parties consider lower air-fares as the ultimate goal versus a fair wage for those that fly and maintain their aircraft.
Are you all serious? The airlines have colluded together to lower fares so that they can cry bloody murder and drive down your wages? Come on. Their goals are to make money, some how, some way. And what exactly is a fair wage?Bob Owens said:No I'm aware of that, but Mike seems to think that we are all just paranoid and there is a mathematical reason for what we are seeing.
[post="243877"][/post]
go here;whlinder said:Are you all serious? The airlines have colluded together to lower fares so that they can cry bloody murder and drive down your wages? Come on. Their goals are to make money, some how, some way. And what exactly is a fair wage?
[post="244041"][/post]
aircon.org
OK, now there's a statement to which I can respond.Bob Owens said:("They" are fishing for solutions to) The problem of selling their product for a price that covers thecost of providing it.
It's not easy to take an airline like AA and operate profitably under all market conditions. When you architect an airline, you have two fundamental choices (though you can opt for various blends of the two). One is to target business travelers (i.e., go after the business mode of the bimodal curve). The other is to target leisure travelers (i.e., go after the leisure mode of the bimodal curve).
The advantage of targeting the business mode is that it supports a higher price curve. That is, one can find an intersection between the supply and demand curves at higher supply costs. For airlines that were around in regulated environments, the fundamental market forces encouraged a higher supply cost structure, so it was much easier for the legacy carriers to taking this approach than to undertake a wholesale rearchitecture of the business.
The disadvantage of targeing the business mode is that it grows and shrinks rapidly in response to the economy. Since airlines cannot grow and shrink as rapidly, or in as cost-effective a manner, the business-mode capacity is often out of sync with the business-mode demand. When economic times are good, this is acceptable; the airlines will make less than they otherwise could, but at least they're profitable. When economic times are bad, though, it's disastrous. Far too much supply chases far too little demand, resulting in losses for everyone.
The advantage of targeting the leisure mode is that it's not as fickle as the business mode. In other words, the shape of the curve down here is much more stable. Whether times are good or bad, the demand is quite predictable for long times into the future. Yield management is easier here, too. In short, unlike the rapids of the business mode, the leisure mode is the calm stretch of the river. This makes long-range business planning much easier.
The disadvantage of targeting the leisure mode is that it doesn't support a high cost structure. In order to get the curves to intersect down here, you have to have a low-cost operation. (As a side note, you'll typically have two, or even three, intersections of the supply and demand curves if you're a low-cost carrier; this gives you more obvious price points to target, and the ability to rapidly respond to market changes in the business mode by simply altering the price mix.) For an airline formed from scratch in a deregulated environment, it's relatively easy to set up a low cost infrastructure; there's no inertia to overcome. It's much harder for an older, well-established airline to become a low-cost carrier, however.
So, if you're a high-cost carrier, you have a handful of choices during periods of decreased business demand.
One is to exit the market entirely. This has yet to be undertaken voluntarily, for dozens of reasons.
Another option is to rearchitect the company as a low-cost carrier. Until now, nobody's taken this approach seriously...mostly because it's really, really hard to do, and exceptionally few business leaders have a clue how to do it. I have ideas of how to do it architecturally, as do many others; it's how to do it organizationally and politically that's so hard, and that separates true business leaders from those who simply manage a business. Because so few people know how to do this, we may never see this happen in the industry. I still hold out hope, though.
The third, and pretty much universally used, option is to ride out the storm, saving as many assets as possible, in the hopes of picking up the big profits when business travelers inevitably return to the skies. This is a relatively easy path to take, which is why all of the legacies have taken it every time. It is also why I disagree with your suggestion that they are fishing for ways to sell the product at a profit. They're just trying to sell it at the minimum loss until business picks up. Well, that's not entirely fair...it looks like DL and US are trying to feel their ways through to becoming LCCs, though it's unclear if they'll be successful at it.
They provide enough that it's pretty straightforward to determine the rest...especially since you also have access to the BTS data. I can't think of any other industry that has information as transparently available.The financial statements have limited disclosure and you know that.
It sounded like you were saying that I gave the wrong answer. But it doesn't much matter. Your initial point in bringing up GE was that the airlines' supply and demand curves don't explain GE's behavior. They don't because they're not supposed to. GE has their own supply and demand curves, which explain GE's behavior. The airlines' supply curves are affected by GE's behavior, but they aren't supposed to explain it.Did I say that you gave the wrong answer or did I simply add a point?
Not much point in going to particulars until you accept the generalized theory, is there? :huh:So far you have not provided many particulars, just generalized theory.
No. You claim that I'm making assumptions about things that are sufficiently relevant as to render the assumptions invalid. You have said this several times, and have yet to come up with a single instance where that is the case. All of the text is in this thread; if you're going to make these claims, then put your money where your mouth is. Otherwise, you're wasting everyone's time.What is this a test?
Not at all. You said that you know how to fix this industry, but you're not doing it yet. Why aren't you doing it yet, if you know how? Do you like taking paycuts or something? :huh:There you go again altering statements to suit your purposes because otherwise they would not fit into your answer.
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