It appears that an airline is a hard business entity to run without going bankrupt. You watch the evening news and they are always posting huge loses and some finally go under.
On the other hand UPS (or maybe FedEx…a large package carrier) is supposed to have one of the largest fleets of aircraft in the commerical world. And you don’t hear about them having the same sort of troubles.
So what factors can we attribute the seemingly different success rates to? Is it cargo versus passengers? Huge insurance premiums? Cheaper planes?
Missus Rainy and I were discussing this the other evening and couldn’t come up with anything that sounded like it might logically explain the difference. Or is it simply that the financial travails of passenger airlines make news and stuff about cargo carriers don’t lead the half hour news.
This may belong in GD, I guess it depends on the experience base of folks posting replies.
Airlines aren’t inherently prone to bankrupcy. It’s just that the economics of air travel are currently shifting dramatically. The new style of business, the low-cost one, is causing problems for the legacy and national flag carriers. And many of those carriers have been badly-run for many years. Over the past few years, we’ve simply seen a bubble burst. It’ll settle down again, given time.
IANA Economist, but the trend over the past few years has been that the older, established airlines have been forced to cut their fares based on pressure from the newer no-frills competitors, such as Southwest and Jet Blue. At the same time, fuel costs and other expenses have been going up, so it’s hard to break even.
I agree with Gorilla, and will add more pointedly to your question that passenger transportation and freight are two completely different businesses that coincidentally both use airplanes. Can’t really be compared.
The problems of the commercial passenger industry have very little to do with the airplanes. It’s similar to what is happening in the telecom industry. Deregulation, lots of entrants, downward price pressures, the market shakes out, lots of bankruptcies, finally a handful of strong players are left and the market restabilizes. Not sure why we aren’t seeing more mergers in the airline industry, though.
There’s been some moves towards mergers in Europe. KLM and Air France are now effectively one company, although still operate under separate brands. Virgin and Lufthansa have been eyeing up BMI, especially as it has a big chunk of Heathrow slots, but there’s problematic pre-9/11 clauses in the potential financial implications of that one. Several low-cost airlines have been merged or taken over - Buzz by Ryanair, and Go by Easyjet. The remains of the bankrupt Swissair merged with Crossair. Austrian Airlines have a majority stake in Slovak Airlines. And so on.
In a word, competition. That’s what is supposed to happen; companies lower prices to secure a percentage of the market, and those that cannot compete go out of business. We have too many airlines.
The passenger aviation has certainly been unusually prone to bankruptcy. Defunct carriers include Braniff, Continental, Pan Am, Eastern, TWA, United, US Air, ATA, Frontier, and many, many others (the linked list runs only through 1998).
Economists don’t agree entirely on the reasons, but everyone agrees that one major factor is that the airline business has extremely high fixed costs (airplanes are expensive, with long lead times to order) and extremely low variable costs (once a plane is flying, adding an extra passenger is virtually free, which puts downward pressure on airfares). Such business are very difficult to manage and more prone than most to extreme boom-and-bust cycles.
Because of this cost structure, bankruptcies tend to cause chain reactions. Even bankrupt airlines usually continue to operate (as United is doing today), since you can’t “liquidate” airplanes (what else can you do with them besides fly them?). Since the bankrupt airline gets to renegotiate its labor contracts and delay paying its creditors, it gains cost advantages and lowers its prices, thereby driving other airlines into bankruptcy.
I used to work as a financial analyst in the telecom industry, which suffers from a similar legacy of regulation and a high fixed/low variable cost structure. We used to worry that telecom would one day become like the airline business, and one could argue that since 2000 that’s exactly what has happened.
Airlines also only have one way to get you from place to place; there is no Delta Ground Shipping. However, you would think that rising fuel prices would affect UPS and other package handling companies in a similar way to the airlines just because every part of UPS except the guy who takes it from the truck to your door requires fuel, and a lot of it.
It’s also interesting that a company like UPS can have the same sorts of overhead as an airline and still be able to pay its employees well with good benefits. They even help their part time workers to pay for college. Obviously, it’s an entirely different business structure with different economies, but still.
Humans are heavy. The FAA ‘standard weight’ for a passenger is 170 pounds. (Unless they’ve changed it recently, which I’ve heard that they’re thinking of doing.) Humans also need a certain amount of space. Packages vary in weight, and don’t need as much space as a human. (e.g., boxes don’t need legroom.) Aircraft have a gross weight limit. If you need to carry a larger payload, you can reduce the amount of fuel. It occurs to me that many small, light packages can by transported in the space that one person would use. Let’s say it costs $20 to send a small package by air (I don’t know how much it really costs) and you can send 40 of these packages in the space that a person takes. (Remember that the space a person takes includes legroom, headroom, the seat, and the space under the seat; plus the overhead storage.) In this case, the carrier is getting $800 for the ‘seat’. Coach passenger fare may be $200 for the same flight. Also, there is no need for flight attendants who must be paid, no cost for meal service or beverages, etc. Weight is also saved in cargo planes because they don’t need seats, overhead storage, upholstery, etc.; so that allows the aircraft to carry a bit more payload.
I believe that UPS was experimenting with using its planes for passenger service on weekends, although I don’t know if they’re still doing this. The idea is that the planes aren’t in use from Friday afternoons through much of Sunday. If I’m remembering this correctly, they were going to use the planes for charter flights to resorts. They had a process for quickly installing seats in the cargo hold.
UPS dropped that after 9/11 - too much hassle for the marginal revenue.
A freight service has much lower operating costs than a passenger service. Those containers in back don’t have to be fed, or supplied with packages of pretzels and cans of soda, they don’t fill up the lavatories, or be kept warm, or even supplied with oxygen. If the flight is diverted or delayed, they don’t have to be put up in hotels or given meal vouchers, and they don’t all call HQ and threaten to sue.
Also, the freight company usually has high-volume, long-term contracts for a pretty predictable volume of cargo than can be planned for easily. That makes pricing stable and predictable, compared to passenger service.
I assume you are saying that while there are no flight attendants, there are cargo handlers to load and unload the aircraft. Passenger airlines also have cargo loaders.
Also, a flight attendant services the passengers on a single aircraft for the duration of the flight. Cargo loaders load one aircraft and then load the next one and the next one.
I hope I’m not wandering too far off the GQ, but are airlines realistically headed for a government sort of takeover. What I mean is, would the US government be led into an Amtrak-style operation of the airlines? If not, why not? Who in the USA, except Southwest, is thriving? Will Southwest eventually take over every route (and is this different from Amtrak)?
Moving passengers around is an inherently costly way of doing business. They require huge costs that freight does not. Seats, for a start. Flight attendants. (Unlike cargo loaders you need a separate crew for each and every plane.) Food. Television. Security.
None of this is new. I don’t know if it’s just a slight overgeneralization or a literal fact, but the railroads always made all their real profit on freight. All the passenger railroads went bankrupt and were merged into Amtrak because it was deemed that the U.S. needs railroad passenger service but no private company could possibly stay in business doing so.
Passenger travel is inherently upscale or as downscale as people will stand for (i.e., buses). There is no middle ground that is profitably long-term.
You see the same trend emerging in all kinds of business. Movies, in which studios will make movies for over $90 million or under $40 million but not in the middle. Stores, where upscale stores do well and discounters do well, but not ordinary mid-level department stores. Supermarkets are heading in this direction. The music industry was there long time ago. It’s part of our economic life today.
GorillaMan said it well. We’re not going to see a government takeover of the airlines. Southwest is the airline with the strongest finances right now, but a couple of others, like JetBlue, are doing well. But their cost structures are different from the major airlines. They don’t have the vast hub-and-spoke systems of the traditional carriers and their labor costs are lower (non-union, perhaps, but also lower pay scales and younger staff). Neither Southwest nor JetBlue serve meals, although that’s not a major expense. I believe Southwest turns around its planes very quickly, so they spend as little time as possible parked at the gate and as much as possible in the air.
Is that really the case? I would have figured volume would have varied widely based on how strong the economy was, how many mail order goods were in transit etc. I would have thought the same factors governing whether companies sent reps to a location versus doing a teleconference would affect package volume.
I don’t know how fluctuation in cargo traffic compares to fluctuation in passenger traffic, so I can’t answer that part of your question. But regardless, cargo service is less prone to fare wars due to traffic fluctuation.
You don’t usually see UPS saying, “Gee, we’re seeing a dropoff in traffic from Chicago to Atlanta, and we’ve got all these flights scheduled, so we better slash our prices for shipments between those two cities.” If they’re getting less traffic out of a particular city, they can just fly fewer planes there and redeploy them somewhere else. That’s harder to do for a passenger service that has flights to and from specific gates, at specific times of day, scheduled far in advance.
Any person you talk to when you call JetBlue is sitting in their home with a PC and a phone headset. That’s right, no giant call center. Interesting aspect of the business model, I imagine we’ll be seeing more of this in the future.
btw, I read this in a magazine and just had to call the JetBlue toll free number to see if it was true.
Me: Hello. Umm. Where are you right now?
Reservation Agent: As a matter of fact, I’m sitting on my couch at home.