It’s very true. Here in Europe there’s a low-cost carrier called Ryanair, who offer absurdly cheap fares with bundles of extra charges and fees. Their chief executive is supposed to have said, “as long as it’s not about safety, all news is good news”: they offered a woman free flights for life as a prize, then a few years later they retracted that offer, and were crucified in the press for it. The company was pleased because both stories got Ryanair in the papers. When a woman asked for a refund because her grandmother had fallen very ill, the chief executive is quoted as saying, “You are not getting a refund, so fuck off”. They figure that if people think they are safe and find out they have the cheapest fares, they’ll fly, full stop. It literally doesn’t matter what else they hear about the company.
If they can’t charge enough money to turn a profit (without driving customers to other airlines), then there are too many seats available. This is basic supply and demand, with no way around it. The load factors are irrelevant; if the airlines were charging $1 for a round trip ticket, I bet the load factor would be right around 100%.
You can’t charge more for passage until one more more existing airlines go bankrupt, reducing the total pool of seats available. Fewer seats means the airlines will be able to charge more per ticket, which means they may be able to turn a profit. Some people will be turned off by the higher price and will stay home (or drive to their destinations), but a core group of customers who really, really want to fly somewhere will agree to pay those higher prices.
If 1000 planes operated at 77% load factor and charging $400 a head leads to massive losses, maybe 500 planes operated at the same load factor and charging $600 a head will be profitable.
Thank you for an answer that makes sense. The way I read the USA Today article, ONE major airline made some money so far this year and the rest of the major carriers lost money. Whoever is first to charge enough to actually make some money will lose their customers to the carriers who are charging less even though they are losing money by doing so. Is this is that glorious capitalist free market I keep hearing about? I guess it is a war of attrition which will be decided by who can stay in business the longest while losing money. Whatever. It still seems like a stupid way to run an industry.
But what do I know?
Right, which is why food manufacturers shrink their products rather than raise their prices much and keep them the same size: people buy things by cost, not by value. The same people who never compare two products to see which one is cheaper per ounce aren’t paying attention to airline fees either.
No, one outlier company with a business model unlike other airlines made money.
The question is whether Southwest’s business model is replicable by other airlines and what the industry would look like if everyone did try to change their models to accommodate.
As you can see in this list of largest airlines, Southwest ranks high on domestic passengers carried, but low on passenger miles flown. It has few international passengers at all. It’s mostly a short haul airline that allows it use smaller planes, fewer hubs, and fewer amenities in fewer locations.
Other airlines have locked themselves into serving largest number of locations and hauling bodies across long distances. This has several consequences, from an increased number of hubs to a larger and more varied fleet with higher maintenance bills, but better service for large businesses and their needs. The other majors do more with international and freight hauling.
Major differences between Southwest and other companies are due to the its relatively short existence. Southwest has fewer senior pilots and aging planes, and has been able to keep those costs relatively low. That’s an advantage that has to equal out in the future as older employees leave.
But it’s been changing that model as it expands and that has had an impact on revenues.
In the meantime, other airlines are merging and will be able to toss off redundant flights and maintenance crews. Can they turn their operations into Southwest? My eight ball says no.
In some ways Southwest is a prototypical cream-skimmer. It doesn’t feel it has to serve everybody. It leaves that for the larger full-business lines. That’s more expensive to do. But while Southwest gets a lot of flak for its narrow service, it was always designed that way. American or United would have to jettison serving everybody and make huge cuts to many areas that they had served for decades. Who knows how that would go?
The shorter way to say it is that starting a small business with a restricted model that can be broadened is a different project than hacking away long-standing customers and hoping that those who are left will pay for what’s left.
To be sure, the industry may need most of the majors to fail and have small, supple, profitable carriers replace them. Easy on paper. Years or decades of disruption to every facet of American life in the reality.
Imho, it’s just basic economics. Bad companies go bankrupt because they can’t sell their service at any price. When they go out of business, the good companies make money and set fair prices. Competition, survival of the fittest, and a fair market ensure that the top companies stay in business and consumers get the best prices.
However, what we have now is an artificial market that is regularly buoyed by taxpayer dollars in the form of airline bailouts. This keeps bad companies in business, and prevents good companies from coming out on top the way they should be doing.
Right now, the market is glutted by bad companies that should have gone bankrupt a long time ago.
In addition to Exapno Mapcase’s points, Southwest benefited from some savvy fuel price hedges, enabling it to pay much lower prices for jet fuel than its competitors. As the NY Times noted, those hedges ran out in 2009, so it will be interesting to see if Southwest can remain so profitable. FWIW, I’m not a frequent flyer, but I do like Southwest, haven’t had a bad experience with them, and will seek them out for any future flying I have to do
Their hedges didn’t “run out”. They are always rolling over various fuel hedges and adjusting them as needed.
Southwest actually took some big losses in 2009 when the fuel prices went the wrong way, putting them at a competitive disadvantage.
I think that you have to consider entry issues: it’s harder to start an airline than, say, a produce stand, and it’s harder to close one down. Having a market presence is worth quite a lot, and I think this draws out the process of market entry and exit. Airlines really aren’t a great model for perfect competition, and while their does seem to be an excess of supply, I don’t think the full picture is simple.
It is indeed. Survival of the fittest, whether “fittest” means you’re a big old airline with a lot of cash reserves, or a young upstart with a new business model that keeps your costs down. Eventually the weakest will fold, leaving more resources (customers) for the remaining competitors.
First, it’s not as if there’s one master controller running the industry. You get to run one airline, and operate it within the constraints imposed by a marketplace which is composed of several airlines and millions of customers, each of whom attempts to act in their own best interest. If you’re in charge of an airline, you try to make money as fast as you can, or lose money as slowly as you can, the best case being determined not by you but by market conditions.
Second, this is the way most industries are run in the US. Pick a small town with four restaurants, and open up a fifth restaurant. The residents of the town like the new restaurant as much as the other four, but they don’t like to eat out more often than they used to, so now all five restaurants will suffer until one of them goes out of business.
A notable exception is agriculture, in which government subsidies are helping to keep some farmers in business and artificially depressing the prices of some commodities to below their free-market level. This is a common cause for complaint in international commerce, where an industry in one country is subsidized by its government to a high degree, while the same industry in another country is subsidized to a far lesser degree (or not at all), creating an unfair competitive advantage for the former. See for example Airbus Industrie v. Boeing.
Also taxes that the airlines pay are based on the price of the ticket, not the price of the fees and surcharges. So: extra profit by tax avoidance.
See also Westjet, a Calgary-based Canadian airline company that seems to be making money and expanding when other airlines are going bankrupt (also following the Southwest model).
Unfortunately reality gets in the way. Say you have a plane with 100 seats which can make six round trips on a route during a day. It is 100% full for four of them, 75% for 1, and 50% for the last. Say you need 40% capacity to pay for landing rights, salaries and fuel. Removing the last flight, though it will increase your load rate, still loses you money since you don’t get the fares from that 10% which helps cover overhead and depreciation of the plane. Irf all your flights are 100% booked (or even the prized time slots) you may be driving customers to your competitors. If your customer is a frequent traveler, this is not a good thing. There is also the factor of bringing in customers to their spokes, even from place where the load factors are not that great. They’ve dumped a lot of this traffic on regional carriers, but if they lost a customer on the not so popular city to spoke leg, they will also lose him on the higher value spoke-to-spoke leg.
Joe Sharkey actually covered this in the Travel section of the Sunday Times. He noted that load rates are at historic highs, and that fares are expected to increase.
The losses come from a variety of factors. First, some airlines like American have higher fixed costs than others - because American has never gone through bankruptcy. Second, the recession cut air travel a lot, and those planes parked in the desert still cost money. In the old day business travelers didn’t pay much attention to fares, leisure travelers did - but today travel offices send nasty emails to your manager if you don’t pick the lowest fare. There are also more alternatives. Raise rates too much, and businesses will invest more in videoconferencing and the like, or reduce the number of trips.
Because of expected fluctuations, when you design a manufacturing flow you never try for 100% utilization. That is a recipe for disaster. Same here. Even 20 years ago the airlines were buying supercomputers and developing algorithms to try to maximize profitability for each flight. That is why fares change on a minute by minute basis.
One final thing - very high load factors mean that any glitch in the system can lead to disaster, as we saw in the volcano situation or almost any storm. If your planes are all fully booked, you have no place to put those on canceled flights.
I flew four legs on Southwest last week, and it struck me that Southwest uses the “copy exactly” method that has worked so well for Intel. They only have 737s. They only have one class of seat - people can sort themselves into classes by paying to get at the head of the line, but once they get there there are no big first class seats going empty. Sure you are very lucky to make a non-stop Southwest flight, but they are very skilled at turning planes around fast, and many people are willing to handle this for the savings. I suspect many of their processes are simpler than those of their competitors. They also don’t seem to negotiate deals with companies. They never show up as a recommended carrier on the on-line booking system I use for work travel, but there is an option to look for cheaper flights than recommended, and they show up there.
I also wonder how much extra business they get due to the simplicity of their web site. They might lose a bit by not optimizing each fare, but I bet there are people who choose them to prevent the case where the fare drops 10% five minutes after you buy, or goes up 10% between the time you see it, get buy in on the time, and try to book.
Forgot to comment on this. The airline is still paying on those 500 planes, and getting no revenue from them, so the break even point for each seat goes up. If you are running a hotel with a low occupancy rate, closing off half the rooms and raising prices doesn’t do you a lot of good. Sharkey noted that airfares are going up while hotel rates are not, no doubt because the airlines did park the right number of planes in the desert, and hotels are stuck with room blocks.
I didn’t state my case clearly enough, sorry. I picked 500 and 1000 planes, but I should have picked bigger numbers because I was thinking of the industry as a whole rather than a single airline. Reducing the capacity of a single airline would indeed probably be bad for that airline, and won’t make much of a difference for the industry as a whole, since ticket prices won’t change much. I was thinking in terms of reducing the overall supply of air travel seats throughout the industry, by a substantial enough number such that ticket prices will increase, presenting an opportunity for any airline still in business to be profitable again. I would guess anti-trust laws prevent the industry as a whole from agreeing to park X number of planes from each airline, and any single airline will likely want to have all its planes in service so as to maximize its share if available air travel business (which only makes things worse for all airlines; see tragedy of the commons), so the only way this will happen is if one or more airlines go out of business.
The goal of reduced seat availability is not to particularly increase load factor (as you noted, you want to stay away from the dreaded zero-slack system), but to enable increased ticket prices. Demand is down for a variety of reasons - recession, telepresence alternatives, etc. - and so supply must be reduced accordingly if the industry is to remain profitable.
The C.E.O. of Ryan Air, a budget airline walked into a hotel in Dublin and asked for a Guinness.
Certainly sir that will be one Euro.
Now that is a very competetive price says the C.E.O., if this hotel can do it why can’t others?
Sorry to interrupt you says the barman, but will you be wanting a glass with your drink?
The analogy can be stretched a bit… If the hotel shuts down half its rooms, seals off the area, and stops heating/air conditioning it, lays off half the maids, cuts back on number of laundry staff, janitors, parking valets, etc - yes their costs go down substantially. Of course if they still have the same number of top executives, where’s the savings? One VP is worth 10 to 50 maids.
Similarly, the number of people needed to service a flight can be reduced substantially if the cutbacks shoten shifts; it will reduce the need for pilots and maintenance mechanics…
(Rant - I have a problem with the idea that the airline goes bankrupt and walks away from its pension contract obligation - money the workers earned in return for foregoing actual wages today. One rule for big business, another for the workers. Apparently the same bankruptcy proceedings don’t cancel major league contract obligations when Mister Blackberry wants to move a bankrupt Phoenix team to Hamilton, Ontario.)
Surely I can’t be the only one who really likes all the little fees?
As a very price-sensitive traveller, I usually take on board my own food, and travel carry-on baggage only. This means that I can save $40 or so. But if they just raised the fares, then I wouldn’t have the option to save that much money.
I don’t like ‘all-inclusive’ fares – since the charges ultimately get passed on to the customer, I am paying for your checked bags.
From the airline’s point of view, it is optimal for them to fill every seat on every flight, with each passenger paying as much as they are willing to pay. The current pricing structure does a reasonable job of that. People like me who will take the time and effort to search pay less, but do travel, and business travellers pay through the nose.
But if they had a flatter fare and fee structure, there would be times when business people would pay less, or people like me just wouldn’t travel. Either way, the airline loses.
So I like the fees, and I can see why the airlines do, too.
pdts
It could just be for marketing reasons. I once read that a hotel chain launched an ad campaign where they told you the REAL cost of, say, a 2-night stay, with all the likely fees included.
They compared these to the list price, plus the other fees, charged by other hotels, to illustrate that they were really the better deal, despite the higher advertised price.
The campaign failed miserably, since every other hotel chain just came out with ads saying “Look how expensive [honest hotel chain] is per night! A night at our hotel only costs [$basic price for a room - all the extra fees]”