BioInvestor

The ATM at the Airlines

sf94127, I disagree that the baggage charge is something that should be removed. There are passengers that simply don't need to check baggage. I believe it fair to disaggregate pricing and assess a fee for those that want to check their bags.

I think that the idea of a fuel charge is interesting. Airlines have tried this option quite successfully. For the case of the airline, the advantage of a charge of food or baggage is that this charge could remain after fuel prices moderate.



On July 5, sf94127 wrote:

I believe consumers would understand (but not like) a surcharge for rising fuel costs. Let this cost float with the price of jet fuel at the time they make the reservation. It may be a $400 flight has a $75 fuel surcharge; so be it. Get the cost out front, transparent, and get rid of the silly nickel and dime stuff which are just surrogates for real issue of high fuel cost.

The ATM at the Airlines

On June 28 at 12:39 AM Stock Miser wrote:

BlueDog, thats part of my point. If I go and do my research on finding an airline to get me from point A to point B, and only later discover I could have flown for less net dollars on another airline not charging such fees or charging less fees because I couldn't read the 2 point font that says I was going to be charged such a fee, I would have surely flown a different airline. . .

I already read this post when you wrote it on June 27. I don't think there's any reason to repost my reply!

The ATM at the Airlines

BlueDog--bingo! :)

The ATM at the Airlines

Thanks Stock Miser, you made my point. Individual opinions aren't that useful, but if there's a theme shared by many people, we’re no longer talking about a single opinion.

Complaining and leaving are two separate and distinct responses: businesses will listen to complaints but respond to the loss of customers. People who complain don't necessarily take their business elsewhere.

You might want to ignore that wise business person you cited, because there's no evidence that I have found to support the notion that a disappointed person will influence a thousand potential customers. Twenty people might hear a story, but certainly not everyone in that group is going to react.

The ATM at the Airlines

dandbear, weclome to SeekingAlpha! Of course, I have been on many flights and never had a carry on that was deemed too heavy and had to be checked. Big deal. It makes as much sense for an airline to base its policies around me as it does around you. There is, however, a great site where people discuss, among other things, their experiences while traveling: www.flyertalk.com Individual experiences while traveling are interesting, but not really useful when analyzing companies.

Having the government involved in handling fees isn't going to happen. The trend globally is to have less government involvement in the business side of running airlines.

The ATM at the Airlines

Stock Miser, I think you're ignoring some of the factors which govern the airline industry.


I don't see the argument against fees as being valid. Airlines that impose--or that plan to impose--such a tariff have targeted the occasional, non-frequent flyer passenger. Most of that group is motivated by price. Only time will tell if such passengers rebel against the concept of paying a separate charge for baggage. In some respects, if an airline is to lose customers, the price-sensitive, infrequent flyer is probably the group that should be targeted first. Passengers with elite status within a program aren't yet affected by the baggage fees discussed by some of the legacy carriers.

The suggestion to raise fares across the board by $25 each way is something that most airlines would love to do; they can't. Even a casual observer of the industry observes that airlines are price takers. They're currently slowly raising fares, but an increase of $25 across the board just won't work: prices are highly elastic. Fees on the other hand are tried and tested: fees work for meals; fuel surcharges have been effective. AA and others will try these baggage fees; if they work, they'll stick. If they don't, they'll disappear.

I don't see that the ATM analogy bolsters your argument. The first important point is that the cost of a good isn't necessarily the determinant when it comes to price. The market determines the price. It would be frankly dumb for a bank to determine a price for the use of an ATM based on its cost of service when it can attract a higher price from the consumer. ATM fees have actually worked very well for banks. Just like the various and sundry fees attached to credit cards, ATM fees are a good source of income. The success of ATM fees (assuming the analogy with airlines is valid) should be a source of solace for legacy carriers, not concern.

I think it's clear that passengers are paying for the transportation of luggage; it is an inherent component of the ticket price; it’s even discussed in the contract of carriage which governs the travel. I read your objection to a separate fee as meaning that you don't like the various costs, or a portion thereof, to be separated out. That's a personal preference. The airlines are doing an experiment right now to see if the preference that you appear to have stated is shared by the flying public. As I said, if it works, expect such fees to stay; if it doesn’t work, they’ll disappear.

The ATM at the Airlines

nultech, the big question is, will you continue to fly US Airways?

US Airways is definitely taking the lead when it comes to fees: howver, the checked bag fee won't apply to frequent flyers--those that reach the threshold for elite status. Here's the link that gives more information: www.usairways.com/awa/...

The ATM at the Airlines

I too am struggling to find the point of the article.

Just one point of information: I checked on the comment made on Continental Airlines. To date, CAL hasn't followed the lead set by AMR in charging for the first or second checked piece of luggage. The latest information from the airline is that they are studying the issue. Here's a link to a report on the topic: www.sfgate.com/cgi-bin...

I have never been a big fan of argument by analogy. If the concept is applied to shed some light on an issue by viewing it from a different perspective, that's one thing. If, on the other hand, an attempt is made to develop a parallel argument, in a different sphere, leading to the desired outcome on the topic of interest, other issues spring to mind. For example, how analogous are ATM machines and their owners when compared to airlines--not very. One could develop an argument using another analogy, say restaurants, and conclude that people actually like lots of choices and prices!

I think there's no question that, given a choice, rational people want to pay a lower price for the same good or service. Having said then, it doesn't take a lot of investigation to show examples of airlines in different parts of the world that really disaggregate pricing by charging lots of different fees, but at the same time, they realize strong passenger loads and growth. Moving from "not liking" to "not paying" is a big step. Time will tell if AMR's move is a good one. Banks have found that ATM fees work: customers pay them. They may not like it, but they do it.

Finally, the mandate to raise fares has been offered by many people posting on this website. It should be clear that, given the option, any business will try maximize revenues. Airlines are no different. In fact, airlines are constantly seeking ways to raise fares; however, these companies are price takers not price makers. The quantity demanded is highly elastic. In the past, at least, attempts to raise fares have failed. Carriers have been more successful this year, but there's simply no way that any carry can raise its fares today to the point where they're profitable and expect load factors to be unaffected. Airlines are doing the next best thing: reducing capacity. They can't affect the demand curve; they can change the supply. That's the way to raise fares.

Airline Deregulation: Now Do It for Real

User 209758, the issue of the "failed business model" gives me the opportunity to explain why you misrepresent, or perhaps mischaracterize, what I wrote.

The discussion was about airlines and the claim that people are essentially agnostic as to whether a carrier lives or dies. I cited as an example of furniture stores and how people swarm them once they have liquidation sales. I also said that failure of a bad business model makes the economy vibrant. You appear to interpret what I wrote to mean that the failure of bad business models is the *only* thing that makes an economy dynamic: something I didn't say. (It turns out that, when new technology comes along, an erstwhile good business model becomes old and stale. If it doesn't change and can't compete, it fails.)

One more thing, I never suggested that all airlines should be in bankruptcy. In fairness, you introduced the idea that "a large amount of bankruptcies are bad for an economy" in the same paragraph where you responded to my posted. I never discussed this topic.

So, a bad business model failing isn't meant to be read as a company retooling. They are two different points of discussion, which were included in different paragraphs.

We can dump the Germans. I thought it a comparison that didn't help the original argument.

I think that a remark such as "giant sucking sound" to describe a complex issue is, by its nature, pithy. Perot's comment was in the context of his opposition to NAFTA and the damaging effect that membership would have on the US economy. Back to what I wrote: I said "sure work is outsourced, but it hasn’t had a material effect on the economy" (keep that phrase in mind). If you go back and look at the sequence of comments: (i) you talked about jobs in China and India; (ii) I explained that outsourcing has had no material effect on the economy; and (iii) you responded by introducing NAFTA and outsourcing. Neither China nor India is in NAFTA! So, I did say that jobs are outsourced; I didn't talk about NAFTA. I am just trying to show that what I write is misrepresented or mischaracterized in your response.

Now I will tell you what I think about jobs going to Mexico thanks to NAFTA. It's bad for people in the US who lose their jobs; it's good for the US economy. This cycle of jobs going offshore has been repeated for scores of years. Textiles, steel, electronics, automobile production, the list goes on and it will continue to grow. When you look at the industries that are gutted in the US, you'll see a trend over time: there's much more value-add in the industries that are left behind. Workers--people like you and me--have to constantly retool and readapt.

I do dismiss the discussion because, as I said, I think that there is way too much emphasis on the role of leaders. Leaders in a democracy can set the tone; some even introduce ideas. That's it. Radical change is tough.

Your list of leaders is interesting. Churchill was certainly a good leader, but he had to fight to form coalitions during WWII even among members of his own party. The big difference between Churchill and the others you list was that Churchill was booted out of office before the war ended. While he certainly set the tone--and it would have been good for Britain’s enemies if some other cabinet member were the PM--it was the British people that did the work. I don’t agree with the importance of the role of leaders.

Somalia is an interesting example; let me offer you another country, Zimbabwe; there's a country with strong leadership! Give me empowered people over a strong leader any day!

I certainly agree that the US, among other companies, has the option of selecting and firing its leadership. The truth is that, in any western democracy, there may be a change in leadership, but there is seldom any radical change in the country. If you want to change a country, you have to change the people.

The US is at the forefront of many areas. Though as other countries develop--particularly those with a greater population--they will flourish too. Ultimately, the US economy won’t be number one anymore.

My guess is that your comment about taking orders is a nod to the service sector, which is now the largest part of the economy and, incidentally, a hallmark of a developed economy. Let me give an example, about one hundred years ago, in 1900, about fifty percent of the US population was involved in the agriculture industry either directly or indirectly. By the end of the century, there were less than two percent of people in that industry. It's not an issue. Economies change with time. The US economy will too. Manufacturing will become less important as other nations, with a better cost structure, benefit.

Airline Deregulation: Now Do It for Real

From my perspective, you did misrepresent what I wrote.

In the example that you cited about FAX machines, etc. you're supporting my point. FAX machines or the Internet are examples of new ways replacing old. People working in older technologies are displaced; they have the chance to retool; if they don't, they will to likely have to endure lower standard of living. You misrepresent what I said when you say that "These ideas and products did not come to us from failed business models." I said that the new replaces the old; I was talking about a dynamic economy where bad ideas fail; where good ideas thrive. The key thing to understand is that these businesses replaced something else. I talked about failed business models, but not exclusively. I also talked about new ideas replacing old ones. All new ideas are, essentially, an improvement on something old. All new ways of doing things replace something else.

I can tell you that I am completely correct when talking about pensions and the Pension Benefit Guarantee Corporation. Taxpayers don't give funds to this entity. You're surmising that the situation may change in the future. However, the facts are that taxpayers, today, aren't funding this entity.

My point about the German unions is that you provided a poor metaphor that, frankly, weakened the argument you were struggling to make. I have no idea if union workers are well educated. I do know that, in the US at least, union membership has seen a very steep decline--and it continues to vote. It seems that society is making its own decision about the value of unions.

When you say that "you mean to tell me that you have never heard of Ross Perot's famous quote?" That statement doesn't represent what I wrote. I didn't talk about Ross Perot; I didn't ask any questions about him. You introduced the quote; I ignored it because it's not relevant. I wrote that the facts simply don't support the claim that NAFTA has been a net negative for the US. Jobs have migrated south, but there has been no net job loss in the US. A pithy remark by a presidential candidate isn't something I find to be substantive.

Thanks for clarifying what you meant. There isn't evidence to support the thesis that the US is in decline. I am going to dismiss your discussion on the role of leaders. The organizational structure of the societies you cited in no resembles the US. A US political leader doesn't have the degree of absolute or autocratic power that existed in older societies. I don't see the analogy as being strong.

I think you're vastly overemphasizing the role of political leaders in a democracy. The US grows because of its people and the work the work ethic that they employ.

With regard to China, I have no great love for the country, but a virus has been let lose. China will surpass the US, but when it does, it will be a society that greatly resembles the US. What will bring change in China is a strong middle class. In fact, as property rights in China start to emerge--and private property is a growing concept--there's no going back. Change will be slow; however, I think that change in China is inevitable. Baring any catastrophe, it's also inevitable that China will eclipse the US economically in two or three generations.

Airline Deregulation: Now Do It for Real

User 209758, you’re misstating what I said. The economy is dynamic. Bad ideas are replaced by good ones; old ways by new. The change necessitates old businesses dying while new concepts thrive. That’s what makes the economy dynamic; that’s what leads to growth. I didn’t make the statement that this or any economy thrives on “going out of business” sales; you’re misrepresenting what I wrote.

If all airlines were to liquidate, that would cause problems. There is absolutely no sign that such an event will occur; it’s not going to happen. A more likely, though not certain, scenario is that a legacy carrier will enter reorganization and not reemerge. It’s possible that a carrier, in the current lending credit environment, won’t be able to finance successful emergence from C11. Cutting capacity, through the liquidation of a legacy carrier, while painful in the short run, just might be good for the industry. Just to be clear lest someone not read through all the posts: I didn’t suggest that all airlines should liquidate.

The people who will ultimately pay for a collapsed pension program are the employees. As I stated, the federal program that “protects” pension isn’t funded by taxpayers. Welfare and pensions are two separate and distinct issues. They are not related.

People are paid what they’re worth. Negotiation is part of the process. I don’t think generalizations about the role of unions are realistic. There are certainly benefits to unions: conditions have improved for employees, more people have had opportunities to springboard into the middle class. There are downsides too, when it creates inflexibilities in an industry and creates an opportunity for competitors. I enjoyed the soliloquy that followed about the British and Germans. I am not sure if many union members give it much consideration, certainly not German unions!

I have no clue what you’re talking about when it comes to NAFTA. There’s no evidence to support the claim that NAFTA is a net negative for the economy. Growth has continued; unemployment is low; there’s no evidence that jobs were lost.

Things will keep improving. You’re talking about a complete collapse of a system. Today, that would mean a complete meltdown of the global economy. An asteroid strike, a global deadly plague, a supernova in the neighborhood, each of these could cause a disaster, but as long as some exogenous event doesn’t occur, I just don’t see a collapse occurring. I don’t buy the argument that you present for the success of the United States. The people of the US have made the country great; the leaders just get the credit. Sure there have been great leaders, but it’s the people that make the difference. If other nations don’t eclipse the US economically, then there’s a problem with global growth. I certainly expect that China and India will continue to grow faster than the United States and eventually become larger economies. It’s not a problem; the former leading economies of the last few centuries are, today, doing quite nicely. I don’t see the success of others as being a negative to the United States! Go China! Go India!

Airline Deregulation: Now Do It for Real

Jetset, if airlines truly are to be regarded as a utility, like an electric, water or gas company, then that position would support the notion that regulation is required: regulation that one sees in classic utilities. I believe that the basis for the argument is that most airlines function optimally when they dominate a particular airport. If Southwest didn’t exist, that argument might carry more weight.

Airline Deregulation: Now Do It for Real

I don’t know the intent of the original author. The piece definitely stated a preference for the structure of the industry; I am not sure if I like the future portrayed there, but it certainly didn’t strike me as inflammatory: spirited, yes, but nothing else!

I wouldn’t say the examples you cite about United and jetBlue can be extrapolated to the whole industry. The dilemma for regulators, those officials that try to ensure that the private enterprise system is humming along nicely, is to balance the economic needs of airlines with the hub and spoke system with those of consumers that want choice. If I am reading your position correctly, I’d agree that less government involvement with decisions would be better. If an airline dominates a hub completely, something which hasn’t occurred yet, and uses, say, predatory pricing, then government should act. I am not opposed to a monopoly as long as it plays fair.

I am not arguing that airlines and restaurants are equivalent. If the argument is that inherent danger should trigger government oversight, then there are more targets than just airlines.

I’ll reiterate that flying is safe. You described why. For me, that’s not the point; flying is safe. There are inherent dangers in lots of activities: driving, eating out, showering, but there are ways to mitigate dangers. The airline industry does a better job of reducing those risks than many other industries. As I pointed out elsewhere, just because there’s danger doesn’t mean that something is dangerous. All industries to a greater or lesser extent control those dangers and reduce risk of failure. The record of safety is undoubtedly thanks to the training, vigilance, etc. of dedicated employees in the industry; the result is that air travel is safe.

I don’t think that a mid-air collision over Switzerland is an indictment against safety in Europe. As you point out, that specific problem seems to have been caused by an ATC failure. There have been close calls in the US too. There are certainly different safety standards in different parts of the world, but for investors in US legacy carriers, it’s not a concern. The industry has quite a remarkable record of safety.

Airline Deregulation: Now Do It for Real

LegacyFO, not the point I was making! Sorry if I wasn't clear.

"This is important because the airline pays that cost and therefor it goes into the cost of the ticket. All that trainining an infrastucture is what keeps you safe."

The price that consumers pay for any purchase has costs, including training and associated costs, built into it. Be it the purchase of a car, a ride in a taxi, a can or corn in the supermarket, Aspirin from the local pharmacy all purchases have costs built into the price. Those costs aren't relevant to consumers. We don't need to know the production history of a product to make a decision.

Airline Deregulation: Now Do It for Real

User 209758 Welcome to Seeking Alpha. It’s always refreshing when a posting attracts new people!

Your post echoes a lot of sentiment which, frankly, is not called for. If you look at consumer behavior in general, people don’t care if a company is profitable. They don’t care if a company goes into bankruptcy. In the grand scheme of things, why should they? They swarm furniture stores that are having “going out of business sales.” Failure of a bad business model is what makes an economy vibrant. The consequence of a failed business is the chance for assets to be redeployed into some that may turn out to be more successful.

I certainly feel for people losing their jobs and benefits; it has happened to many of us; it’s the price we pay for living in a private enterprise system. Good ideas should be allowed to thrive; bad ideas should be allowed to flounder. They should be allowed to collapse quickly, completely and irrevocably. There are casualties in such a system, but the benefits far outweigh the costs. I tend to agree with the sentiment that C11 reorganization isn’t working well in the airline industry.

The taxpayer argument isn’t a good one. Even if former employees get welfare benefits, it’s a small percentage of the overall government spend. It’s also a temporary measure. You might think that taxpayers would be left holding the bag, but the Pension Benefit Guaranty Corporation doesn’t receive taxpayer dollars. It also doesn’t necessarily reimburse loss at 100%.

The statement that there was “less government welfare because people had real jobs that made decent money” doesn’t really hold true. Historically, there’s not much of a correlation between those two factors.

It’s tough medicine to take, but the reason that airline employees don’t drive fancy cars or live in big houses (the inference here is that these employees don’t receive much in the way of compensation) is that they’re paid what they’re worth. Society may be perverse in how it values things; we have to live with it or move on!

The US is in a good position right now in that it can import many scientists, engineers, software developers, practitioners in the medical field, etc. It’s impossible to know if this situation is sustainable. It may even not be desirable to depend on such foreign help. If there is a problem here, the solution is probably a greater emphasis on education. Sure, work is outsourced, but it hasn’t had a material effect on the economy.

I think we’re always going to read about the demise of the US economy. Things keep on improving. There will, undoubtedly, come a time when the US economy isn’t the global leader; things will still keep on improving.