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B Borrman

Steve,

I couldn't resist replying. You say that this has been bothering you for two years, but a lot has changed in two years. It's not simply ticket prices that are determing profit right now -- it's the cost of oil.

If you look at the numbers, Southwest would have lost money in 2005 if they didn't have significant oil hedges. And now that the hedges are rolling off, what do they do? Introduce the biggest price increase in the airline's history.

Jetblue has been warning everyone that they will lose money this year, just as they lost money in the last quarter of 2005. And AirTran has flourished because Delta has essentially left them alone. Now that Delta's on the edge of death, don't expect Atlanta to be so friendly for AirTran much longer.

Legacy carriers, love them or hate them, are necessary. It will never be financially feasible for someone to fly you from Boise to Brussels direct. You will need to go through a hub.

Legacy carriers will start to make money the way British Airways has. Lavish services on those who will pay, and cut back services for those who won't.

One point you're very right about -- if we keep wanting to pay Greyhound prices, we should stop complaining about Greyhound-like service.

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Ben Popken

December 0, 0000 12:00 AM

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Michael writes:

Hi, I'm a regular reader and first time commenter (ding ding ding).
Here's my take.

You are absolutely right except that liquidation is highly unlikely
because the bankruptcy laws in the US are so protective and liberal that
even carriers that are unlikely to return to profitability can survive
by entering bankruptcy protection.

It is entirely fitting that Southwest is raising fares now that their
oil futures are rolling off. And, writing off the current state of the
industry as an anomoly due to the high price of oil doesn't cut it
either - like it or not, the high price of oil is here to stay.

The big losers unfortunately will be the tourists and the secondary
market cities that, during the era of cheap oil, built their cities
commercial model on the idea that they could not only attract carriers,
but push them to provide service cheaper than they should have (i.e. at
a fair profit point). The \"invisible hand\" of the free market economy
will hurt them, because when carriers are forced to turn back to
profitability WITH expensive oil, they will drop these markets or raise
their prices substantially. And the city governments that rely on
frequent, cheap air service in order to build their economies will have
no alternative but to accept it and move on, perhaps finding alternative
cargo and transportation options to keep their economies moving.

As for the every day tourist, I think that expectations will need to be
reset and that they will be the hardest hit air travel audience. Things
we take for granted, like checking luggage, will become an expense to
consider before flying.

I still travel a lot on business, and while the service has been a bit
bumpy, my employer pays biz class and I travel pretty well. But as a
tourist, I've already seen cost increases that are making me consider
whether flying the whole family (of five) out to Orlando from Chicago is
the best way to get to Disneyworld, or if I should consider driving.
Everyone else will have to make that painful choice too, I predict.

Thanks.
Michael Humphries-Dolnick
http://famille.org

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B Borrman

December 0, 0000 12:00 AM

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Please don't mistake my mention of oil as an excuse for the indutry's current state. I mention it only as the most pressing issue they face -- and one that shows there is a problem with the industry as a whole, including Southwest.

Again, if you look at the financial models most have released, with oil in the $50-$58 range, most carriers expect to dig out a small profit. United in fact says they are break-eve with oil at $66.

As to the small towns, they won't be abandoned. What will happen is what has already happened -- mainline service will end and Express carriers will be used.

There are several fundamental flaws that must be fixed for this industry to ever make sense in the US:

1. Taxation: Airlines are taxed more than cigarette makers, alcohol producers or fire arms manufacturers for a few examples.

2. Regulation: The industry was never fully deregulated. It is still one of the most directly influenced by the government, with more stringent government oversight than most. Whether you like the free market or not, looser restrictions on cross-boarder deals is what has allowed the European and Asian air travel markets to flourish in the last several years.

3. Legacy costs: This is the most painful issue for every one involved. It's exactly what's hitting the auto industry as well. Decades of poor management/union relations and companies trying to buy peace by mortgaging the future have saddled airlines with costs that the business cannot support.

The entire industry is flawed. And frankly, when times were good in the late 90s, airlines taught consumers to expect to get more than you pay for.

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AcidReign

December 0, 0000 12:00 AM

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.....Consider me forced out of air travel options anywhere east of the Mississippi. I took one of the (likely) non-profitable direct flights United offered a year or so ago, from Birmingham to Chicago O'Hare. This was a 10:00 flight, but less than half of it was sold, and the plane got delayed because of mysterious mechnical difficulties. The delay was presented as 30 minutes by the helpful ticket clerk, and they revised this every hour. Instead of just having the balls to tell us the flight was cancelled, they kept us hanging around all day.

.....Eventually, late in the afternoon, they combined us with another flight, to produce one nearly full plane. I'm sure it saved them money. And maybe they were trying to drum up business for the Airport food joints and bar....

.....But, it should not take over 13 hours to fly from Birmingham to Chicago. At any price. One can drive that far in 11 hours doing less than the speed limit. And even at $3 a gallon on gasoline, driving is cheaper than one plane ticket at the current \"deflated\" prices. Plus, you see a lot more interesting things at ground level!