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Why Are Airlines Trying To Crush Eachother?  
User currently offlineF9Animal From United States of America, joined Dec 2004, 5077 posts, RR: 29
Posted (9 years 7 months 1 week 3 days 2 hours ago) and read 3485 times:

While standing outside, I thought about something. By the way, it was freezing cold outside!

Why are the airlines still trying to crush eachother? Competition is important, but why continue slashing your fares, when you know your competitor will slash too? When XYZ airlines raises the fares, why not join them? Cheeks in the seats are great, but it obviously is not making the company money if your litterally giving them away! Maybe I dont understand, but it seems like it is doing nothing but creating further red for everyone.

With the fuel prices spitting to the stratosphere, why continue to slash fares? The flying public is back in the air, and what would $10 each way increase do to hurt loads? If the airlines are going to match eachother, why not match higher fares to make up for losses?

If fuel prices were low, then I could appreciate fare wars. Is it a bad time to show your muscles? If you are on the verge of bankruptcy or already in it, why continue to flex a muscle? Why not swallow the pride right now, and raise the fares? Especially with Spring Break and Summer loads expected to be in the records? Is now the best time to try to squeeze a profit?

Educate me!!!! Please!!!! I need to learn something.


I Am A Different Animal!!
16 replies: All unread, jump to last
 
User currently offlineMrniji From , joined Dec 1969, posts, RR:
Reply 1, posted (9 years 7 months 1 week 3 days 2 hours ago) and read 3476 times:

To give a brief answer: because the neo-liberal consensus has won and shunned all humanity  Wink

Quoting F9Animal (Thread starter):
When XYZ airlines raises the fares, why not join them?

Very often, competition laws forbid tacid agreements in regard to prices (cartells)


User currently offlineBongo From Colombia, joined Oct 2003, 1863 posts, RR: 5
Reply 2, posted (9 years 7 months 1 week 3 days 1 hour ago) and read 3442 times:

It not only happens in aviation, but in every single type of business. I'm in the steel market and it happens very often.


MDE: First airport in the Americas visited by the A380!
User currently offlineElwood64151 From United States of America, joined Feb 2002, 2477 posts, RR: 6
Reply 3, posted (9 years 7 months 1 week 3 days 1 hour ago) and read 3429 times:

It's very simple:

Let's say I sell razor blades, and that my razor blades are just a little better than Schick's blades, and just a little worse than Gillette's. But all-in-all, they're pretty much exactly the same. I sell at the same price as Schick and Gillette matches me.

In an attempt to increase sales, Schick drops its prices 20%. Trying to make sure that I don't lose market share, I lower my prices, and Gillette follows suit.

Now, market share has returned to normal, or as close as it's ever going to get. Perhaps by lowering prices first, Schick increased its share 2-3%.

I want to increase my prices again so that I can make more money off my customers. So I go ahead and increase my prices just 10%. Gillette and Schick stay where they are, and with good reason.

With my prices 10% higher, only my most loyal customers and customers who have little choice (for example, someone on a business trip goes to the convenience store and only my razors are on the shelf) are going to stick with my product.

My market share decreases substantially as Schick and Gillette continue to offer their razors at the lower price. In fact, they're selling more razors than before, so they're actually making more money than I am, even though my prices are higher.

In other words, while I'm getting 10% of my customers to pay more for my razors, the vast majority of my customers are leaving me in droves for my less-expensive competitors. In fact, public opinion has swayed and my razors are now considered less desirable than Schick's. Even if I drop my prices again, the damage has been done.

The same kind of thing is going on in the airline industry today. While it makes sense for every airline (including the LCCs) to raise fares, no one is going to do it. The two or three airlines that don't raise fares are going to ruin it for the rest of them.

Hope this helps to explain it for you.



Those who fail to learn history are doomed to repeat it in summer school.
User currently offlinePHLBOS From United States of America, joined Mar 2004, 7533 posts, RR: 24
Reply 4, posted (9 years 7 months 1 week 3 days 1 hour ago) and read 3426 times:

The primary reason for some of the fare wars, even when fuel prices are high, is the notion that at some point one of the carriers will drop the competing route thereby allowing the remaining carrier (if it's the sole one remaining) to have more control in setting the fare(s). Usually when that happened, the fares for that route went sky high; especially if the route in question o/d'd at one of the carrier's hub airports. This particular practice worked for decades and when LCCs were largely new and untried products.

When the customer asked, after the fact, "Why the drastic increase?"

The response was usually, "Hey, that's how the free enterprise system works, if you don't like it; take a train or drive there yourself."

The thing is, in recent years, the tables have since turned on the legacy carriers and many of the LCCs (like B6, FL, F9 & WN) out there now have a larger share of the market, newer planes and aren't leaving anytime soon. This is driving many of the legacy carriers nuts. Plus a few carriers, WN in particular, took the gamble of hedging a sizable percentage of their fuel costs and it ultimately paid off this time around. Had oil prices dropped to $5 or $10 a barrel, WN would've been kicking itself. Maybe if many of the legacy carriers that could of, hedged more of their fuel purchases; then the high oil prices wouldn't impact them as much now.

Another thing that is starting to hurt all the airlines is (fuel hike or no fuel hike) that many businesses have started using conference calls and internet conferences as a means of holding meetings instead of actually traveling (flying) to the conference destinations. For them, this new technology will save them lots of money; especially with the presently rising oil prices.

No disrespect to those out here that work for the legacy carriers, but part of the earlier quote that was often used to answer customer's questions about high fares in the past is now coming back to haunt your companies, "Hey, that's how the free enterprise system works."

In short, what comes around goes around.



"TransEastern! You'll feel like you've never left the ground because we treat you like dirt!" SNL Parady ad circa 1981
User currently offlineTango-Bravo From United States of America, joined Jun 2001, 3806 posts, RR: 29
Reply 5, posted (9 years 7 months 1 week 3 days 1 hour ago) and read 3397 times:

Quoting F9Animal (Thread starter):
Why are the airlines still trying to crush eachother? Competition is important, but why continue slashing your fares, when you know your competitor will slash too? When XYZ airlines raises the fares, why not join them? Cheeks in the seats are great, but it obviously is not making the company money if your litterally giving them away! Maybe I dont understand, but it seems like it is doing nothing but creating further red for everyone.

Well-observed. After years of trying to find a plausible explanation for the sheer folly you describe, the only reason I can offer is that the U.S. legacies are abysmally mismanaged by executives driven by a level of egomania that is so extreme as to cause the myopia reflected in their obsession with market share and load factors at the expense of profits to the point of jeopordizing the survival of their own basket case airlines.

Their egomania is, in fact, so out-of-control that one such executive VP gave the reason for his decision to enter a particular market as "we want to stop our competitor from making a profit in the market." No mention that his airline sees a potential for profit in the market that previously held no interest and, in fact, entering a market for such a senseless motive is undoubtedly a formula for ensuring that the market will be a yet another non-profit venture created by the executive's reactionary folly driven purely by ego. Seems his underlying objective is above all, like his U.S. legacy counterparts, to win "pissing contests" rather than weigh decisions on whether it will contribute to the cause of profitability.


User currently offlinePadcrasher From , joined Dec 1969, posts, RR:
Reply 6, posted (9 years 7 months 1 week 3 days 1 hour ago) and read 3377 times:

It's the classic Mexican Standoff or Prisoner's dilemma.

" imagine two criminals arrested under the suspicion of having committed a crime together. However, the police does not have sufficient proof in order to have them convicted. The two prisoners are isolated from each other, and the police visit each of them and offer a deal: the one who offers evidence against the other one will be freed. If none of them accepts the offer, they are in fact cooperating against the police, and both of them will get only a small punishment because of lack of proof. They both gain. However, if one of them betrays the other one, by confessing to the police, the defector will gain more, since he is freed; the one who remained silent, on the other hand, will receive the full punishment, since he did not help the police, and there is sufficient proof. If both betray, both will be punished, but less severely than if they had refused to talk. The dilemma resides in the fact that each prisoner has a choice between only two options, but cannot make a good decision without knowing what the other one will do. "

Airlines cannot efficiently rig or fix prices and the one that kept fares high would be punished more. Hence, they all match the low fares.


User currently offlineSlider From United States of America, joined Feb 2004, 6860 posts, RR: 34
Reply 7, posted (9 years 7 months 1 week 2 days 20 hours ago) and read 3298 times:

Quoting Padcrasher (Reply 6):
Airlines cannot efficiently rig or fix prices and the one that kept fares high would be punished more. Hence, they all match the low fares.

Good example PC, and I'll add to yuor above statement that while an individual carrier's decisions are rational, the industry is very irrational, hence what works for one seldom works for all and it quickly becomes a race to the bottom.

DL's SimpliStupidFares is a good example of that--they, as well as all majors, have had record LFs month after month, so they decide to cut fares, reduce yield and essentially play Russian Roulette with 5 full chambers at a time when they--and NO carriers--can afford to dilute yields even more.

Now the revenue hit expected by other carriers is expected to be immense, on top of already untenable fuel costs, astronomical taxes, and fees and security charges.


User currently offlinePlaneSmart From New Zealand, joined Dec 2004, 987 posts, RR: 0
Reply 8, posted (9 years 7 months 1 week 2 days 20 hours ago) and read 3273 times:

First and foremost, each airline is trying to survive. Trying to survive, just as in nature, means as death looks more likely, the greater the risks you are prepared to take.

Cutting prices, unless it generates a disproportionate increase in passengers, will actually increase losses.

And just as in nature, it's a case of the fittest survive, so if you can cut prices, and push a competitor to the edge, you may have bought time for your airline.

In the USA, never have so many airlines been flying, but for the goodwill of financiers, leasing companies and suppliers. All manner of concessional deals, including interest & fee holidays, are in play. Many airlines have breached financial covenants, and financiers, with full knowledge are continuing to provide funding, rather than call in the loans / re-possess aircraft. Major financiers have bought out smaller financiers loans and leases, so that these small players do not take any unilateral action.

Of course this is as much about the financiers self-interest as the airlines and passengers. The time gives the financiers the opportunity to writedown loan values over say three years rather than one week.

However, it's a house of cards. At some stage, financiers, or more likely some of the smaller leasing companies financiers, are going to say enough, and then we are probably going to see 2-3 multiple failures in a short period of time.

Most major financiers have multiple exposures to airlines, so are definitely not in the business of seeing one crush another, although there is consensus one major is probably going to have be sacrificed for the short-term benefit of the others.

Back to the original post. Airlines are not trying to crush each other directly. Indirectly, they may well do so, but are just as likely to do it to themselves.


User currently offlineMidway2airtran From United States of America, joined Jul 2003, 864 posts, RR: 2
Reply 9, posted (9 years 7 months 1 week 2 days 20 hours ago) and read 3269 times:

Quoting Tango-Bravo (Reply 5):
U.S. legacies are abysmally mismanaged by executives driven by a level of egomania that is so extreme as to cause the myopia reflected in their obsession with market share and load factors at the expense of profits to the point of jeopordizing the survival of their own basket case airlines.

I kind of like that response. It's more of a mentality and values of the organizations than actual business, no matter how they try to change, it still lingers. Hence, the rise of opportunity for the LCC crushing reality.



"Life is short, but your delay in ATL is not."
User currently offlineATLhomeCMH From United States of America, joined Dec 2003, 770 posts, RR: 3
Reply 10, posted (9 years 7 months 1 week 2 days 20 hours ago) and read 3262 times:

Its a matter of survival. If XYZ carrier doesn't throw their hat into the ring and "play the game" in the industry (develop competitive business practices), carriers ABC and DEF will eat them alive. It's all about putting yourself in the best position financially to at least keep your head above water in this industry, no matter who's throat you cut to do it. And that's business, plain and simple.


"The most terrifying words in the Engligh language are, 'I'm from the government and I'm here to help.'"-Ronald Reagan
User currently offlineMandala499 From Indonesia, joined Aug 2001, 6921 posts, RR: 76
Reply 11, posted (9 years 7 months 1 week 2 days 11 hours ago) and read 3159 times:

The US legacies had an effective oligopoly. However, ego, greed, etc etc have led them to cannibalizing themselves.

It's a basic moral hazard for olipolies... zero-sum, market share objective, etc. To the outside observer, they look like they're trying to fly everyone from everywhere to everywhere through their hubs so the pax don't do that by flying someone else... One thing they've seemed to loose sight of is "is that what the pax want?"

All it needs is one or two players that can fly for cheaper and don't play along with them (WN, and now JetBlue)... To the outside observer, WN's approach seems to be colonizing cities... they go in to one and say "where do people here want to fly to?" and once that's done, they go and pick another city and repeat the process... Net effect, they're flying from everywhere but not to everywhere... they're flying from everywhere to the major destinations of that particular city.

They've indirectly taken out the yields that would have been the bread for the legacy...

The legacies tend to still try and make money out of their current system while they should have looked into providing an alternative operational method to start gaining pax back. Instead, they seem to still try to eat and copy each other up...

Mandala499



When losing situational awareness, pray Cumulus Granitus isn't nearby !
User currently offlinePilotpip From United States of America, joined Sep 2003, 3150 posts, RR: 11
Reply 12, posted (9 years 7 months 1 week 2 days 11 hours ago) and read 3136 times:

As mentioned the airlines are bleeding each other to death. They're going for short-term cash flow over decent revenues in the hopes that one or more will perish. When this happens, capacity decreaces and as a result the law of supply and demand will dictate that fares across the board go up(in theory).

Also, many airlines are run by morons. The recent fare hikes is the first move many have made recently that made sense. The whole reason businesses exist is to make money. If you loose money you don't last too long. LCC doesn't mean fares are lower, it means their operating costs are lower. They can charge comparable fares to AA, UA, etc and still make money because their management structure is streamlined and their operating models offer much lower costs of operation.

The consumers are also a reason for the legacies' fall. Some have tried to give a product that differentiates from the rest but the consumer is not willing to pay for it. Air travel is now a commodity. Other businesses aren't willing to pay for first class seats in the age of telecommunications. If they are, they are more likely to use business jets because of the massive amounts of time they save and the flexibility they offer.



DMI
User currently offlineAerorobnz From Rwanda, joined Feb 2001, 7261 posts, RR: 13
Reply 13, posted (9 years 7 months 1 week 2 days 7 hours ago) and read 3079 times:

You kill the enemy before they kill you. In the world around us if there are too many similar species going for the same niche, sooner or later they will die out unless the weakest link is extinguished or they find another niche to fill that will ensure their survival. Airlines have a very similar philosophy, which is why you have companies like NZ/QF that wanted the shareholding alliance, KL/AF etc etc.
Whichever is the best option for continued survival is what they will do.


User currently offlineF9Animal From United States of America, joined Dec 2004, 5077 posts, RR: 29
Reply 14, posted (9 years 7 months 1 week 2 days 7 hours ago) and read 3068 times:

I can see these carriers crushing one another, and hurting themselves while doing so. Eventually someone will fall.

So, what if? What if UA and US shut doors tomorrow? Would it be a positive result for the industry? I constantly hear the words "Over Capacity". Would it bring relief to the remaining carriers?

10 years from now if the above was to happen, would we find the industry in the same situation?

Would regulating the airlines be a move in the right direction to minimize the pains we are seeing today? I know the fuel prices are beyond anyone's control right now, but if the fuel drops in price.... What would happen then?

If the industry was regulated, would we see the kinds of problems we see today? I was not alive during regulation, so please excuse my ignorance. It just seems like the old timers reflect on the glory days, while they say the good old days are long gone.



I Am A Different Animal!!
User currently offlineHmmmm... From Canada, joined May 1999, 2104 posts, RR: 5
Reply 15, posted (9 years 7 months 1 week 1 day 18 hours ago) and read 2962 times:

De-regulation was great for the passengers and great for anyone wanting to start up a carrier. But it was bad for the legacy carriers. Should we go back to a regulated industry? Well, if the industry eats itself into oblivion because every carrier wants to undersell every other carrier, then perhaps this industry is incapable of self-regulation and needs the government to do it for them. The JetsGo fiasco is a good example of how the public can be hurt by this de-regulated industry.

De-regulation was supposed to increase competition and lower fares. It did that. But it didn't stop there. It created a glut of over capacity that is killing every carrier and sending many of them into chapter 11. The airline business is considered glamorous so every entrepreneur with an ego wants to start his own airline. And this glut of seats is now forcing many flights to go with load factors that don't even break even. And since one seat is almost identical to another seat, the only selling point is price. So now we have two forces driving prices down: 1) over capacity and 2) cut-rate pricing for market share.

That was not the intent of de-regulation. But that is what is happening. The industry is cannibalizing itself. And the end result of de-regulation is that it will translate into fewer airlines and less competition as so many of them fall by the wayside. In the eat-or-be-eaten theory, only one airline can survive in any market. In Canada, only one major airline survives now and even that one went into bankruptcy protection. In Canada, before de-regulation, we had two successful airlines. After de-regulation, we have none. Bigger airlines buy out smaller ones, until you have only behemoths left. Then those behemoths cannibalize each other and then no one is left standing in black ink. Even the charter airlines eat each other and then go belly up.

De-regulation was supposed to increase competition. But after the whole process plays out over two decades, de-regulation allows those same airlines to amalgamate, merge, take-over, and drive out each other so you have less competition than you started with. Unlike other industries, the airline industry seems hell bent on self-destruction.



An optimist robs himself of the joy of being pleasantly surprised
User currently offlineTango-Bravo From United States of America, joined Jun 2001, 3806 posts, RR: 29
Reply 16, posted (9 years 7 months 1 week 1 day 18 hours ago) and read 2929 times:

Quoting Hmmmm... (Reply 15):
...then perhaps this industry is incapable of self-regulation and needs the government to do it for them.

Much as I prefer government to stay out of the economics side of businesses, I have come to the conclusion that the U.S. legacy airlines managers have proven (to me) beyond all doubt that they are incompetent at doing what they must to be viable entities. It seems to be much the same "north of the border."

Therefore, I am of the opinion that re-regulation (of fares, etc) of the U.S. industry, while not desirable is, nonetheless, the lesser of the two evils, which are: 1) an economically regulated industry -or- 2) an industry run by fools who, by their decisions and actions, have demonstrated that they are, above all, proficient at self-destruction. Or, to say it another way, having had more than enough opportunities to prove otherwise, the U.S. legacies have demonstrated that they cannot get out of their own way.


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