Here's the problem that bothers me about the current situation. The legacy carriers can't blame all of their problems on the price of oil, but if oil were going for $34 a barrel, rather than $54, some legacy carriers would be making some money, and others would have much smaller losses.
But the LCCs won't go along when a legacy carrier tries to push even a modest increase of $5 or $10 OW
. Even WN
has to buy 20% of its fuel at market prices.
My father-in-law is a business professor, after having spent about 25 years in management at GM
and another manufactuer. Normally, if a company sees an increase in the cost of a raw material or necessary commodity, its competitors will see similar increases. So, prices will increase by a similar percentage throughout the industry.
If, a company with a lower-cost structure has been fortunate enough to lock in prices for a raw material, it still ought to raise prices, although not necessarily as much as its competitors. It will still have a pricing advantage, and with higher prices, the company will have greater revenue and profits, which can be used for a variety of capital uses.
So, why do B6
, etc. keep nixing the attempts of AA
and other legacy carriers to raise fares? B6
is paying more for fuel, because Wall Street expects Q3
of 04 to be half of Q3
03. Do the LCCs work on the notion that for every $5 or $10 increase in fares, their load factors go down by 1 or 2 points? I'm paying about $.35 more for a gallon of gas than I did in mid-August, but it hasn't affected my driving. So if an airline raises fares by $10 or $20 RT, that doesn't affect my travel plans.
Now, as for the legacies, they should learn how to price fares. Let's say it costs $X to fly a 737 from ORD
(crew, fuel, landing fee at LGA
, catering, baggage handling at ORD
, and mechanic preparation at ORD
) plus a percentage of the airline's overhead (executive salaries, heavy maintenance, weather forcasters, reservation agents, gate leases, etc.) which will be called $Y. Then add a figure which the airlines deems a reasonable profit, $Z The airline should charge $X+Y+Z/# of seats for each ticket.
Obviously, that formula can be tinkered with a bit to reflect load factor, first class and coach pricing, and advance purchase vs. walk-up fares. But I get the feeling that the legacy carriers don't price tickets based on the cost of getting planes from A to B plus some of the overhead or fixed costs.