RobertS975
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The Flaw In The Airline Business Model

Sun Sep 18, 2011 1:09 pm

Even though the world has had an airline business for about 80 years now, it is generally not a very good business. There are short periods of profitable times, even a boom year now and then, but then the airlines can lose more money in a 5 year period, say after 9/11, than they had made during the previous fifty years. I know that many will point out the exceptions, but in general, the airline business is a tough one with many factors that are beyond the control of airline management- oil prices, geopolitics, earthquakes, epidemics etc.

I always thought that instead of airlines having to pay airports to operate from them, the airports should pay the airlines! For without the airlines, there would be nobody parking their cars at the airports at $30/day, nobody renting cars, nobody eating at the restaurants or buying at the shops.

I can fly from my home airport, BOS-Florida for $200 RT... and when I come home a week later, my parking fee is the same $200. The airlines should get a "cut" of that fee as if they weren't there with their flights, there would be no passengers parking at the airport.

Obviously, there are major expenses to operate an airport which need to be paid for by concession fees, leases and landing fees. But the larger point here is that airports and concessionaires and generally profitable while airlines are generally not profitable.
 
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par13del
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 1:42 pm

Quoting RobertS975 (Thread starter):
The airlines should get a "cut" of that fee as if they weren't there with their flights, there would be no passengers parking at the airport.

Consider that the property could be more valuable for some other less noise making and polluting purpose as an airport,
maybe if the airlines attempt to sit on the BRAC commissions and take over old military bases they could lower their operating cost and prevent NIMBY's.

Quoting RobertS975 (Thread starter):
But the larger point here is that airports and concessionaires and generally profitable while airlines are generally not profitable.

Airports are in static locations, management is more stable, they do not switch locations for lower tax rates, do not aggresively compete with other airports on concession fees, have regulatory authority to ensure that no new airports are built within their area of authority, most have voters who have to approve spending, the list goes on and on.
Additionally, a number of airports are not generally profitable since some are not self sustaining requiring tax payor funds.
 
LAXtoATL
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 1:51 pm

Quoting RobertS975 (Thread starter):
I always thought that instead of airlines having to pay airports to operate from them, the airports should pay the airlines!

In some cases they do. There are subsidies provided by airports to bring in new airlines. I just read yesterday that DFW is paying QF several million dollars to operate their new service.

Quoting RobertS975 (Thread starter):
The airlines should get a "cut" of that fee as if they weren't there with their flights, there would be no passengers parking at the airport.

You can reverse this as well, if there were no airport for the airlines to land the planes there would be no passengers.

Quoting RobertS975 (Thread starter):
Obviously, there are major expenses to operate an airport which need to be paid for by concession fees, leases and landing fees. But the larger point here is that airports and concessionaires and generally profitable while airlines are generally not profitable.

I understand your point but its the industry they choose to operate in. Moving forward however, I think you will see more discipline from the airline management and a focus on ensuring they are flying profitably. Most of airlines really seem to be ditching the 'managing for market share' mindset and are adopting a 'managing for margins' mindset. Historically there was a tolerance for losses in the airline industry because they all were generally losing money (mainly because there was no effort to ensure profitability, losses were just considered acceptable if certain things happened like fuel price increases) now the airlines are being more proactive in increasing revenues and lowering costs to ensure profitability even during the challenging environments. Once the industry changes its approach, the tolerance for airlines that are not profitable will wane (unprofitable airlines in the pass were not really held accountable because it was accepted that the industry would have periods of unprofitability but once it becomes an airline specific problem they will be held accountable) . Bottom line, from here on I think you will see that the airline industry will change its course and become net positive. The downside of course is that it is us, the traveling public, that will be paying the bill to ensure that the airlines are profitable. But that's how all other business operate, they manage supply and demand and make sure they charge enough to make a profit - it just to took this industry forever to figure out how to get it done.
 
frmrCapCadet
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 4:26 pm

The first passenger service Seattle to Los Angeles by United was priced to fill the available seats, because United had the mail contract and had to fly the distance and more or less on time regardless. Passengers were a needed bonus.

About 20 years ago I read that passengers liked to pay about $15 less than it cost the airline to fly them. Why? Amongst other reasons a seat on an airline of worth nothing without a person in it. And then there are competitors. The dynamics of the market are such that there is high pressure to undercharge. During regulation all of this was taken into account.

Free market fundamentalists think the market is rational and efficient. In certain circumstances it is. In others it is not, and it commonly is called 'market failure'. The aviation industry and the medical industry both experience this. Oddly enough, aviation favors low prices that batter the industry, and the medical industry produces ever increasing costs (currently 18% of GNP), far above inflation. Very roughly speaking if I don't like air travel I reduce that travel to a minimum and benefit other ways. If I have a badly infected tooth I fix it or die - government ensures there are no back alley dentists.
Buffet: the airline business...has eaten up capital...like..no other (business)
 
PanHAM
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 5:50 pm

Quoting RobertS975 (Thread starter):
always thought that instead of airlines having to pay airports to operate from them,

That's basically th Ryanair business model. Also called raisin picking. Goes mtogether with the exploitation of brainwashed passengers who have been told that the carrier is "cheap". Clever application of the IKEA role model where the furnitures are cheap but you have to go through the whole shop and by the time you reach the cash point you bought expensive stuff no one needs and you actually did not want to buy.

Does not work for the real airlines who provide the general public a full service including interlining and cargo and many more things the raisin pickers deny.
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Tango-Bravo
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 5:51 pm

Quoting LAXtoATL (Reply 2):
But that's how all other business operate, they manage supply and demand and make sure they charge enough to make a profit - it just to took this industry forever to figure out how to get it done.

Understandably so when one considers the history of the airline industry. Even here in the U.S. where airlines have always been privately owned, (ostensibly) for-profit businesses, they were de facto public utilities -- and acted accordingly -- until deregulation turned their world upside down. And when we're talking about an industry as vast and complex and capital/labor intensive as major airlines, for the airlines to have made the adjustment from public utilities to for-profit enterprises in ~30 years "ain't bad"...IMHO.

Quoting par13del (Reply 1):
maybe if the airlines attempt to sit on the BRAC commissions and take over old military bases they could lower their operating cost and prevent NIMBY's.

...except that the NIMBYs would then build new housing developments where none had existed since the beginning of time, directly under the flight arrival and departure paths, and then demand draconian restrictions on flight ops and/or that the airport be moved to another distant location.
 
BlatantEcho
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 5:55 pm

Quoting frmrCapCadet (Reply 3):
Free market fundamentalists think the market is rational and efficient. In certain circumstances it is. In others it is not, and it commonly is called 'market failure'.

Not sure what planet you are on, but just because a market is not operated the way you would like it, does make it a failure on some grand level.

Capital intensive? Sure
Boom - bust? Yup

I'm always shocked when good money is thrown at bad airlines, but that's how the free market works. Heckuva lot more efficient than the regulated days.

If banks/institutions/manufacturers think they can make a return on their money in airlines, they will invest it. No return possible - if your 'broken market' was even 1% true, there would be no investment or capital flow at all.
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frmrCapCadet
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 6:49 pm

One has to posit either divine fiat or some sort of evolutionary adaption to assert that markets are usually efficient. It would also help to have some good current evidence. Markets tend to be more efficient than governments in a number of areas (and with some the other way around), but neither are stellar performers.

But the question posed by the tread starter is why are airlines generally consumers of capital and not creators. It is a good question, touched upon from time to time on this forum, but definitely worth posting and discussing. I have offered a couple reasons. A third very speculative one is that owning and running an airline is a lot sexier than most other enterprises, and guys who can afford to do have done so - usually with the same capital consuming results.
Buffet: the airline business...has eaten up capital...like..no other (business)
 
707lvr
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 7:45 pm

I always believed the "flaw" in the air business model was the fun of it. People hop in and out, based on a whim to play airline, and force prices to stay much, much lower than they should be. Like it our not, we should be paying at least double or more what we are for an airline seat. I was in the hotel business, same problem was no-rev empty rooms. But we could raise our rates every year without fear another hotel would open up tomorrow next door. Or that another chain would start serving our location the next week. Result is that the SAME room I sold for $7.47 back in 1973 costs $179 today. But you can find airline tickets at almost the same price as they were then.
 
BMI727
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 7:54 pm

Quoting RobertS975 (Thread starter):
I always thought that instead of airlines having to pay airports to operate from them, the airports should pay the airlines!

Some airports do exactly that.

Quoting RobertS975 (Thread starter):
I can fly from my home airport, BOS-Florida for $200 RT... and when I come home a week later, my parking fee is the same $200. The airlines should get a "cut" of that fee as if they weren't there with their flights, there would be no passengers parking at the airport

First, most airlines do sell packages, so they will get a cut of hotel, rental cars, etc. Secondly, you could say that airlines are getting a cut of that money since presumably the airport's operating fees would have to be that much higher without parking revenue.
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ckfred
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 8:11 pm

You don't need to have a Harvard MBA to understand how to run an airline.

To fly a plane from A to B, you need to account for the cost of labor, the cost of landing fees, the cost of fuel, a proportion of the gate fees at A and B, catering for the flight, overhead (salaries for management and other fixed costs), a portion of the annual cost of maintenance on the aircraft, a portion of the lease or other ownership costs), a reasonable return on investment, and so on.

Then, after caculating the amount of revenue that can be generated by mail and cargo, you get the amount of money needed to collect from fares. Work though the mathmatics for first, walk-up coach, and discounted coach (called yield management in the industry), you can see what fares need to be to make the flight profitable.

If the fares are significantly higher than competitors, then you either need to eliminate the flight or figure out what can be done to charge a higher fare than a competitor.

Unfortunately, airlines have let themselves become commodities. They really can't offer additonal value (i.e., more amentieis) in exchange for higher fares. AA has been competing with WN for years, even when AA offered free services that WN didn't, such as food in coach and seat selection. Yet, Pennisula Hotels doesn't compete with Holiday Inn, and Hilton doesn't compete with Motel 6. Each of those brands goes after a different segment of the market.
 
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Francoflier
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 8:22 pm

I would also hazard that with the amount of major airlines decreasing and the remaining tending to consolidate into super airlines or alliances, airports will have a harder time justifying those ludicrously expensive fees as airlines will simply not compete for landing slots as much and will have a much higher leverage in their negotiations.

I do agree that airports need to share some of the risk, especially the larger ones near main cities for which the traffic flow is ensured by the local economy, not the other way around...
I'll do my own airline. With Blackjack. And hookers. In fact, forget the airline.
 
cmf
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 8:48 pm

Quoting frmrCapCadet (Reply 3):
Free market fundamentalists think the market is rational and efficient. In certain circumstances it is. In others it is not, and it commonly is called 'market failure'.

  
I fully understand investing in a startup with a solid business plan. Solid meaning having identified a segment where they will be able to compete and generate profit in a likely time frame.

I do not understand why billions of dollars are pumped in to companies with horrible track records.

Quoting frmrCapCadet (Reply 7):
But the question posed by the tread starter is why are airlines generally consumers of capital and not creators. It is a good question, touched upon from time to time on this forum, but definitely worth posting and discussing. I have offered a couple reasons. A third very speculative one is that owning and running an airline is a lot sexier than most other enterprises, and guys who can afford to do have done so - usually with the same capital consuming results.

  

Quoting ckfred (Reply 10):
If the fares are significantly higher than competitors, then you either need to eliminate the flight or figure out what can be done to charge a higher fare than a competitor.


To expand. Fare is just one part. Cost is the other. Difference between fare and cost is what counts. That your fare is significantly higher isn't bad as long as you offer something people are prepared to pay for. We see this every day as people pay for business class over economy and so on.

Problem is that airlines have taken on so high fixed costs that during long periods they are not focused at generating profit but rather covering as much of the fixed costs as possible, If they can operate a plane and loose one dollar less that way than by mothballing they will. It is considered good business practice. And it is, if done for short periods.

Problem is that there is so much capacity that this seems to be the norm rather than exemption. In my mind too high expectations on P2P and frequency have caused the system to have too much capacity.
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par13del
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 9:04 pm

Quoting cmf (Reply 12):
Problem is that there is so much capacity that this seems to be the norm rather than exemption.

Some airlines are doing just fine with the current industry capacity, others less so, what capacity can do is to make marginal and poorly run carriers profitable.
 
DfwRevolution
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 9:06 pm

Quoting ckfred (Reply 10):
To fly a plane from A to B, you need to account for the cost of labor, the cost of landing fees, the cost of fuel, a proportion of the gate fees at A and B, catering for the flight, overhead (salaries for management and other fixed costs), a portion of the annual cost of maintenance on the aircraft, a portion of the lease or other ownership costs), a reasonable return on investment, and so on.

Then, after caculating the amount of revenue that can be generated by mail and cargo, you get the amount of money needed to collect from fares. Work though the mathmatics for first, walk-up coach, and discounted coach (called yield management in the industry), you can see what fares need to be to make the flight profitable.

You're describing cost-plus pricing, and it's a method that often results in inefficient cost structures. If airlines are using it, maybe that's their problem. Arguably, the better philosophy is target costing, which is backwards from the process you describe.

Target costing starts with the price that customers will pay for a good or service. It subtracts the desired profit margin to determine the target cost of the good/service. The cost structure is then set to achieve this target. This is a superior method as it preserves profit margins instead of just taking what's left over between the going market price and a haphazard cost structure. It also puts significant downward pressure on costs instead of just accepting them for what they are or picking arbitrary cost-saving targets.
 
WNbob
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RE: The Flaw In The Airline Business Model

Sun Sep 18, 2011 11:50 pm

When air travel fell into the "commodity" category that's was the begining of the end. Price of entrance seems to be low as Boeing, Airbus, third party leasings can't give away their planes fast enough. We need some EXCITEMENT in this industry, we need a VISIONARY, we need a REVOLUTION.
 
roguetrader
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 12:08 am

Quoting ckfred (Reply 10):
Then, after caculating the amount of revenue that can be generated by mail and cargo, you get the amount of money needed to collect from fares. Work though the mathmatics for first, walk-up coach, and discounted coach (called yield management in the industry), you can see what fares need to be to make the flight profitable.

Sticking to that basic method produces profitable airlines - Ryanair and Southwest come to mind. BUT, all the legacy carriers of America and Europe are stuck in the broken and financially unstable hub-and-spoke model which (in their odd thinking) means they should and do fly numerous unprofitable routes for the sake of the hub. It may very well be that SFO or DEN or ATL is unprofitable for AA, but it is not conceptually possible for them to stop serving such major markets...whereas WN left SFO (and DEN too?) when they couldn't make it work because they exist much closer to the ideal you set out, that each route/city must pay for itself.

Quoting cmf (Reply 12):
I do not understand why billions of dollars are pumped in to companies with horrible track records.

One interesting thing about US legacies in particular is that their frequent flier programs are probably the main viable asset they have that is always profitable. Chase gave financing to a bankrupt UA because it profited so much from offering the MileagePlus credit card, likewise Amex financed Delta because of the profit they make selling Delta credit cards. It's almost like they are in the business of creating/selling frequent flier miles, with the airline part just being a function of that...

RT
 
cmf
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 12:39 am

Quoting par13del (Reply 13):
Some airlines are doing just fine with the current industry capacity, others less so,

Some are the exemption, not the norm.

Quoting par13del (Reply 13):
what capacity can do is to make marginal and poorly run carriers profitable.

Can you provide an example of a poorly run carrier who became profitable by adding a lot more capacity.
Don’t repeat earlier generations mistakes. Learn history for a better future.
 
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par13del
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 2:15 am

Quoting cmf (Reply 17):
Can you provide an example of a poorly run carrier who became profitable by adding a lot more capacity.

All carriers benefit when capacity is cut, as pax choice goes down. All airlines have been lowering capacity in the US, the result is higher yields, higher load factors, fares are on the increase.

As for adding capacity, that's a much tougher nut to crack, only way I could see that was probably before de-regulation or if regulation rears its ugly head again.
 
rwessel
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 3:16 am

Quoting ckfred (Reply 10):
You don't need to have a Harvard MBA to understand how to run an airline.

To fly a plane from A to B, you need to account for the cost of labor, the cost of landing fees, the cost of fuel, a proportion of the gate fees at A and B, catering for the flight, overhead (salaries for management and other fixed costs), a portion of the annual cost of maintenance on the aircraft, a portion of the lease or other ownership costs), a reasonable return on investment, and so on.

Then, after caculating the amount of revenue that can be generated by mail and cargo, you get the amount of money needed to collect from fares. Work though the mathmatics for first, walk-up coach, and discounted coach (called yield management in the industry), you can see what fares need to be to make the flight profitable.

If the fares are significantly higher than competitors, then you either need to eliminate the flight or figure out what can be done to charge a higher fare than a competitor.

Sure it's that simple. Except. The airline business being largely a commodity, you *cannot* charge much more than your competitors, and you *cannot* just "eliminate the flight" (you either have to find another route to fly, or you're stuck paying the financing and whatnot on an idle aircraft, or trying to dump the aircraft). So it's often a choice between taking a modest loss on a flight, or a bigger loss dumping the flight or trying to get rid of the aircraft.

That’s the real flaw in the airline business – once you’re in it, and there are competitors and empty seats, you’re either stuck taking a big loss by getting out, or a little loss by staying in.

Quoting WNbob (Reply 15):
When air travel fell into the "commodity" category that's was the begining of the end. Price of entrance seems to be low as Boeing, Airbus, third party leasings can't give away their planes fast enough. We need some EXCITEMENT in this industry, we need a VISIONARY, we need a REVOLUTION.

Ugh. None of the customers want a revolution. They want cheap and reliable transport. If you don't like being in a commodity business, be in a different business.
 
cslusarc
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 3:42 am

Quoting ckfred (Reply 10):
Unfortunately, airlines have let themselves become commodities. They really can't offer additonal value (i.e., more amentieis) in exchange for higher fares.

I think that real story is how someone can fix this flaw in the airline business model by decommoditizing air travel.
--cslusarc from YWG
 
ckfred
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 4:00 am

Quoting dfwrevolution (Reply 14):
Target costing starts with the price that customers will pay for a good or service. It subtracts the desired profit margin to determine the target cost of the good/service. The cost structure is then set to achieve this target. This is a superior method as it preserves profit margins instead of just taking what's left over between the going market price and a haphazard cost structure. It also puts significant downward pressure on costs instead of just accepting them for what they are or picking arbitrary cost-saving targets.

But, up until the recession, look at what the hotels were doing. They were upgrading rooms like crazy, with better mattesses, better bedding, flat-screen TVs, better toiletries, and such. And, they were increasing room rates while improving rooms.

The airlines have worked on the notion of making items that were once free subject to fees, so that they can offer lower fares to compete. This is the exact opposite of how most businesses work. You take items that were once additoinal cost and include them in the base price, while increasing the base price, although the increase is less than the price for the item, when it was an option.
 
ozark1986
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 8:04 am

Quoting ckfred (Reply 21):
But, up until the recession, look at what the hotels were doing. They were upgrading rooms like crazy, with better mattesses, better bedding, flat-screen TVs, better toiletries, and such. And, they were increasing room rates while improving rooms.

ckfred is barking up the right tree. The airlines are not offering the premium product/service that justify charging more for a seat. The hotel industry has a tremendous amount to teach the airline industry.
 
esdex
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 12:00 pm

Airlines, especially those with international markets, have very challenging risk exposures. Expensive plant in the aircraft with relatively few manufacturers, long delivery times which require long term vision to capitalise, relatively expensive labour with high training costs and a number of other restrictions that other industries don't face, volatility of key overheads such as fuel, volatility of external economic environment - when time's are tough, people don't tend to travel as much, significant regulatory burdens such as licensing, foreign exchange risk, political risk - not only issues such as terrorism but market protectionism and comeptitive hurdles such as subsidised/protected markets etc. Unless you're in for the long haul over 15-20 years, airlines represent a significant investment risk compared to other industries. Not to say you shouldn't do it though!
 
GCT64
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 12:47 pm

Quoting cslusarc (Reply 20):
Quoting ckfred (Reply 10):Unfortunately, airlines have let themselves become commodities. They really can't offer additonal value (i.e., more amentieis) in exchange for higher fares.
I think that real story is how someone can fix this flaw in the airline business model by decommoditizing air travel.

I agree that the fundemental issue is that airlines (particularly the US airlines), by not clearly differentiating their product versus a competitor's, have allowed themselves to get sucked into being a commodity (with attendant low margins and a desire to seek the economies of scale through consolidation). The question is whether this can be reversed?
Flown in: A30B,A306,A310,A319,A320,A321,A332,A333,A343,A346,A359,A388,BA11,BU31,B190,(..54 more types..),VC10,WESX
 
ozglobal
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 1:05 pm

A good topic. There is too much uncertainty attached to too much capital in the airline business, with ever growing margin squeeze. You will never have a sustainably profitable HSR network on a purely private business model basis. Airlines are similar in the long term. There needs to be some convergence of interests beyond private direct return on capital. Emirates and SIA are examples of state model synergies which are very successful for both owner and customer. The airline is a strategic means to an end, as well as a commercial service in its own right. QF used to be something similar, before Oz came to believe it should be a wholly privatized entity. Whether it be a state / corporate symbiotic relationship or a hybrid of private interests, it is clear that airlines' business models can rarely stand totally alone in the long term.
When all's said and done, there'll be more said than done.
 
kcrwflyer
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 1:15 pm

Quoting RobertS975 (Thread starter):
I always thought that instead of airlines having to pay airports to operate from them, the airports should pay the airlines! For without the airlines, there would be nobody parking their cars at the airports at $30/day, nobody renting cars, nobody eating at the restaurants or buying at the shops.

1. I've never seen the $30/day lot or garage. If I ever paid that to park at an airport there better be a gold bar in the trunk when I get back.

2. Do you work for Allegiant or did you just get a copy of the playbook?
 
LAXtoATL
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 1:25 pm

Quoting kcrwflyer (Reply 26):
I've never seen the $30/day lot or garage.

Granted it is a premium lot, but ATL certainly has a $30/day a lot. And I assume they aren't the only airport in the country with one and I would guess in some of the more affluent cities they might even have pricier lots.

Quoting kcrwflyer (Reply 26):
If I ever paid that to park at an airport there better be a gold bar in the trunk when I get back.

Unfortunately, never found my gold bar. Maybe next time.
 
GCT64
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 1:32 pm

Quoting kcrwflyer (Reply 26):
I've never seen the $30/day lot or garage. If I ever paid that to park at an airport there better be a gold bar in the trunk when I get back.

Don't ever park at LHR then! after the last time I got stung (and there was no gold bar in the trunk), I vowed never to give them any more car parking money.
Flown in: A30B,A306,A310,A319,A320,A321,A332,A333,A343,A346,A359,A388,BA11,BU31,B190,(..54 more types..),VC10,WESX
 
PanHAM
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 1:52 pm

Parking at FRA is about € 25,00 per day / 24 hours which are usually reached after 4 hours. The deal is that the next 20 hours then are "free". Parking at 9 am day one and getting back 2 pm day 2 the bill is € 50,00 In US$ that is 35,00 resp. 70,00

Airports make a lot of money from parking and cncessions, in FRA it is more than 49%.

But the real flaw in the business model of airlines is that of beeing a "national Carrier". They will vanish in Europe and that makes sense. .
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ckfred
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 1:55 pm

Quoting GCT64 (Reply 24):
I agree that the fundemental issue is that airlines (particularly the US airlines), by not clearly differentiating their product versus a competitor's, have allowed themselves to get sucked into being a commodity (with attendant low margins and a desire to seek the economies of scale through consolidation). The question is whether this can be reversed?

Back in the days of regulation, airlines differentiated themselves. Delta was a southern carrier, with southern dishes in its meal service, and many F/As who hailed from the South.

Braniff was the stereotypical Texas carrier, with brightly colored airplanes, leather seats, and over-the-top food. (My father loved the cherries jubilee served as the first class dessert.)

AA tried to differentiate itself with MRTC. Many feel the problem was that it only advertised MRTC in its major markets (Boston, New York, Miami, Chicago, the Metroplex, and L.A.). People I knew in Atlanta who flew to ORD regularly never saw an ad. They would have been willing to pay a premium over DL's fares to get extra legroom, if AA had simply run a national ad campaign.

Here's the question to ask. WN has superior customer service and fewer fees. B6 has better IFE than most U.S. carriers. While VX probably is cheaper on a walk-up basis, it has a very different on-board product, and certainly upscale food service compared to what the Legacies offer.

How much could these three carriers raise their fares and not lose passengers? Is there product different enough (and better) to the point that people are willing to pay a premium over AA, UA, and DL?
 
MaverickM11
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 3:10 pm

Quoting ckfred (Reply 30):
AA tried to differentiate itself with MRTC. Many feel the problem was that it only advertised MRTC in its major markets (Boston, New York, Miami, Chicago, the Metroplex, and L.A.). People I knew in Atlanta who flew to ORD regularly never saw an ad

If you have a finite number of ad dollars, why would AA advertise in ATL?

Quoting ckfred (Reply 30):
They would have been willing to pay a premium over DL's fares to get extra legroom, if AA had simply run a national ad campaign.

This is one of the bigger problems in the industry--people say all kinds of things, but then never put their money where their mouth is. Next to no one in ATL would pay a premium to fly AA to ORD. And that's why they didn't bother advertising much outside of their major cities.
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ckfred
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 3:33 pm

Quoting MaverickM11 (Reply 31):
If you have a finite number of ad dollars, why would AA advertise in ATL?

Quoting ckfred (Reply 30):
They would have been willing to pay a premium over DL's fares to get extra legroom, if AA had simply run a national ad campaign.

This is one of the bigger problems in the industry--people say all kinds of things, but then never put their money where their mouth is. Next to no one in ATL would pay a premium to fly AA to ORD. And that's why they didn't bother advertising much outside of their major cities.

But advertising in your home markets is like preaching to the choir. If you live in the Metroplex, and your business travels took you regularly beyond the limits of the Wright Amendment, you pretty much had to take AA. If you lived in Chicago, and your company had a contract with AA, you're pretty much stuck on AA.

It's people who lived in spoke cities and travel to other spoke cities that AA was ignoring. If you lived in GRB and need to get to BOS, you could take AA or UA via ORD or NW via DTW, or maybe DL via CVG.

If you lived in OKC and need to get to MIA, you could have taken AA via DFW, CO via IAH, possibly NW via MEM, or DL via DFW or ATL.

This is where AA needed to advertise MRTC nationally and not just in its major hub cities.
 
frmrCapCadet
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 4:44 pm

Quoting OzGlobal (Reply 25):
Whether it be a state / corporate symbiotic relationship or a hybrid of private interests, it is clear that airlines' business models can rarely stand totally alone in the long term.

I thought your post had a good summary of the economics. Here in the US WN is the exception, their profit margins are consistent, but not robust. In most industry gross margins of 10% are considered healthy, and IIRC WN generally is at the 5% mark. Could this be an indicator that airlines are less than half as profitable as other industies?
Buffet: the airline business...has eaten up capital...like..no other (business)
 
WNbob
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 5:06 pm

Quoting rwessel (Reply 19):
None of the customers want a revolution.

Huh? customers are happy with air carriers? The last time I checked air carriers' reputations are only slightly better than lawyers and the cable company. Air carriers are often punching bags for the press.

But am not looking from the customers' point of view, which as mentioned in other replies, want-this, want-that but don't want to pay for them.

So, from a business concern (this thread) lets stop doing what has not worked. Make it EXCITING to fly Air-Excitement. Lets sell a product that people want to pay, people are curious about, people want to experience, THEN we'll start to make some bucks$
 
roguetrader
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 5:55 pm

Quoting MaverickM11 (Reply 31):
If you have a finite number of ad dollars, why would AA advertise in ATL?

Because AA does actually provide something special and arguably better than Delta in ATL - a private bag claim, no-train gate access and a (subjectively) easier airport experience...for those going to ORD, DFW and MIA.

But, your point is actually very revealing. No, you don't advertise if you're AA in ATL if you buy into the hub-and-spoke legacy mindset, which crazily for AA gives up competing in PHL, Washington, Houston and ATL ... which are 4 of the top 10 markets in America....yet WN advertises in DFW, ORD and south Florida, along with most of the other fortress hubs of the legacies. This is the big failure of hub and spoke: large markets are conceded to the resident hub carrier, yet WN isn't afraid to come in and take them on in ATL, DEN, Chicago, Dallas, Houston, etc...

RT
 
cmf
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 6:12 pm

Quoting par13del (Reply 18):
All carriers benefit when capacity is cut, as pax choice goes down. All airlines have been lowering capacity in the US, the result is higher yields, higher load factors, fares are on the increase.

I would suggest that is exactly the point I was making. They added more capacity than the market could absorb while keeping fares at profitable levels.

Quoting par13del (Reply 18):
As for adding capacity, that's a much tougher nut to crack, only way I could see that was probably before de-regulation or if regulation rears its ugly head again.

I certainly am not aware of any poorly run airline who got helped this way. Thus I had to ask.

Quoting GCT64 (Reply 24):
I agree that the fundemental issue is that airlines (particularly the US airlines), by not clearly differentiating their product versus a competitor's


Schedule is the most important difference. Notice how direct flights have, typically, higher fares than 1 or more stops. Notice how flights departing/arriving at certain times have higher fares than other times though the rest of the product is identical.

Quoting wnbob (Reply 34):
So, from a business concern (this thread) lets stop doing what has not worked. Make it EXCITING to fly Air-Excitement. Lets sell a product that people want to pay, people are curious about, people want to experience, THEN we'll start to make some bucks$


With all respect I do not think the problem isn't that passengers are not prepared to pay. Passengers are smart enough to take the best deal. That's not a problem. That is how it should be.

The real problem is that airlines price below making a reasonable return. If they did it for short periods it would be OK but it has become the norm. Sadly the industry is not disciplined enough to make the adjustments it takes. And somehow there are still investors who are prepared to give them money.
Don’t repeat earlier generations mistakes. Learn history for a better future.
 
rwessel
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RE: The Flaw In The Airline Business Model

Mon Sep 19, 2011 10:43 pm

Quoting wnbob (Reply 34):
Huh? customers are happy with air carriers? The last time I checked air carriers' reputations are only slightly better than lawyers and the cable company. Air carriers are often punching bags for the press.

They may be unhappy, but they've repeatedly demonstrated that what they really want is cheap. And, apparently, the opportunity to complain about something. Heck, the vast majority of people would clearly rather complain about legroom than pay an extra 15% to get a seat in the upgraded economy section.

Quoting wnbob (Reply 34):
So, from a business concern (this thread) lets stop doing what has not worked. Make it EXCITING to fly Air-Excitement. Lets sell a product that people want to pay, people are curious about, people want to experience, THEN we'll start to make some bucks$

Well, *I* might pay extra for an aerobatic routine during my flight to the ski resort. You want excitement, come fly loops and barrel rolls in *our* 757s, and avoid our competitor's hair-dryer powered A340s that can barely manage straight and level!   

But seriously, I'm not sure how exciting air travel could possibly be for most people. It's like buying gas for your car - the vast, vast, vast majority people are doing it in service of some other goal. I want to get to the meeting at the customer's site, or I want to get to the ski resort. Any excitement in that process is a bad thing. What exactly are you proposing to sell?
 
Burkhard
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 11:12 am

Quoting PanHAM (Reply 29):
But the real flaw in the business model of airlines is that of beeing a "national Carrier". They will vanish in Europe and that makes sense.

Completely agree. The main flaw is that the airline business is a true global world wide business, but is treated like a local one. When I look into car industry, Volkswagen as example alone has a share of the world market for cars of 12%, while the whole Lufthansa group (one of the biggest players) has a share of the world market of less than 4%, just two examples.
So what is needed to overcome the crises is more consolidation, also across economic borders, and an end of nationalistic bonsai carriers.

A successful model might merge the airlines along the 3 alliances to really global service providers, giving three big airlines with a market share around 20% each, and the remaining 40% to specialized carriers.
 
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par13del
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 1:11 pm

Quoting Burkhard (Reply 38):
A successful model might merge the airlines along the 3 alliances to really global service providers, giving three big airlines with a market share around 20% each, and the remaining 40% to specialized carriers.

Hmmmm, not disagreeing fully but global commercial entities such as those are what created the GFC which the entire world is suffering the consequences while the perpetrators are.........,for another thread.
 
Burkhard
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 1:20 pm

It was not the real economy and real global industry who created the GFC - a really global airline would be able to react to local or regional market changes far better than the current local ones which are in danger once a single unpleasent event or desaster takes place at their home airport.
 
RL757PVD
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 1:53 pm

Quoting RobertS975 (Thread starter):
I always thought that instead of airlines having to pay airports to operate from them, the airports should pay the airlines! For without the airlines, there would be nobody parking their cars at the airports at $30/day, nobody renting cars, nobody eating at the restaurants or buying at the shops.

I can fly from my home airport, BOS-Florida for $200 RT... and when I come home a week later, my parking fee is the same $200. The airlines should get a "cut" of that fee as if they weren't there with their flights, there would be no passengers parking at the airport.

Obviously, there are major expenses to operate an airport which need to be paid for by concession fees, leases and landing fees. But the larger point here is that airports and concessionaires and generally profitable while airlines are generally not profitable.

If you took a closer look at the airport side of the house, you would see this is not the case, especially in recent years.

Airports are not and can not be profitable in the US, they are essentially public utilities. Any money generated on the airport needs to be kept on the airport. Many airports in the US have had to lay off staff in an effort to keep costs low.

Small airports can accomodate someone for G4 for next to nothign because their facilities are next to noting. Even at the highest volume airport, ATL, they can not afford to operate if Delta paid nothing to the airport.
Experience is what you get when what you thought would work out didn't!
 
Flighty
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 1:58 pm

Quoting frmrCapCadet (Reply 3):

Free market fundamentalists think the market is rational and efficient. In certain circumstances it is. In others it is not, and it commonly is called 'market failure'. The aviation industry and the medical industry both experience this

Utterly ridiculous (for aviation). Aviation is a successful example of free market action. A great (safe and fast) product is provided to everybody at low cost. Do you feel bad for Fortune 500 companies such as Boeing, GECAS, AMR, United? If so, if you believe they need more profits then I suppose there is a market failure in there somewhere.

Medical (like elementary education) is totally different. These can function quite well in a free market (as foreign countries show us) but in a civilized country, the government has a role in basic education and medical. This is not to say government should manage airlines. That would be crazy (observe Air India). Talk about market failure.

Edit: I could also argue quite easily that a free market would provide dramatically superior medical & education to the public systems we have now. In my city the budget of $20,000+ per pupil would buy quite a good private school education for every kid.

[Edited 2011-09-20 07:01:12]
 
frmrCapCadet
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 4:19 pm

So why can't they make money? That is the point of discussion on this thread.
Buffet: the airline business...has eaten up capital...like..no other (business)
 
NathanH
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 4:49 pm

Quoting Flighty (Reply 42):
Utterly ridiculous (for aviation). Aviation is a successful example of free market action.

The US Airline industry has lost almost $60 billion domestically since deregulation. I would hardly call that a successful example of free market action. Especially in light of the government bailouts the industry has gotten in the past.

http://curiouscapitalist.blogs.time....to-invest-in-the-airline-industry/

[Edited 2011-09-20 09:50:26]
 
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mayor
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 5:15 pm

Quoting ckfred (Reply 32):
But advertising in your home markets is like preaching to the choir. If you live in the Metroplex, and your business travels took you regularly beyond the limits of the Wright Amendment, you pretty much had to take AA. If you lived in Chicago, and your company had a contract with AA, you're pretty much stuck on AA.

It's people who lived in spoke cities and travel to other spoke cities that AA was ignoring. If you lived in GRB and need to get to BOS, you could take AA or UA via ORD or NW via DTW, or maybe DL via CVG.

If you lived in OKC and need to get to MIA, you could have taken AA via DFW, CO via IAH, possibly NW via MEM, or DL via DFW or ATL.

This is where AA needed to advertise MRTC nationally and not just in its major hub cities.
Quoting roguetrader (Reply 35):
But, your point is actually very revealing. No, you don't advertise if you're AA in ATL if you buy into the hub-and-spoke legacy mindset, which crazily for AA gives up competing in PHL, Washington, Houston and ATL ... which are 4 of the top 10 markets in America....yet WN advertises in DFW, ORD and south Florida, along with most of the other fortress hubs of the legacies. This is the big failure of hub and spoke: large markets are conceded to the resident hub carrier, yet WN isn't afraid to come in and take them on in ATL, DEN, Chicago, Dallas, Houston, etc...

Pre DL/WA merger, DL didn't advertise at all in SLC as the flights to ATL, DFW and PDX were always full.....no need to.

Quoting roguetrader (Reply 16):
whereas WN left SFO (and DEN too?)

When did WN leave DEN??? Also, did WN ever actually serve SFO or was it always SJC? If it was SJC, that was part of their business model at the time, serving secondary airports rather than major ones where they would have to compete, head on, with the legacies.
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incitatus
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 5:31 pm

Quoting kcrwflyer (Reply 26):
1. I've never seen the $30/day lot or garage. If I ever paid that to park at an airport there better be a gold bar in the trunk when I get back.

London Heathrow gets 77 pounds if you park the car by the terminal for 24 hours. That is $120.
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DfwRevolution
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 9:37 pm

Quoting ckfred (Reply 21):
But, up until the recession, look at what the hotels were doing. They were upgrading rooms like crazy, with better mattesses, better bedding, flat-screen TVs, better toiletries, and such. And, they were increasing room rates while improving rooms.

The airlines have worked on the notion of making items that were once free subject to fees, so that they can offer lower fares to compete. This is the exact opposite of how most businesses work. You take items that were once additoinal cost and include them in the base price, while increasing the base price, although the increase is less than the price for the item, when it was an option.

No, it's exactly how a business should operate. You charge prices based on what customers are willing to pay. The fact that airlines have been successful collecting added fees shows that their product was underpriced. Airlines have generally not used added fees to lower their base fares.

This is another failing of the cost-plus approach. When you don't expend the effort to determine how much your product is worth to the consumer and just tack-on an arbitrary profit, you run the risk that you tack-on less profit that then customer was willing to pay!
 
RobertS975
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 9:45 pm

Quoting kcrwflyer (Reply 26):
I've never seen the $30/day lot or garage. If I ever paid that to park at an airport there better be a gold bar in the trunk when I get back.

I assume from your "handle" that you are from Charleston, WV (KCRW). Indeed, that would explain your views about airport parking rates, as the long term parking at the Yeager Airport tops out at about $7/day.
 
Flighty
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RE: The Flaw In The Airline Business Model

Tue Sep 20, 2011 10:19 pm

Quoting NathanH (Reply 44):
The US Airline industry has lost almost $60 billion domestically since deregulation. I would hardly call that a successful example of free market action. Especially in light of the government bailouts the industry has gotten in the past.

Touche... it is true, airlines do not make money. They are so competitive they actually lose money. But, at least they deliver the goods to society (and then some). The financial picture involves losses to mostly very wealthy financiers, leasing companies, airline entrepreneurs. Like the wine industry, the airline indsutry is to some extent a fun industry that people enter and finance because they are passionate about it.

How can we describe the products available... extensive... punctual... safe... cheap. Looking good there.


Govt bailouts.. while the PBGC did assume some pensions, that is the only one I can think of... and that's more of a labor union bailout than corporate welfare IMO. It's also self financed up to this point (making a bailout declaration quite suspect thus far). Airlines are pretty innocent and pure compared to some other lines of business.