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enilria
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Senator Asks DOJ Investigate Capacity "Discipline"

Thu Jun 18, 2015 11:58 pm

I completely agree. This is effectively price-fixing and collusion through restriction of supply. I guess you could also call it a cartel, not unlike OPEC, and enforced by Wall Street. I hope DOJ actually does something...they can start by not allowing UA more slots at EWR, allowing the ME3 to continue to expand in the USA, and forcing WN to make room for DL at DAL.

http://www.nytimes.com/2015/06/18/bu...ry-into-airline-behavior.html?_r=0
 
flyby519
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 12:47 am

What happened to free market? Didn't de-regulation happen 30+ years ago?
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catiii
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 12:50 am

Richard Blumenthal is a moron. So if McDonald's and Burger King both publicly agree on the best way to price a hamburger is that collusion? The fact that he doesn't understand that the airlines have figured out how to make money, that it isn't a secret, and most importantly it isn't illegal, doesn't mean it's collusion.

And if/when the ME3 want to stop having their losses, capex, and operations subsidized by bene government, then we can talk about expansion beyond 5th freedoms for ALL carriers, not just the ME3 because they're "cool."
 
commavia
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 12:50 am

Quoting flyby519 (Reply 1):
What happened to free market?

Great question. Since when is it the government's job to prevent companies from withholding their services? Isn't that between said companies and their shareholders/owners?
 
jcwr56
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 12:55 am

Election time already?

He complains yet offers ZERO ideas. Typical politician at its' finest.
 
flyDTW1992
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 12:58 am

This is nonsense. It's not as though it's some evil secret these airlines are using to effectively turn a profit. It's good business. They've finally hit a viable business environment post-deregulation and post-9/11 and now this idiot decides he doesn't like it.
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MSPNWA
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 1:02 am

Unfortunately it's too late to do much of anything. What helped create this era of anti-consumer "capacity discipline" was consolidation. Consolidation that should have been blocked.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 1:20 am

Quoting flyDTW1992 (Reply 5):
've finally hit a viable business environment

People within the airline industry see it this way. The travelling public sees it as ridiculous fares.

Let's be honest, the main thing that allowed this "viable business environment" to occur was the government allowing 6 airlines to merge into 3.

The problem with the airline industry is that it is *really* hard to start a new airline, and even harder to directly compete with the big 3 who can drop fares to the point of losing money on specific routes almost in perpetuity in order to keep others out.

They don't have to be illegally colluding to realize that none of the big 3 are going away anytime soon, so having one of the 3 pricing aggressively to hurt another one makes no sense for anyone involved. But pricing aggressively to hurt a smaller airline is VERY worthwhile.

Ultimately the government can't do much about the pricing scheme since it's very likely no laws are being broken, but they could help smaller airlines with programs to take away slots from the big 3 (or just make new slots) and give them to smaller airlines at slot restricted airports.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 1:29 am

Quoting enilria (Thread starter):
allowing the ME3 to continue to expand in the USA,

The US3 are making record profits on their domestic operations, the ME3 expanding to the US will have no effect.

Quoting enilria (Thread starter):
forcing WN to make room for DL at DAL.

WN is using its gates at DAL, it is the city of Dallas problem to have gates for additional carriers.

Quoting MSPNWA (Reply 6):
What helped create this era of anti-consumer "capacity discipline" was consolidation. Consolidation that should have been blocked.

  
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 1:43 am

Quoting MKIAZ (Reply 7):
The travelling public sees it as ridiculous fares.

And that's because - in my opinion - the traveling public was spoiled with "ridiculous" (ridiculously low) fares for several decades during tumult and upheaval following deregulation when airlines were unwilling or unable to do what was necessary to actually become commercially viable. The traveling public - and I include myself in that group - had it too good for too long and it's about time they pay what it costs to operate a viable air transportation system that earns its cost of capital and generates a risk-appropriate return for investors. That's not too much to ask. And indeed that's exactly what we now have. If airliners were making 50% net margins, that would be one thing. But they're not. The industry is producing net margins in the high-single-to-low-double-digits, which is entirely reasonable given the cost and risk associated with operating large, complex air transportation networks.

[Edited 2015-06-18 18:43:47]
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:09 am

Quoting commavia (Reply 9):
And that's because - in my opinion - the traveling public was spoiled with "ridiculous" (ridiculously low) fares for several decades during tumult and upheaval following deregulation when airlines were unwilling or unable to do what was necessary to actually become commercially viable. The traveling public - and I include myself in that group - had it too good for too long and it's about time they pay what it costs to operate a viable air transportation system that earns its cost of capital and generates a risk-appropriate return for investors. That's not too much to ask. And indeed that's exactly what we now have. If airliners were making 50% net margins, that would be one thing. But they're not. The industry is producing net margins in the high-single-to-low-double-digits, which is entirely reasonable given the cost and risk associated with operating large, complex air transportation networks.

^^^^^^winner
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:14 am

Quoting flyby519 (Reply 1):
What happened to free market? Didn't de-regulation happen 30+ years ago?

This is a simplistic response. Free markets don't always produce socially optimal outcomes. That's a long topic but simply shouting "free markets" regarding a good - air transportation - that relies entirely on public infrastructure won't do.

Quoting catiii (Reply 2):
So if McDonald's and Burger King both publicly agree on the best way to price a hamburger is that collusion?

If they publicly agree that burgers should be priced at X, then yes. That's not quite what's happening here, but they are certainly trying to send each other signals that they will not be expanding capacity - leading the other guys to maintain an equilibrium of lower supply.

Quoting catiii (Reply 2):
The fact that he doesn't understand that the airlines have figured out how to make money, that it isn't a secret, and most importantly it isn't illegal, doesn't mean it's collusion.

Whether it's illegal will depend on whether there are "reasonable restrictions on trade." And whether it's illegal is an entirely different question from whether airlines are behaving in a way that we, as a society, would want them to. We can pass laws to motivate higher supply.

Quoting MSPNWA (Reply 6):
Unfortunately it's too late to do much of anything. What helped create this era of anti-consumer "capacity discipline" was consolidation. Consolidation that should have been blocked.

If consolidation had been allowed (there are good efficiency reasons for this choice), it should have been matched with pro-supply incentive structures. One such structure, for example, would be changing airline landing and user fees so that fees would decrease, per passenger, if more seats on a flight. Under the current system, a passenger generally pays the same user fees whether she lands on a CRJ-200 or an A380. That's a woefully inefficient way of pricing public infrastructure. The A380 passenger should pay less, the CRJ passenger more. That alone would provide a market incentive to upgauge flights (increasing total supply).

Quoting MKIAZ (Reply 7):
Ultimately the government can't do much about the pricing scheme since it's very likely no laws are being broken
Quoting commavia (Reply 9):
The industry is producing net margins in the high-single-to-low-double-digits, which is entirely reasonable given the cost and risk associated with operating large, complex air transportation networks.

Your comment takes the current route structure for granted. If, as I suggest above, we charged passenger and landing fees to incentivize more seats/flight, that would have several pro-supply consequences:

-more seats/flight, obviously
-lower average CASM, resulting in a new competitive equilibrium where profit maximization occurs at lower price points
-better use of public infrastructure

Market fundamentalism is usually stupid. Unfortunately, politicians who want to interfere with the market tend to be progressives, and progressives tend to be less willing to tweak market incentives to realign market outcomes - they just want to use sledgehammer tools like anti-trust where chisels like my suggestions work better. I am glad that Senator Blumenthal has started this dialogue; hopefully it will, in the long run, motivate more subtle and intelligent ways to deal with the oligopolies we've allowed to run our air transportation system.

One final point to the market fundamentalists: why not view air transportation as public infrastructure - like transit, rail, highways. In this domain private actors are not necessarily present or primary, and all non-aviation modes are either public or heavily subsidized/regulated. I'm not saying government-run airlines any more than I'm saying government-run railroads. But regulation can and should have a very strong role when we're talking about transportation systems.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:22 am

Quoting MSPNWA (Reply 6):
What helped create this era of anti-consumer "capacity discipline" was consolidation. Consolidation that should have been blocked.

Except that there's currently more revenue seats than at any point in the last three decades, yet PRASM overall is down..... meaning more people, are going to more destinations, than at any point in the USA's deregulated history; and paying less to do so.

So explain to me again how "consolidation" is the problem.   
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commavia
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:23 am

Quoting Matt6461 (Reply 11):
we charged passenger and landing fees to incentivize more seats/flight, that would have several pro-supply consequences

But therein, again, is the issue I take with that opinion - why should the government be incentivizing "pro-supply consequences?" I don't want the government incentivizing anything other than safety and reliability. Personally, I don't mind airport operators using landing fees to incentivize better time-utilization - i.e., peak time pricing - because it incentivizes more efficient, reliable utilization of scarce infrastructure assets at congested airports. But to me, there's really no need - let alone justification - for the government to incentivize "more seats/flight." Ironically, it seems that on that front, the market is already accomplishing precisely that goal without any such government intervention.

Quoting Matt6461 (Reply 11):
One final point to the market fundamentalists: why not view air transportation as public infrastructure - like transit, rail, highways.

Because it isn't like transit, rail or highways in my opinion.

Quoting Matt6461 (Reply 11):
But regulation can and should have a very strong role when we're talking about transportation systems.

That is one perspective. I, personally, have a different one - it is not possible for me to disagree more with the above. In my opinion, regulation has a rightful and reasonable place in the civil aviation system when it comes to safety and foreign relations (i.e., bilaterals), but other than that, I believe regulation should have essentially zero role. Subject to the practical realities of constrained access in certain places (and that's a whole different subject), airlines should be able to do what deregulation envisioned - fly wherever they want, whenever they want, charging whatever price they want, and either live or die based on the consequences of those commercial decisions. No right or wrong - just two different perspectives.

[Edited 2015-06-18 19:25:15]
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:41 am

Quoting Matt6461 (Reply 11):
Under the current system, a passenger generally pays the same user fees whether she lands on a CRJ-200 or an A380. That's a woefully inefficient way of pricing public infrastructure. The A380 passenger should pay less, the CRJ passenger more. That alone would provide a market incentive to upgauge flights (increasing total supply).

But, at least where small regional aircraft are used on routes where they match the demand (i.e. not 8 daily RJs on RDU-DCA), passengers already are paying more for smaller aircraft. TYS is a much higher fare market than BNA, and the average gauge is also much smaller. That's not a coincidence.

Quoting Matt6461 (Reply 11):
If, as I suggest above, we charged passenger and landing fees to incentivize more seats/flight, that would have several pro-supply consequences:

It would not be at all pro-supply in smaller markets that cannot support large aircraft, even though many of those markets have historically supported some level of profitable scheduled service. I'm not thinking of EAS markets but somewhat larger cities like CRW or ATW.

Quoting enilria (Thread starter):
and forcing WN to make room for DL at DAL.

Yeah, because DL is such a low fare carrier at places like CVG.

/sarcasm
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peanuts
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:46 am

Quoting Matt6461 (Reply 11):
Market fundamentalism is usually stupid.

Could you please elaborate on this?

Quoting Matt6461 (Reply 11):
why not view air transportation as public infrastructure - like transit, rail, highways.

These are all money pits.
Look at AA, UA and DL's current motivations to be the best.
Amtrak has no motivation. They can't even run a solvent Dining Car operation.

There's a place for government. On the surface, from a respectable distance.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 2:58 am

Quoting MKIAZ (Reply 7):
The travelling public sees it as ridiculous fares.

I imagine that in some markets fares are very high, but in some it is an awesome deal. People pay $150 each way to get on an aircraft and fly for 5-6 hours coast-to-coast at 550 mph. Then get off at the other end and pay $75 for a Uber ride that takes 1 hour at 20 mph. It is ridiculous.
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:09 am

Quoting commavia (Reply 13):
In my opinion, regulation has a rightful and reasonable place in the civil aviation system when it comes to safety and foreign relations (i.e., bilaterals), but other than that, I believe regulation should have essentially zero role.

I generally respect your keen analytical mind, commavia. Here I think we have an ideological difference. The way I would phrase that difference is that you seem to believe that free markets and lack of regulation are a good in and of themselves. I believe that free markets are a tool that we a society use to engender positive social outcomes - through publicly enforced property rights etc. My argument is a non-starter against your position, which I broadly call market fundamentalism, because in the strong version of market fundamentalism there are no facts about improved human welfare that can justify the outrage of meddling with the sacred (market outcomes). I'm not saying that you're advancing that version, but your argument's philosophical underpinnings lean in that direction.

Quoting commavia (Reply 13):
why should the government be incentivizing "pro-supply consequences?"

My practical answer is obvious: greater supply means lower prices. If pro-supply regulatory incentives increased the supply of ASM by, say, 50%, but decreased airline profits by, say, 30%, I'd be entirely fine with that. No airlines would go out of business; their stock prices would simply come down. In the meantime the consumer surplus created by 50% greater supply would, imo, vastly outweigh the utility loss suffered by presumably diversified investors in airlines. Plus GDP would improve with easier access to face-face meetings and shipping of goods. Transportation has a multiplier effect on economies, which is why we're generally happy to subsidize roads, rail, and even airports.

My philosophical answer goes to the ideological differences I outlined above, and we could spend a lifetime on that...

Quoting peanuts (Reply 15):
Could you please elaborate on this?

See above. See also the writings, e.g., John Rawls and Michael Sandel. It's probably too big an argument to have here but I couldn't help myself but to say at least something against the belief that free markets are always the best.

Quoting peanuts (Reply 15):
Amtrak has no motivation. They can't even run a solvent Dining Car operation.

Agreed. Amtrak should be privatized, subsidized, and heavily regulated. I'm all for public airlines; I'm just also for giving them incentives to produce the kinds of outcomes that are best. For myriad reasons (risk aversion, anti-competitive motives, cost externalization, benefit non-capture), private companies don't have incentives to create socially optimal outcomes unless we (the people, acting through duly-elected representatives) supply them.

[Edited 2015-06-18 20:10:30]
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:15 am

Quoting jcwr56 (Reply 4):
He complains yet offers ZERO ideas. Typical politician at its' finest.

   With over a year to the elections. I HATE politicians. Worthless people.

Quoting flyDTW1992 (Reply 5):
This is nonsense. It's not as though it's some evil secret these airlines are using to effectively turn a profit. It's good business. They've finally hit a viable business environment post-deregulation and post-9/11 and now this idiot decides he doesn't like it.

  

Quoting MKIAZ (Reply 7):
Ultimately the government can't do much about the pricing scheme since it's very likely no laws are being broken, but they could help smaller airlines with programs to take away slots from the big 3 (or just make new slots) and give them to smaller airlines at slot restricted airports.

They can't do that either--the US3 would sue and win because they paid for assets and the government came in and took their assets. Airports would have to create new slots and/or gates in order for this to work.

Quoting commavia (Reply 9):
And that's because - in my opinion - the traveling public was spoiled with "ridiculous" (ridiculously low) fares

          

Quoting commavia (Reply 9):
The traveling public - and I include myself in that group - had it too good for too long and it's about time they pay what it costs to operate a viable air transportation system that earns its cost of capital and generates a risk-appropriate return for investors. That's not too much to ask.

          

Quoting LAX772LR (Reply 12):
Except that there's currently more revenue seats than at any point in the last three decades, yet PRASM overall is down..... meaning more people, are going to more destinations, than at any point in the USA's deregulated history; and paying less to do so.

   I don't see all the fuss. In general, every route I fly has either stayed the same price or dropped.

Quoting peanuts (Reply 15):
Amtrak has no motivation. They can't even run a solvent Dining Car operation.

  

Quoting peanuts (Reply 15):
There's a place for government. On the surface, from a respectable distance.

     And I'm a Democrat. But government in the airline/transport industry has never worked well. See Amtrak.
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enilria
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:20 am

Quoting catiii (Reply 2):
So if McDonald's and Burger King both publicly agree on the best way to price a hamburger is that collusion?

Well yes, that is the definition of the word.

Quoting commavia (Reply 3):
Since when is it the government's job to prevent companies from withholding their services?

Publicly coordinating to shame the other airlines into withholding capacity to keep up price is the same as OPEC and no U.S. company is allowed to be in OPEC.

Quoting MSPNWA (Reply 6):
Consolidation that should have been blocked.

Exactly

Quoting MKIAZ (Reply 7):
Let's be honest, the main thing that allowed this "viable business environment" to occur was the government allowing 6 airlines to merge into 3.

Yup and it went too far.

Quoting MKIAZ (Reply 7):
They don't have to be illegally colluding to realize that none of the big 3 are going away anytime soon, so having one of the 3 pricing aggressively to hurt another one makes no sense for anyone involved. But pricing aggressively to hurt a smaller airline is VERY worthwhile.

I see every week in the OAG threads how the big airlines can now just crush the smaller airlines. Look at DL in SEA vs. AS. Long term DL can afford to lose tons of money in that project and AS cannot as it is their whole business.

Quoting par13del (Reply 8):
Quoting enilria (Thread starter):
allowing the ME3 to continue to expand in the USA,

The US3 are making record profits on their domestic operations, the ME3 expanding to the US will have no effect.

Agreed

Quoting Matt6461 (Reply 11):
Quoting catiii (Reply 2):
So if McDonald's and Burger King both publicly agree on the best way to price a hamburger is that collusion?

If they publicly agree that burgers should be priced at X, then yes. That's not quite what's happening here, but they are certainly trying to send each other signals that they will not be expanding capacity - leading the other guys to maintain an equilibrium of lower supply.

DOJ has already ruled that signaling of future plans between airlines is illegal even if it is in a public forum. There was a consent decree when the same thing happened using language embedded in fare basis codes to threaten smaller competitors.

Quoting Matt6461 (Reply 17):
The way I would phrase that difference is that you seem to believe that free markets and lack of regulation are a good in and of themselves.

In a perfectly free market all the airlines would merge down to one and then operate as few flights as possible for the maximum price possible while charging 1 cent fares in any market a new carrier entered until the new carrier bled to death. Obviously you can't have a 100% free market. We are closer on the spectrum to that than we have ever been before. I think we are too close, but it's a matter of opinion. The problem is that if we ignore the rest of the world where competition is increasing rapidly and instead have an oligopoly here our airlines will become massively uncompetitive in the global marketplace which is why the US3 is trying to block the ME3 from expanding.
 
commavia
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:29 am

Quoting Matt6461 (Reply 17):
My argument is a non-starter against your position, which I broadly call market fundamentalism, because in the strong version of market fundamentalism there are no facts about improved human welfare that can justify the outrage of meddling with the sacred (market outcomes).

Well I suppose you and I have a different definition of "improved human welfare." To me, the fact that we have a stable, commercially viable air transportation system capable of safely, reasonably reliably and still incredibly affordably (by historical standards, adjusted for inflation) transporting millions of people every day while also employing (directly or indirectly) millions of other people and generating earnings for still-thousands-more owners is the defintion of "improved human welfare."

I guess what I take issue with - not just with the above, but with the general tenor and sentiment of this and other threads like it - is the sense that the only type of "human welfare" that matters is that of passengers (consumers). There are plenty of other "humans" with a stake in the air transportation system, and in general their welfare was absolutely not improved by the state of affairs from 1978 up until the late 2000s, when the barriers to entry were low and the industry was legally prohibited from consolidating to a rational state. Ask a seasoned airline employee or shareholder how they feel about the "improvement" of their "welfare" during that period.

Again - I would totally understand, and possibly even agree with, these arguments if airlines were making 50% net margins and truly exercising monopolistic power. But for all these hysterics and protestations by politicians and the media, that is simply not the case. The industry structure today has settled into an oligopoly with four very large nationwide competitors plus a constellation of smaller operators offering a widely varying range of products and prices either regionally or nationally. In the context of virtually any single other major consumer-market-driven industry on earth, that would be considered pretty much standard, so I continue to fail to see why airlines are constantly held to a different standard. And, again, this rational industry structure is producing net margins in the high-single-to-low-double-digit range on average. Given the cost, complexity and risk inherent in air transportation - is anyone honestly suggesting that ~7-14% net margins are unreasonable?

Quoting Matt6461 (Reply 17):
My practical answer is obvious: greater supply means lower prices.

And why should the goal be lower prices? I guess therein lies the "philosophical difference," as you rightly put it. I don't believe the goal in any competitive free market should be "lower" prices, but instead "profit-maximizing" prices subject to the natural forces of supply and demand, as augmented as minimally as possible by the practical constraints of market access. I understand the airline industry - like really every industry - can never truly be "free" because the reality is that market access is simply not infinite in some places, but instead constrained by runways, gates, slots, etc. Nonetheless, in general, I don't want a system that is always oriented towards "lower prices." We tried that for 30 years after deregulation and it was pretty much a complete disaster for many of the other constituencies and stakeholders in the air transportation system except the passengers who paid those low fares. Employees and shareholders, however, were perpetually screwed.

[Edited 2015-06-18 20:42:53]
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:30 am

Quoting MKIAZ (Reply 7):
People within the airline industry see it this way. The travelling public sees it as ridiculous fares.

The traveling public is wrong.

Quoting commavia (Reply 9):
And that's because - in my opinion - the traveling public was spoiled with "ridiculous" (ridiculously low) fares for several decades

  

Unfortunately as we've seen in other areas, the government has no problem pandering to the insatiable desire of the general public to get things for free or at greatly reduced rates compared to the actual cost of the business.
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commavia
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:35 am

Quoting enilria (Reply 19):
Publicly coordinating

So essentially airlines are illegally colluding? Do you have proof of that? If so, file a lawsuit.

Quoting enilria (Reply 19):
I see every week in the OAG threads how the big airlines can now just crush the smaller airlines. Look at DL in SEA vs. AS.

Yes. By all means let's look at Alaska, and how Delta is allegedly "crushing" it's smaller rival in SEA. Last time I checked, smaller Alaska getting "crushed" amounted to generating incredibly impressive profit margins that are still the envy of much of the industry - including Delta!

And while we're examining how the "big airlines" can "crush" the "smaller airlines," let's take a look at how JetBlue and Spirit and Allegiant are doing in the "crushed" department. Again - all seem to be holding their own just fine.

So the key differentiation, to me, seems to be not really a matter of scale, but simply of smart management and sound business models. The "smaller airlines" that have been "crushed" - both before and after the recent wave of consolidation - were generally those either (a) mismanaged, and/or (b) with ridiculous business models that never had a chance of success. Witness Skybus, California Pacific, People Express, etc. and on and on.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:36 am

Good. The DOJ should enforce the law.

Quoting flyby519 (Reply 1):

What happened to free market? Didn't de-regulation happen 30+ years ago?

Aviation free market was destroyed after the fuel crisis of 2008. What we have now is oligarchy, especially in the Trans-Atlantic marketplace. Both sides of Atlantic are minting money and laughing at the dumb sheep who pay the fares.
 
commavia
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:37 am

Quoting Flighty (Reply 23):
Both sides of Atlantic are minting money

With, again, "minting money" amounting to net margins in the ~7-14% range. It continues to astound me that anyone finds that to be unreasonable for an industry as costly, complex and risky as air transportation, but apparently lots of people do.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:43 am

Quoting enilria (Thread starter):
I completely agree. This is effectively price-fixing and collusion through restriction of supply. I guess you could also call it a cartel, not unlike OPEC, and enforced by Wall Street. I hope DOJ actually does something...

And what do you think would happen to supply when one of the big 3 go bankrupt because there was "capacity discipline".
That is a major component why so many airlines failed, they focused on market share instead of profitability. They finally have it right (that is if you want them to be around long-term without government assistance)

Quoting flyDTW1992 (Reply 5):
This is nonsense. It's not as though it's some evil secret these airlines are using to effectively turn a profit. It's good business. They've finally hit a viable business environment post-deregulation and post-9/11 and now this idiot decides he doesn't like it.

Pretty much.

Quoting Matt6461 (Reply 17):
My practical answer is obvious: greater supply means lower prices. If pro-supply regulatory incentives increased the supply of ASM by, say, 50%, but decreased airline profits by, say, 30%, I'd be entirely fine with that. No airlines would go out of business; their stock prices would simply come down.

I think you realize how cost intenstive the airline industry is. It isn't cheap to add 50% ASMs. If they did that profits wouldn't decrease by 30%, they would decrease by at least 200%. Just about everything they would fly would lose money (lots of money). A small carrier can grow by 50%, if one of the US3 grew by 50% it would throw the entire industry's supply and demand out of balance. And that is just one, you don't think the others would sit idle and watch a competitor try to steal their customers? And now you are in a death-spiral.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:54 am

Quoting MSPNWA (Reply 6):

Except the fare discipline historically breaks down with 4+ competitors. If profits were that good, WN, B6, NK, and G4 would be expanding faster than they are.

ROC is a mantra wallstreet looks at.

Quoting commavia (Reply 9):

Yes. Too easy. I just paid $400 for TCON which I thought was fair pre-bag fee. Others disagree... I guess we're proving air travel is an elastic market....

Quoting LAX772LR (Reply 12):

I'm amazed at the air travel available. If ROC was double what it is today, I would complain. But when so much is offered for a fair return on capital...

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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:55 am

The legacies aren't the only game in town and haven't been for some time. While they practice capacity discipline, the NK's, F9's, AS's, and B6's continue to grow and fill in the gaps. If the micro-managing regulators put a gun to the head of the legacies and tell them to expand it will likely put pressure on the LCC expansion plan and ultimately impact overall capacity in ways not anticipated. It's always the unintended consequences that foil these brilliant plans by the regulators who think they know better than the market. And, say, with the Pope's ultimatum today, shouldn't we be praising capacity discipline? Aren't these evil carbon spewing aircraft contributing to the destruction of the planet?
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:56 am

Quoting commavia (Reply 13):
Because it isn't like transit, rail or highways in my opinion.

Air transportation, like road and rail transportation, increases business opportunities and overall levels of economic activity. Plus it's a good that we just want people to have, just as we want the urban poor to be able to get around in cities, for example.

Quoting commavia (Reply 20):
stable, commercial viable air transportation system capable of safely, reasonably reliably and still incredibly affordably (by historical standards, adjusted for inflation) transporting millions of people every day while also employing (directly or indirectly) millions of other people and generating earnings for still-thousands-more owners is the defintion of "improved human welfare."

I am not proposing a return to the old regime. I'm actually fine with 4 main airlines and broad deregulation of routes. The changes I propose would tweak, at the margins, airlines' incentives to focus on yield and to restrict supply anti-competitively.

Quoting commavia (Reply 20):
here are plenty of other "humans" with a stake in the air transportation system, and in general their welfare was absolutely not improved by the state of affairs from 1978 up until the late 2000s,

Like I said I agree the ancien regime sucked. But boo fucking hoo to the shareholders. They're diversified - even a 30% hit to their airline holdings won't hurt them a ton, while society would see great benefits. This might go to our philosophical differences. I care a bit more about average people flying to see family, for instance, than about equities that are disproportionately held by relatively few individuals.

Quoting commavia (Reply 20):
Given the cost, complexity and risk inherent in air transportation - is anyone honestly suggesting that ~7-14% net margins are unreasonable?

Not at all. And they could keep those margins in a competitive arena that had slightly different incentives around the capacity/yield tradeoffs. CASM would go down in my proposal, for instance, partially balancing the RASM hit of lower fares.

Quoting commavia (Reply 20):
I don't believe the goal in any competitive free market should be "lower" prices, but instead "profit-maximizing" prices
Quoting commavia (Reply 20):
We tried that for 30 years after deregulation and it was essentially a disaster for all the other constituencies and stakeholders in the air transportation system except the passengers who paid those low fares.

One should not give a damn about a market's goals. This is why I think of market fundamentalism as the U.S.'s true religion - it causes sensible people to talk about nonsensical things like the goal's of a system of contractual and property rights. A market isn't a thing whose preferences matter in the least. The only preferences that exist and that matter belong to individual people. The real goal is ensuring access to affordable, reliable transportation. We as a society can choose among many options, including (1) 80's style regulation (2) current free-er market (3) free market tweaked at margins to encourage higher supply. (1) is the worst, (3) is the best, (2) is better than (1) imo.
 
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RE: Senator Asks DOJ Investigate Capacity "Discipline"

Fri Jun 19, 2015 3:57 am

Quoting enilria (Reply 19):
Well yes, that is the definition of the word.

Then perhaps you're in need of a new dictionary.

Let's review:
Collusion
[kuh-loo-zhuh n]

Law. a secret understanding between two or more persons to gain something illegally, to defraud another of his or her rights


http://dictionary.reference.com/browse/collusion?s=t

  • Secret understanding? ....no.   
    Seeing that a competitor has raised/lowered fares, and then reactively responding in like kind, does not qualify as a "secret understanding."

  • Gain something illegally? ....no.   
    Revenue or pax gained as a result of raising/lowering fares as a market response, is not an illegal gain.

  • Defraud another? ....no.   
    People often pay less for a 1hr long plane ride, than you'd pay for an 1hr taxi ride-- no one's getting defrauded here.

  • Of his or her rights? ....no.   
    Flying is a privilege, not a right.

    So again, what's this definition that you're referring to again?


  • [Edited 2015-06-18 21:01:32]
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    flyguy89
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:00 am

    Quoting enilria (Reply 19):

    In a perfectly free market all the airlines would merge down to one and then operate as few flights as possible for the maximum price possible while charging 1 cent fares in any market a new carrier entered until the new carrier bled to death.

    In a perfectly free market, that would be impossible because there'd be a constant stream of competitor airlines entering the market place to challenge that monopoly. Even in the not-so-free market of today, airlines like G4 and NK can enter a market charging rock bottom fares AND make money off of those fares, rendering the traditional tactics of the legacies (increased capacity and matching fares) ineffective.

    Quoting MKIAZ (Reply 7):
    The problem with the airline industry is that it is *really* hard to start a new airline

    Not really. If PeoplExpress take 2 taught us anything, it's that starting an airline is not unreasonably hard.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:03 am

    Quoting flyguy89 (Reply 30):
    n a perfectly free market, that would be impossible because there'd be a constant stream of competitor airlines entering the market place to challenge that monopoly.

    How do you figure?

    In a "perfectly free market" a monopoly could easily grow to the point where it can cross-subsidize operations sufficiently to choke new entrants out of the market; or can even collude with potential financiers to deny them capital.
    We'll discuss... later, if you somehow manage to survive that is. ~Sesshomaru
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:11 am

    Quoting LAX772LR (Reply 29):

    I'm glad you see wiki as a reliable source, but that definition would not be applied in anti-trust law as it is overly simplistic.

    http://www.justice.gov/atr/public/guidelines/211578.htm

    Quoting LAX772LR (Reply 29):
    Flying is a privilege, not a right.

    The anti-trust division of the DOJ would argue, "American consumers have the right to expect the benefits of free and open competition — the best goods and services at the lowest prices." So yes it is a right to fly in a sense. Pricing is a whole different discussion. True anti-competitive analysis of the airline industry is much too nuanced for this forum.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:14 am

    Quoting LAXtoATL (Reply 25):
    I think you realize how cost intenstive the airline industry is. It isn't cheap to add 50% ASMs. If they did that profits wouldn't decrease by 30%, they would decrease by at least 200%.

    I'm talking about moving a competitive industry to a new profit-maximizing equilibrium. Consider the following hypothetical:

    -In world-state A, airlines can have 10% margin on $10bn revenue, flying 100mil pax/year.

    -In world state B, airlines can have 6% margin on $12bn revenue, flying 140mil pax/year.


    If a regulatory incentive existed to move from A to B, with cheaper flights but lower airline profits, a decision not to do so would be immoral, imo. That's my main point. I'm not certain what effect on capacity my regulatory tweaks would cause, I'm just saying that it's philosophically charged - and erroneous imo - to state that we shouldn't do such tweaks because market outcomes are sacred or some other broadly accepted U.S. religious dogma.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:14 am

    Quoting flyguy89 (Reply 30):
    In a perfectly free market, that would be impossible because there'd be a constant stream of competitor airlines entering the market place to challenge that monopoly.

    Depending on the industry some free markets trend towards perfect monopolies and other trend toward competition. Monopolistic competition also exists, which isn't always ruled illegal, in which few firms in a market operate as a monopoly as a result of market conditions.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:19 am

    Quoting Matt6461 (Reply 17):
    increased the supply of ASM by, say, 50%, but decreased airline profits by, say, 30%

    A 50% ASM increase across the industry would be all but guaranteed to bankrupt every airline in the country.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:20 am

    Quoting LAX772LR (Reply 31):
    a monopoly could easily grow to the point where it can cross-subsidize operations sufficiently to choke new entrants out of the market

    They can already pretty much do that already, yet they don't because in many cases it's a money-losing proposition, even more so against a competitor like G4, NK, and I guess now F9 who can absorb their blows and make still be profitable. You have to consider indirect competition as well from other modes of transportation.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:24 am

    Quoting catiii (Reply 2):
    So if McDonald's and Burger King both publicly agree on the best way to price a hamburger is that collusion?

    Yes.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:24 am

    Quoting MKIAZ (Reply 7):
    But pricing aggressively to hurt a smaller airline is VERY worthwhile.

    The last time DL failed to try to compete with WN, the repercussions were felt within the company all the way up until they filed for bankruptcy.

    Quoting commavia (Reply 9):

    And that's because - in my opinion - the traveling public was spoiled with "ridiculous" (ridiculously low) fares for several decades during tumult and upheaval following deregulation when airlines were unwilling or unable to do what was necessary to actually become commercially viable.

             HEAR!! HEAR!!

    Quoting Matt6461 (Reply 28):
    I care a bit more about average people flying to see family, for instance, than about equities that are disproportionately held by relatively few individuals

    As opposed to the workers at those airlines that are actually receiving profit sharing on a consistent basis?  
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:29 am

    Quoting osubuckeyes (Reply 32):
    So yes it is a right to fly in a sense.

    Ah, then I'm sure those who've been blacklisted from airlines, or denied boarding for a slew of reasons other than available capacity, would be thrilled to know that they suddenly have a "right to fly."

    Quoting osubuckeyes (Reply 32):
    it is overly simplistic.

    So's the general comprehension in regard for most matters among this site's membership... like for like dude.

    No one's claiming that that's the specific argument that's going to be made in a court-room, but it does effectively serve to show why claims that reactive adjustment of fares to match publicly-declared fare changes by competitors, amounts to collusion, are ridiculous on their face.

    Quoting flyguy89 (Reply 36):
    yet they don't because in many cases it's a money-losing proposition

    Hmm, I'm gonna go with: no-- they don't do it because they're going to get prosecuted, barred, and possibly broken up. Not that that stops plenty from trying.

    [Edited 2015-06-18 21:31:49]
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:30 am

    Quoting commavia (Reply 3):
    Since when is it the government's job to prevent companies from withholding their services?

    Ever hear of the Civil Rights Act?
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:42 am

    Quoting LAX772LR (Reply 39):
    claims that reactive adjustment of fares to match publicly-declared fare changes by competitors, amounts to collusion, are ridiculous on their face.

    That is not the claim though. The claim is that airlines act overly conservative in offering capacity increases in order to keep fare artificially high to create a monopolistic effect.

    Quoting LAX772LR (Reply 39):
    So's the general comprehension in regard for most matters among this site's membership... like for like dude.

    Thus why I said anti-competitive analysis is way too nuanced for this thread, and I will leave it at that.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 4:47 am

    Quoting osubuckeyes (Reply 41):
    That is not the claim though. The claim is that airlines act overly conservative in offering capacity increases in order to keep fare artificially high to create a monopolistic effect.

    And why shouldn't they? They're a publicly traded company. They have every right to set prices as they see fit and to make a profit.

    If we're going to waste time and money on fighting a monopoly, I'd rather it be cell phone companies, internet providers and the cable companies. In today's online and mobile world, a cell phone and the internet is FAR more important and much more of a "right" than air travel. You can still drive. You can't use a pay phone because they don't exist anymore.
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 5:10 am

    Isn't everything on the market technically priced as a result of a restriction of supply? I do not see why how this is any different, or why it should be treated differently. Also, collusion is the wrong idea.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 5:19 am

    Quoting northwestEWR (Reply 42):
    And why shouldn't they? They're a publicly traded company. They have every right to set prices as they see fit and to make a profit.

    Because that's ILLEGAL if it is a harm to the overall competitive landscape. There is a reason anti-trust law exists. Educate yourself...

    https://en.wikipedia.org/wiki/Sherman_Antitrust_Act
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 5:47 am

    Quoting LAX772LR (Reply 12):
    Except that there's currently more revenue seats than at any point in the last three decades, yet PRASM overall is down..... meaning more people, are going to more destinations, than at any point in the USA's deregulated history; and paying less to do so.

    So explain to me again how "consolidation" is the problem.   

    The problem is that you're forgetting the technology factor. It's a common mistake to compare to status quo. Technological advancement naturally allows us to consume more for less. The debate is whether the airlines or the flying public are gaining more than their proper share of technology advances. An oligopoly means the airlines are.
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 5:57 am

    Quoting osubuckeyes (Reply 44):
    Because that's ILLEGAL if it is a harm to the overall competitive landscape. There is a reason anti-trust law exists. Educate yourself...

    Prove that it's harmful to the competitive landscape. For the first time in a decade, airlines are making money and LCCs like G4, NK, F9 and B6 are continuing to expand and take new deliveries. If it was a deeply un-competitive environment, those carriers wouldn't be expanding and/or making money.
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 6:01 am

    Quoting northwestEWR (Reply 46):
    Prove that it's harmful to the competitive landscape. For the first time in a decade, airlines are making money and LCCs like G4, NK, F9 and B6 are continuing to expand and take new deliveries. If it was a deeply un-competitive environment, those carriers wouldn't be expanding and/or making money.

            

    Exactly. Even at a fortress hub like DTW all you have to do is look over at the sea of colorful LCC tails (most of which are modern, new aircraft like sharklet-equipped A320s) at the other terminal to realize this market is not anti-competitive in any deep, harmful way.
    Now you're flying smart
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 6:02 am

    Quoting enilria (Thread starter):
    I completely agree. This is effectively price-fixing and collusion through restriction of supply.

    It's no such thing. Where were you when airlines flooded the market with a glut of supply in a fare war? People do not have a right to "low fares" or even "affordable fares". They can buy what is being offered or they can choose not to fly.

    Here's what Blumenthal (and you) are missing: Think about why planes are packed. Think about why fares are high. SOMEONE is paying these fares. SOMEONE is flying. Why in the world should ANY business sell their product for LESS than what someone is freely willing to pay for it?
     
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    RE: Senator Asks DOJ Investigate Capacity "Discipline"

    Fri Jun 19, 2015 6:04 am

    Quoting commavia (Reply 9):
    And that's because - in my opinion - the traveling public was spoiled with "ridiculous" (ridiculously low) fares for several decades during tumult and upheaval following deregulation when airlines were unwilling or unable to do what was necessary to actually become commercially viable. The traveling public - and I include myself in that group - had it too good for too long and it's about time they pay what it costs to operate a viable air transportation system that earns its cost of capital and generates a risk-appropriate return for investors.

    Bravo! Exactly!

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