commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 11:57 am

Quoting EA CO AS (Reply 99):
Just overheard on CNN, reporting on the DOJ's probe:

"Fares have skyrocketed....according to government data, airfares have increased 16.4% since 2010..."

The stupid...it burns...

Exactly. Isn't it remarkable how there was no CNN report, let alone government inquiry, when airfares declined so dramatically in the decades before 2010?

  

Pathetic.
 
washingtonflyer
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:00 pm

Capacity discipline is a troubling phrase.

I'm involved tangentially in some antritrust work for a major firm client. I don't do antitrust per se.

One of our clients has been the target of several major civil actions (sherman act and clayton act). Repeated refrains in these civil complaints is that there are 1) press articles where industry heads in this industry stress the need for capacity rationalization and capacity rightsizing, and 2) industry association meetings where CEOs and EVPs routinely talk about market dynamics (including both pricing and supply).

To a plaintiff's lawyer, that is red meat, and a jury could easily be swayed that way. Our motions were summary judgment were tossed out like last week's newspapers and several defendants have already settled in some of the cases.

With that being said, airlines are not viewed very favorably right now. Fares are sky high; passengers are nickled and dimed for practically every amenity that had previously been free (bags, food, even a seat in the middle half of the plane). Change fees are outrageous. And despite the fact that Jet A pricing is 40% less than it was from 2010 to 2014, fares haven't gone down one iota. Indeed, I've never had to pay more to fly to California from DC than I did this past year.

On top of that, airlines in their merger proceedings have always promised better customer service, more benefits, and better value. That clearly has NOT happened. Capacity is down or, at best, flat, and fares are up.

So, yeah, I'd say that is a ripe one for someone looking to score political points. Whether it sticks or not will obviously be determined later...
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:21 pm

Quoting washingtonflyer (Reply 101):
On top of that, airlines in their merger proceedings have always promised better customer service, more benefits, and better value. That clearly has NOT happened.

According to who? Not everyone defines "value" the same way. Personally, I continue to strongly feel that all of these alleged evils and ills perpetrated by the airline industry are producing returns that are incredibly reasonable. But I recognize that others feel differently.

Similarly, I know many do, indeed, think that, "better customer service, more benefits, and better value," have "NOT happened," but I - personally - feel very, very differently. As a frequent air travel consumer myself, I think we are living in essentially a second golden age of air travel. The vast majority of air travel consumers today have incredible choice among multiple competitors, offering a wide range of products at a wide range of price points (from Spirit and Allegiant to JetBlue, Southwest, Alaska and Virgin America to AA, Delta and United, and everything in between). And all the while, airlines are investing in new airplanes, onboard entertainment and wifi, better premium cabins with better meals, new ground infrastructure like terminals and lounges, and - perhaps most importantly for me - modernized IT platforms that are steadily making it easier and faster to interact and transact with airlines than ever before.

If the price for all of the above is airfares that are rising at sub-4% CAGR - as CNN apparently so shockingly reported! - that's fine by me. There's more to "value" than just "price." I continue to find it astoundingly reasonable and logical for prices in the airline industry to be rising in the low-single-digits so as to produce net margins in the high-single-to-low-double digits, and it continues to amaze me that people think there is a problem with this. But hey - to each their own.
 
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enilria
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:24 pm

Quoting washingtonflyer (Reply 101):

I agree with most of that. I think the industry is seen as evil by the consumer which is a huge factor. Otoh, the industry is very powerful with lawmakers.

I think, at the least, this will divert a lot from the lobbying effort the US3 is using against the ME3. The same govt affairs resources will now be diverted.

B6 in their recent Fair Skies filing asked for repeal of JVs with antitrust immunity, or at least periodic reviews. I wonder if that is at the crux of this? It could also be a result of the EWR slot proposal. The airlines just went too far. I'm sure WN's anti-competitive behavior at a DAL helped convince the DOJ there were no white hats in the Big 4 any more.
 
PSU.DTW.SCE
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:40 pm

Quoting enilria (Reply 86):
ROTFL. So deserved. We'll see if it goes anywhere.

Yeah, I expect a bunch of political grandstanding, stupidly ignorant comments, and something that basically goes nowhere. It will amount to as much as a UN resolution. You can see how much faith I have in the DOJ......

Quoting enilria (Reply 103):
I agree with most of that. I think the industry is seen as evil by the consumer which is a huge factor. Otoh, the industry is very powerful with lawmakers.

Outside of this board, the average consumer loathes the airline industry. They feel like they are screwed on airfare, customer service, and route cutbacks. The industry has very unfavorable view.
 
BestWestern
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:42 pm

I see DL in Seattle as a competitive move to build market share.


I see DL/UA in NYC as colluding to reduce competition on city pairs.


Definition


A non-competitive agreement between rivals that attempts to disrupt the market's equilibrium. By collaborating with each other, rival firms look to alter the price of a good to their advantage. The parties may collectively choose to restrict the supply of a good, and/or agree to increase its price in order to maximize profits. Groups may also collude by sharing private information, allowing them to benefit from insider knowledge.

Read more: http://www.investopedia.com/terms/c/collusion.asp#ixzz3ejmH2s9Z
A318/19/20/21 A300/10 A332/33 A342/3/5/4 A358 A388
B732/3/4/5/6/7/8 B741/2/3/4 B752 B762/3/4 772/3/W B788
TU134 TU154.
F70/100 F50
AT42/72
BaE 146 / AR8/J
EMB110/120/135/145/170/190/195
CR2/7 Q400
D328
DC9 /10 / 11 MD81/2/87
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:48 pm

I don't often agree with much of what he says, but I think this is pretty much right on the mark on the subject:

http://www.forbes.com/sites/danielreed/2015/07/02/doj-investigation-big-airline-collusion-or-bureaucratic-bullying/

A few excerpts:

Similarly, it’s likely that some in the Justice Department’s upper echelon simply fail to understand how businesses in general compete and how ruinously competitive the airline industry, in particular, always has been. Their legal training, even in antitrust law, does not automatically confer on them full understanding of competition issues.

Furthermore, on a net margin basis, the industry still is a below-average performer, which will make it near-impossible for the government to convince anyone that the airlines are doing anything wrong. (If they are cheating, they’re doing a pretty mediocre job of it.)

All indicators of future travel demand – stock market instability, high consumer and national debt levels, stagnant wages, political uncertainty surrounding the upcoming presidential election, high corporate tax rates, and rising political and economic instability in both Europe and Asia – say that airlines should be cautious about adding too much capacity right now. Besides, why would they fiddle with a business formula that finally seems to be working decently well for them?

So, unless Justice uncovers tape recordings or emails in which executives from two or more carriers engage in a discussion about limiting capacity in order to prop up fare prices its likely nothing of importance will come from this new antitrust investigation.
 
burnsie28
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 12:55 pm

As far as airfare goes (regardless of if these acusations are true or not) I feel like the DOJ only has themselves to blame for allowing all these mergers that reduced competition to next to nothing.
 
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enilria
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:29 pm

Quoting commavia (Reply 106):

In past actions all DOJ has walked away with are consent decrees just to stop continuing their behavior. I do think this serves as notice that the limit has been reached.
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:34 pm

Quoting enilria (Reply 108):
In past actions all DOJ has walked away with are consent decrees just to stop continuing their behavior.

I'll look forward to the DOJ's "consent degree" telling airlines to "stop continuing their behavior" of matching capacity with demand so as to create value.

Or is the "consent degree" simply going to be for airline CEOs to "stop continuing their behavior" of "signalling" by way of stating the obvious in open, public fora?
 
richierich
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:36 pm

Quoting RDUDDJI (Reply 22):
This. Perhaps the DOJ should investigate itself for approving all these mergers that have eliminated much of the competition.

I think that is the sentiment many of us have...the airlines are finally making money, so it must be collusion, right?!
None shall pass!!!!
 
sccutler
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:36 pm

Quoting commavia (Reply 68):
I literally cannot wait for the outcome of this "investigation."

...

It's called capitalism.

Hear him, hear him!

The market has a great way of sorting things out, and it has done just that.
...three miles from BRONS, clear for the ILS one five approach...
 
WPIAeroGuy
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:45 pm

Quoting PSU.DTW.SCE (Reply 104):
Quoting enilria (Reply 103):
I agree with most of that. I think the industry is seen as evil by the consumer which is a huge factor. Otoh, the industry is very powerful with lawmakers.

Outside of this board, the average consumer loathes the airline industry. They feel like they are screwed on airfare, customer service, and route cutbacks. The industry has very unfavorable view.

I really think this is the heart of the issue. The airlines have every right to make as much profit as they can. However, from the public's point of view, what you get for your dollar is less. Less food, less legroom, more hassle at the airport. The people flying F and using the lounges are a minority. You may get a PTV, or have to pay out the rear for WiFi, but other than that the whole travel experience (from the public's perception) has gotten worse.

I think airlines really need to look hard at what they provide for the money they charge, and find ways to increase fares while also increasing what you get for your dollar.

Imagine if Apple decided that the iPhone 8 would be slower and have less memory than the 7, because slower chips are cheaper. And then Google, Samsung, Nokia, HTC, realized the same thing. But prices wouldn't drop, because once Apple stops producing the 7, anyone buying a new phone would have to buy an 8. Fortunately this hasn't happened in the tech industry yet, but that's why that industry has a much better public perception than airlines.

The marginal price to upgrade service from basic Y to C or even Y+ on the majors is ridiculous. I fly mostly on Delta up and down the east coast, and it costs usually $30-$40 a segment to upgrade to Y+. And what do I get? 2 hours in a chair with an inch more legroom and "free" booze. I'm 6'5" and could certainly use that inch, but a lot of the time I just suck it up because it would add at least $120 roundtrip to my ticket, not including anyone I'm traveling with.
-WPIAeroGuy
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:51 pm

Quoting WPIAeroGuy (Reply 112):
I really think this is the heart of the issue. The airlines have every right to make as much profit as they can. However, from the public's point of view, what you get for your dollar is less. Less food, less legroom, more hassle at the airport. The people flying F and using the lounges are a minority. You may get a PTV, or have to pay out the rear for WiFi, but other than that the whole travel experience (from the public's perception) has gotten worse.

I think airlines really need to look hard at what they provide for the money they charge, and find ways to increase fares while also increasing what you get for your dollar.

Sadly, I agree - most of the general the public does think they're getting screwed by paying more for less.

From my perspective, however, they should be paying more for less, as they were paying too little for too much for the first three decades of deregulation. Unfortunately, the public's understanding, let alone appreciation, of air transportation is - in my experience - sorely lacking, and thus so are their expectations generally unrealistic. When the traveling public was conditioned for decades to think that free food and extra legroom, at unprofitable fares, was acceptable and indeed normal, of course they'll be unhappy when suddenly they are asked to pay what it actually costs to run an airline and make a reasonable return - despite the fact that consumers already have to do that with virtually every single other product or service they procure.

This serves as yet another reminder of what a double standard - in oh-so-many ways - airlines are held to.

[Edited 2015-07-02 06:53:37]
 
CitrusCritter
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:52 pm

Maybe DOJ shouldn't have approved all the anticompetitive mergers.
 
AirbusCanada
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 1:56 pm

Quoting vin2basketball (Reply 18):
Everybody loses their minds the minute airlines make an ounce of profits. I don't understand why. Who's complaining about the billions made by Apple, or Google many of whom operate in much less competitive industries than US airlines

Apple has been fined $450 million for colluding with publishers to fix the prices of e-books.
Can't really complain about Google's High Pricing as most of their services are free. Privacy is a whole different issue.
If you think Phone business is not as competitive as airline, see if you can find a single manufacturer making decent profit other than Samsung and Apple?

[Edited 2015-07-02 07:04:14]
 
AirbusCanada
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:03 pm

Quoting A333MSPtoAMS (Reply 43):
Finally, Behaving like rational, prudent, smart businesses. Instead of, testosterone driven out of control expansion everytime there is a shot at an extra .00001 margin growth.

Also known as "competition".

Quoting A333MSPtoAMS (Reply 43):
t's free market... Anderson, Parker, etc., are not colluding, they're just all using a practical business plan.

Also known as "oligopoly" thanks to very high barrier to entry.
(due to limited runway/slot/ATC capacity at major Metropolitan markets)
 
Flighty
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:03 pm

Quoting commavia (Reply 106):
Similarly, it’s likely that some in the Justice Department’s upper echelon simply fail to understand how businesses in general compete and how ruinously competitive the airline industry, in particular, always has been. Their legal training, even in antitrust law, does not automatically confer on them full understanding of competition issues.

Bankers will say the same tripe. It's a big lie whose small details are 100% true. It's like regulators don't understand our business. They don't understand why we must use child labor. Their little hands are simply required by our delicate business process.

People who have worked airline pricing and planning know full well that this is a monopolist situation. They know that AirTran for example was murdering them and helping the consumers of the USA. They (all of the big 4) jumped for joy when WN picked off AirTran, lifting all domestic fares by say $50. It was like Babe Ruth hitting a triple with 3 on base. It was a team effort.

Quoting burnsie28 (Reply 107):

As far as airfare goes (regardless of if these acusations are true or not) I feel like the DOJ only has themselves to blame for allowing all these mergers that reduced competition to next to nothing.

Thank you, agreed.
 
Rdh3e
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:13 pm

It's funny that today DL announced PRASM decline of 4.5% for June, indicating significant downward fare pressure. It seems the "collusion" to "increase fares" is going swimmingly    http://ir.delta.com/news-and-events/...ormance-for-June-2015/default.aspx
 
PSU.DTW.SCE
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:20 pm

Holy crap, DL ran at 88% system-wide load factor in June.

DL mainline domestic was 89.7% LF
DL Pacific LF was 89.6% LF

These LF are unheard of. We used to think 85% was insane, now we are almost at 90%
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:43 pm

Quoting Flighty (Reply 117):
Bankers will say the same tripe. It's a big lie whose small details are 100% true.

Some call it "tripe" and a "big lie." I call it "economic reality."

Quoting Flighty (Reply 117):
They don't understand why we must use child labor. Their little hands are simply required by our delicate business process.

Please. Airlines earning high-single-to-low-double digit net margins is akin to child labor?

Perhaps we've officially jumped the shark on this latest populist outrage against the evils of capitalism.
 
Osubuckeyes
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:44 pm

Quoting commavia (Reply 113):
ey should be paying more for less, as they were paying too little for too much for the first three decades of deregulation.

So customers "should" pay more because of three decades of airlines' mis-management.

Quoting commavia (Reply 109):
matching capacity with demand so as to create value.

You can match capacity to demand at any price level. However, here we sit with 90% load factors and the airlines are basically saying "we can't expand our planes are too full". If airlines can match capacity to demand at will to grab whatever ROI they want then that is a huge red flag that the market is noncompetitive.
 
BravoOne
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:49 pm

Here is the bottom line. This administration is looking for money to sustain the impossible dream. Record fines are the norm these days for business organizations that are open for ridicule and what a better target than the big three + one. When this is over I'll bet the going rate will be way north of 100 million each. Just say'n.
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 2:58 pm

Quoting osubuckeyes (Reply 121):
So customers "should" pay more because of three decades of airlines' mis-management.

No, customers "should" pay more because that's what it costs. The reason why airlines have been unable and/or unwilling to charge these prices in the past - and mismanagement is merely one of many such reasons, many outside the industry's control - is irrelevant. The airline industry is no different than any other product or service on earth - in a capitalist market system, customers should pay what it costs to run the business and generate a risk-appropriate return for the contributors of capital into said business. Airlines are finally there. As a consumer, I have no problem with that.

Quoting osubuckeyes (Reply 121):
However, here we sit with 90% load factors and the airlines are basically saying "we can't expand our planes are too full".

No, what airlines are "basically saying" is that the marginal return from adding incremental capacity above a certain level would be dilutive to the overall returns of the business today, and dilutive to the risk-appropriate returns expected by contributors of capital.

Quoting osubuckeyes (Reply 121):
If airlines can match capacity to demand at will to grab whatever ROI they want then that is a huge red flag that the market is noncompetitive.

That summation, of course, is predicated, though, on the suppositions that "the market is noncompetitive" and thus airlines are able to "at will to grab whatever ROI they want." Personally, I think both of those suppositions are 100% false. And from my perspective, today's industry structure of four huge carriers that essentially overlap and compete directly in the vast majority of markets, along with a constellation of other competitors offering a wide array of network, product and price combinations, along with the resulting still-incredibly-competitive nature of pricing in the airline industry today, proves every single day how 100% false those suppositions are.
 
psa188
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 3:11 pm

Quoting Confuscius (Reply 8):
Nothing new, Bob Crandall to Richard Branson:

That should read "Howard Putnam," not "Richard Branson."
 
vin2basketball
Posts: 216
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 3:17 pm

Quoting PSU.DTW.SCE (Reply 119):
Holy crap, DL ran at 88% system-wide load factor in June.

DL mainline domestic was 89.7% LF
DL Pacific LF was 89.6% LF

These LF are unheard of. We used to think 85% was insane, now we are almost at 90%

Capacity rose 2.6%, fares fell 4.5%. It's collusion I tell you. Dastardly collusion.

Quoting enilria (Reply 87):
There is a spectrum in terms of level of competition. If you have a lot of competition you may have an unprofitable industry, but without regulation and in an industry with extreme barriers to entry airlines will merge down to just one airline. In capitalism it will always be cheaper to buy a competitor than "defeat them" and since bankruptcy makes it virtually impossible to "beat" anybody, acquisition is by far the cheaper method. As there are fewer and fewer competitors the value to eliminate the remaining ones via acquisition increases.

Yes, the DOJ is guilty of allowing the last round of mergers, but 1) the airlines lied about the benefits and if they were not achieved the DOJ has the right to hold them accountable and 2) the DOJ tried to stop the AA/US deal and was undermined by airline lobbying of politicians. The same politicians who are using the same lobbying effort to block the ME3 from competing. This, hopefully, represents a full stop of mergers, slot trades, and other anti-competitive actions.


The key phrase in there is that the DOJ allowed the last round of mergers. What benefits did the airlines lie about? Improved service - that's pretty apparent given all of the product improvements. Improved networks and connectivity for passengers? This is true, even after service cuts. The DOJ has approved every single action that has tangibly reduced competition, starting with ATIs/JVs from 1993-present, mergers from 2005-present, slot swaps, etc. The DOJ created the oligopoly, and now they're surprised that airlines aren't rushing to add capacity?

Beyond the philosophical points I noted earlier (more rationally and eloquently stated by commavia), on a practical level, I think this is more a case of Wall Street rewarding airlines for capacity discipline and executives acting accordingly. Since when are public statements requested and required by the airline's owners (shareholders) evidence of collusion? Did airline executives all get into a room in 2008/9 and decide on some sort of secret code that they would convey through public statements? If they managed that and nobody found out about it till now, then instead of investigating, the DOJ should be recruiting them for the CIA. Next it'll be nonverbal cues. OMFG, Richard Anderson and Doug Parker wore the same colored tie to an investor conference. It's a code. Collusion! Collusion! Collusion!
 
maxholstemh1521
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 3:40 pm

Quoting DCA-ROCguy (Reply 21):
Good for DOJ, doing its job. Airfares are unnecessarily high, and capacity unnecessaily low, in order to satisfy the unreasonable greed of Wall Street. Airlines are private businesses who provide a social or public good, so they have an obligation to keep fares as low as possible while still making a reasonable profit.
Quoting DCA-ROCguy (Reply 25):
Airlines are simultaneously private businesses and stewards of a public or common good. Of course they should make a reasonable return. But now they're getting greedy. No, Southwest, for instance, should not be expecting a 15 percent return. Try 8-10.

Where in the constitution gives you or anyone else the right to decide what a reasonable profit is? Airlines are a private business, and they should be able to charge whatever they want for their seats. The fare wars in the nineties made the industry incredibly unstable. How would you like to go to work and have the threat of the company closing its doors any day. I have co-workers who had to live that for many years. The industry is finally maturing, and learning from past mistakes.
It's not a Beaver
 
dl021
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 3:43 pm

Quoting DCA-ROCguy (Reply 21):
Airfares are unnecessarily high, and capacity unnecessaily low, in order to satisfy the unreasonable greed of Wall Street. Airlines are private businesses who provide a social or public good, so they have an obligation to keep fares as low as possible while still making a reasonable profit.
Quoting DCA-ROCguy (Reply 25):
Airlines are simultaneously private businesses and stewards of a public or common good. Of course they should make a reasonable return. But now they're getting greedy. No, Southwest, for instance, should not be expecting a 15 percent return. Try 8-10.

.....who's business is it to control or limit the profitability of airlines? Businesses in general? Competition dictates prices, and if airline management copy the guys competing with them because they pay attention and take their responsibilities to investors seriously then why are they criminal?

Dictating "reasonable profit"? Seriously? Regulation didn't lower airfares, deregulation did. Overcorrection and a series of bankruptcies from airlines making transition over 25-30 year period means they learned lessons.

The airlines have no public good obligation other than by law they are required during times of war to contract to CRAF.

Other than that go start your own airline and see what pressures come to bear.
Is my Pan Am ticket to the moon still good?
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 4:05 pm

Another person with whom I don't often fully agree but who I think sums up this entire situation quite well: http://aviationblog.dallasnews.com/2015/07/analyst-jamie-baker-gives-four-reasons-he-doesnt-think-theres-anything-to-find-in-airline-antitrust-probe.html/

"First, the implication that airlines currently enjoy pricing power flies in the face of current data.

Second, roughly 80% of fare increases we track have failed in recent years – so we can’t help but find humor in the suggestion of collusion.

[...]

Fourth, the industry is already one of the most transparent imaginable, in our view, as ticket prices and schedules are publicly available, in most cases up to a year in advance.

[...]

Southwest responding to its owners and cutting its 2016 growth plans after the equity shellacking it received last month (in response to a potential 8% growth rate) is not illegal.

[...]

We are comfortable presuming no such malfeasance took place, and that managements will continue taking legal steps to ensure respectable returns for investors, thereby advancing the widely embraced pursuit of higher valuation multiples."
 
MSPNWA
Posts: 1973
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 4:08 pm

Quoting osubuckeyes (Reply 121):
You can match capacity to demand at any price level. However, here we sit with 90% load factors and the airlines are basically saying "we can't expand our planes are too full". If airlines can match capacity to demand at will to grab whatever ROI they want then that is a huge red flag that the market is noncompetitive.

Correct. Airlines have matched supply and demand at a level far above the perfectly competitive market price. That's not a good thing for a transportation service industry. It's a drag on the macroeconomy.

Quoting commavia (Reply 123):
The airline industry is no different than any other product or service on earth - in a capitalist market system, customers should pay what it costs to run the business and generate a risk-appropriate return for the contributors of capital into said business. Airlines are finally there. As a consumer, I have no problem with that.

Woah, let's stop right there. Although the airline industry isn't different in that they should operate it to gain the appropriate return, there's a huge difference among industries in what an appropriate return should be. It's okay for Apple to garner huge margins because their products are discretionary items. If I don't want to consume an Apple product and it's high margin (and I usually don't), I don't have to buy it to live a more satisfying life. There are other near perfect substitute products out there for my enjoyment, or I may decide to not buy anything electronics related at all if I don't want one. But now say I want to see a new part of the world, or I have to attend an important meeting or funeral of a loved one. Now this is a need that usually does not have a viable substitute. Time and/or geography would prevent such alternatives. I have to buy an airline ticket to attain that increased quality of life. And remember, it's the world or that important gathering that enhances my life (unless you're the rare airline geek), not the process of getting there (that's a negative QOL these days). So for every dollar that person pays for the ticket is a dollar less that person can use to enhance their QOL. From a macroeconomic view, airlines should not make any profit beyond what it costs for sustainable investment in new technology to lower their costs and improve the flying experience (airlines aren't doing this much BTW with their record profits). Any profit beyond that is a detriment to the overall economy. We've gone well beyond that stage. Any profit after that becomes a fight between the millionaire investor versus the flying public. Who do want to see have more money in their pocket?

Quoting commavia (Reply 123):
No, what airlines are "basically saying" is that the marginal return from adding incremental capacity above a certain level would be dilutive to the overall returns of the business today, and dilutive to the risk-appropriate returns expected by contributors of capital.

But that marginal return is still very profitable. Therein lies the noncompetitive market that needs to be ended. That return is not appropriate for the overall economy.

Quoting commavia (Reply 123):
That summation, of course, is predicated, though, on the suppositions that "the market is noncompetitive" and thus airlines are able to "at will to grab whatever ROI they want." Personally, I think both of those suppositions are 100% false. And from my perspective, today's industry structure of four huge carriers that essentially overlap and compete directly in the vast majority of markets, along with a constellation of other competitors offering a wide array of network, product and price combinations, along with the resulting still-incredibly-competitive nature of pricing in the airline industry today, proves every single day how 100% false those suppositions are.

You can think what you want, but the evidence is clearly not supporting your view of it being a competitive market. It's sadly an oligopoly at best, colluding at it's worst. That's not a good thing no matter what the numbers say.

Quoting vin2basketball (Reply 125):
Capacity rose 2.6%, fares fell 4.5%. It's collusion I tell you. Dastardly collusion.

Load factors and RASM at those levels indicate a noncompetitive market. Hopefully not a collusive one, but we'll see.
 
Rdh3e
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 4:18 pm

Quoting MSPNWA (Reply 129):
But now say I want to see a new part of the world, or I have to attend an important meeting or funeral of a loved one.

Both of those things are discretionary.

Quoting MSPNWA (Reply 129):
Load factors and RASM at those levels indicate a noncompetitive market. Hopefully not a collusive one, but we'll see.

On what basis can you claim this?
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 4:20 pm

Quoting MSPNWA (Reply 129):
But that marginal return is still very profitable.

"Very" is highly subjective. To me, the ultimate arbiter of what is sufficiently, "very" or otherwise profitable is the market - not the subjective opinions of anyone here and certainly not a regulator let alone a politician.

Quoting MSPNWA (Reply 129):
Therein lies the noncompetitive market that needs to be ended. That return is not appropriate for the overall economy.

Fine. If we're going to get into the business of artificially determining what constitutes an "appropriate" return, then we're back to regulation. It's as simple as that. This is literally finance 101 - risk and return.

Sources of capital (investors and lenders) demand a return that they believe is commensurate with the risk they're accepting by placing said capital with a given company.

If we're going to place an artificial ceiling on the return that the market, left to its own devices, views as risk-appropriate, then one of two things will occur. Either capital will dry up, in which case some other source (likely the government) will have to step in and directly fund airlines. Or risk will have to be reduced.

That second option was essentially exactly the point of regulation - by allowing a regulator to limit direct competition on given routes and restrain the ability of carriers' to directly attack each other and undercut competitors' prices, regulation effectively reduced the risk associated with operating an airline, thus allowing airlines to attract capital while delivering lower returns. This is exactly what happens with most utilities and other tightly-regulated markets - businesses in said markets attract a different class of investor who is willing to accept a different rate of return because they do not want to shoulder as much risk. And in that situation - when airlines were regulated - were fares higher or lower than they are now?

This is certainly a public policy the U.S. can pursue. We can reregulate airlines and allow federal bureaucrats to determine what "reasonable" returns are and limit airlines as such. But in so doing, we'll also have to accept the other outcomes inherent in regulation - less choice, fewer competitors and higher prices. I highly encourage anyone interested in these outcomes to write their elected officials and advocate for that position. In the meantime, I'll be writing my Senators and Congressman to share my opinion.

Quoting MSPNWA (Reply 129):
but the evidence is clearly not supporting your view of it being a competitive market.

Everyone can pick the evidence they want. I'll stick with my evidence that for all the whining and complaining, capacity is up, fares are down, and airlines are generating net margins that I view as exceedingly in-line with the risk, cost and complexity of their business.
 
MSPNWA
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 4:27 pm

Quoting rdh3e (Reply 130):
Both of those things are discretionary.

Doing your job is "discretionary"? Attending your parents funeral is "discretionary"? Wow. Where you do draw the line on discretionary spending? Eating? I mean, we don't have to wear clothes to live, right?
 
washingtonflyer
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 4:39 pm

Being profitable is one thing, but stating how you do it and what you actually do to achieve that is another.

As I mentioned upstream, I've seen a firm client get nailed for over $150,000,000 in civil judgment claims because they sough to ensure capacity discipline and to optimize their profit levels (an industry which is also highly cyclical and one where one needs adequate ROI to ensure that cost of capital is covered and to stock up for soft periods).

Just sayin'
 
vin2basketball
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:09 pm

Quoting EA CO AS (Reply 99):
Fares have skyrocketed....according to government data, airfares have increased 16.4% since 2010...

Using 2010 as a base is willfully deceptive - of course coming out a recession fares will rise. So let's use 2008 as a base. It precedes enough of the mergers such the rise should be captured more accurately anyway. Then you have to adjust for average stage length, which has risen 6.6% since 2008, which would cause a good chunk of the rise in base fares. You could use PRASM to adjust for stage length, but even that's a bit misleading since it also takes into account increasing load factors. So let's take stage length adjusted yield to really reflect what the average consumer is paying.

From 2008-2015, this rose from 11.75 cents to 12.53 cents (6.6%). But CASM in the same time rose from 11.33 cents to 11.94 cents (5.4%) and that is reflective of the massive plunge in fuel prices in 2H 2014. And oh by the way CPI inflation was up 9.9% over the same period. Where is this massive, horrific rise in airfares everyone keeps talking about?
 
MSPNWA
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:20 pm

Quoting commavia (Reply 131):
"Very" is highly subjective. To me, the ultimate arbiter of what is sufficiently, "very" or otherwise profitable is the market - not the subjective opinions of anyone here and certainly not a regulator let alone a politician.

Not subjective when you compare it to the historical return of the industry. A margin of 8%, 9%, or 12% is very profitable in the context you like to use.

Quoting commavia (Reply 131):
Fine. If we're going to get into the business of artificially determining what constitutes an "appropriate" return, then we're back to regulation. It's as simple as that. This is literally finance 101 - risk and return.

Stop with the straw mans. No one is advocating going to back to regulation. People, myself included, are advocating a highly competitive, capitalistic industry. There is a middle ground.
 
washingtonflyer
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:25 pm

Quoting vin2basketball (Reply 134):
From 2008-2015, this rose from 11.75 cents to 12.53 cents (6.6%). But CASM in the same time rose from 11.33 cents to 11.94 cents (5.4%) and that is reflective of the massive plunge in fuel prices in 2H 2014. And oh by the way CPI inflation was up 9.9% over the same period. Where is this massive, horrific rise in airfares everyone keeps talking about?

I don't think you can look at total airfares across the nation and assume that there has been no change. My evidence is anecdotal based the route pairs that I fly every month since 2005.

Flying to SAN, fares used to be in the $350 range. They're now consistently in the $500 range.

Flying to LGA on Shuttle ex-DCA, fares would be about $450 for a one day advance; we now pay closer to $800.

Three week advance fares to CLT used to be about $400 r/t. They are now closer to $650.

These are fares that I paid 3 years or even 2 years ago (when Jet A was 40% higher).

Its funny, Airlnes screamed about raising prices when Jet A was through the roof - fuel surcharges and the like.

Now that fuel is down 40%, where is the fuel "rebate"?
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:26 pm

Quoting MSPNWA (Reply 135):
Not subjective when you compare it to the historical return of the industry. A margin of 8%, 9%, or 12% is very profitable in the context you like to use.

And therein lies exactly my point - that's a false comparison because the "historical return" of this industry was far, far too low, as evidenced by the constant upheaval and turmoil, near-constant entry and exit of new competitors, bankruptcies and consolidations, pension repudiations, etc.

Quoting MSPNWA (Reply 135):
No one is advocating going to back to regulation.

With respect, yes, that is exactly what is being advocated - here, and in other threads popping up. When a government entity tells airlines how they can or cannot price their product, and/or how much profit they are allowed to make, that is pretty much the definition of regulation.
 
QualityDr
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:31 pm

Quoting vin2basketball (Reply 18):

Everybody loses their minds the minute airlines make an ounce of profits. I don't understand why. Who's complaining about the billions made by Apple, or Google, or whomever


Oil makes $2B profit per week. Why haven't we taken a crack at them? I suspect the answer is, they know who to buy, er, support in Congress. The airlines appear to be more "outside the tent" in that sense. I know they lobby and do all sorts of things. But somehow they don't have the stroke in the Halls of Government to stop this kind of attack.

Shoot, even the for-profit education sector makes higher profit (rates and amounts) than airlines. I say leave them alone, for now...
All you need in this life is ignorance and confidence; then success is sure. -- Mark Twain
 
Osubuckeyes
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:33 pm

Quoting commavia (Reply 137):
how much profit they are allowed to make, that is pretty much the definition of regulation

DOJ will not be passing a regulation on how much they can or cannot make. If they find that there is sufficient evidence of collusion there will be a lawsuit filed then there will be either a trial or a settlement. Settlement is more likely, which depending on the partys' involved could be slot/gate/asset divestiture or simply a large fine. The anti-trust division is a punitive body not a regulatory one.
 
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par13del
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:34 pm

Quoting commavia (Reply 68):
his sounds to me like nothing more than the latest all-too-common capitalist outrage whipped up by an uninformed media and even-more-uninformed politicians and bureaucrats with no understanding of even basic economics.

So am I the only X-File's fan around who questions whether it is any coincidence that this is coming up after the US3 and it supporters started pushing the government to do something about the ME3?????
 
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DocLightning
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:39 pm

Quoting BMI727 (Reply 89):
There is exactly one legal issue here: have airlines been colluding with competitors to fix prices and supplies?

Well, look at that, we agree on something. Mark it on the calendar.

Yes, we agree on these issues. Airlines have a right to make a profit and sell tickets for prices that the markets will bear. But what means to that end are acceptable?

In some countries, complete monopoly has been the acceptable model. Aeroflot in the USSR, for example. So why is collusion not OK here? I'm not arguing that it is, but it is interesting how these lines of "acceptable" vs "unacceptable" behavior are drawn.

But my question is whether the investors are worried that the legal issue does exist.
-Doc Lightning-

"The sky calls to us. If we do not destroy ourselves, we will one day venture to the stars."
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commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:42 pm

Quoting washingtonflyer (Reply 136):
Its funny, Airlnes screamed about raising prices when Jet A was through the roof - fuel surcharges and the like.

Now that fuel is down 40%, where is the fuel "rebate"?

Why must there be any "rebate?" Airfares are like other prices in a capitalist market - they're set based on the value (as defined by the price the market will bear) of the product provided, rather than the cost of said product.

Quoting osubuckeyes (Reply 139):
DOJ will not be passing a regulation on how much they can or cannot make. If they find that there is sufficient evidence of collusion there will be a lawsuit filed then there will be either a trial or a settlement. Settlement is more likely, which depending on the partys' involved could be slot/gate/asset divestiture or simply a large fine. The anti-trust division is a punitive body not a regulatory one.

I'm aware of that. My comment to which you replied was referring not to the DOJ but to a comment made in reply 129 that "return[s that are] not appropriate ... should be ended."
 
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par13del
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:44 pm

Quoting washingtonflyer (Reply 136):
Its funny, Airlnes screamed about raising prices when Jet A was through the roof - fuel surcharges and the like.

Now that fuel is down 40%, where is the fuel "rebate"?

So if fuel is down and prices are rising it must mean that some other cost / expense is at play, right?
In some circles it is just supply and demand.
 
washingtonflyer
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:47 pm

Quoting commavia (Reply 142):
Why must there be any "rebate?" Airfares are like other prices in a capitalist market - they're set based on the value (as defined by the price the market will bear) of the product provided, rather than the cost of said product.

Because the sole justification was that fuel being one of the greatest expense drivers of airline operations, surcharges had to be put in place to account for the fuel rise. But, now, fuel has gone down...
 
vin2basketball
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 5:59 pm

Quoting washingtonflyer (Reply 136):

So anecdotal data is now superior to aggregated data? Prices went up in 6 of the literally thousands of city pairs on offer in the US airline market. Clearly that means fares are rising and the data is lying....

        

Quoting osubuckeyes (Reply 139):
DOJ will not be passing a regulation on how much they can or cannot make. If they find that there is sufficient evidence of collusion there will be a lawsuit filed then there will be either a trial or a settlement. Settlement is more likely, which depending on the partys' involved could be slot/gate/asset divestiture or simply a large fine. The anti-trust division is a punitive body not a regulatory one.

The dominant piece of evidence that they point to is capacity decisions. When they say that airlines' capacity decisions are unlawful (b/c they haven't added enough), then by extension they're making a capacity decision (i.e. you must add more of it) for airlines. That's pretty much regulation.

Quoting par13del (Reply 143):
So if fuel is down and prices are rising it must mean that some other cost / expense is at play, right?
In some circles it is just supply and demand.

Overall CASM for airlines is up by about 6.5% across the 2008-2015, more if you isolate to 2010-2015, other costs are rising, even if fuel is not. 1H 2015 has seen fares fall sharply when fuel fell.

Quoting washingtonflyer (Reply 144):
Because the sole justification was that fuel being one of the greatest expense drivers of airline operations, surcharges had to be put in place to account for the fuel rise. But, now, fuel has gone down...

Overall airline CASM is UP, not down over the last few years. And once again, in 1H '15, fares have fallen with fuel prices.

        
 
liftsifter
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 6:00 pm

Of course there's collusion, the question is can the DOJ prove it? That might be the hard part.
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DCA-ROCguy
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 6:01 pm

No time to reply to all worthwhile comments in detail, but some brief observation.

Quoting commavia (Reply 68):
My opinion hasn't changed from what it's long been - it is an absolutely fantastic thing that this industry is finally able to earn an entirely-reasonable, risk-appropriate return on capital and create value not only for shareholders, but also employees and other stakeholders. If that means that some "spoiled" consumers, who enjoyed far-too-low fares for far-too-long, are having to pay more (either through higher base fares, or higher fees), then so be it. It's called capitalism.

This argument has the situation precisely backwards. In the last decade, there was sufficient price and capacity competition, and passengers had appropriate airfares. The legacies were allowed to used bankruptcy court to trim their costs to be viable. Then, once they were achieving a certain amount of cost discipline (the true "discipline" that applies to airlines), so that they could make money on more reasonable fares, they simply merged to destroy competition. Airlines can make money without gouging, and history proves it.

Quoting BMI727 (Reply 89):
No it isn't. Utilities have to be treated differently because there is no practical way to build additional water mains or run five different sets of power lines for competing companies. Having an airline send a plane to fly between Point A and Point B is perfectly practical, and apparently quite popular as well, considering the number of startups even during very bad markets.

This comment ignores history, especially recent history. The airline industry has extremely high barriers to entry, it is not at all easy to start a competitive airline. George Soros had to spend over $100 million and have an unusual competitive window (slots available at JFK) to found JetBlue. Very few airline startups succeed. It is *extremely* difficult to found and build a competitive airline that has a meaningful impact on industry fares and capacity.

Quoting rbavfan (Reply 97):
No they are not. Look at the cost of a plane compared to 20 years ago. It quite remarkable how much they went up. All the while air fares were flat or lower, fuel was high, crew cost grew & then were strangled into submission by all the bankrupcies & airlines bled to death. If you look at inflation airline fares are one of few things that have went down over the last 30 years.

Airline fares, as the Washington Post has indicated, have gone up substantially by the meaningful metric: the past decade. Only after about 2003 did the legacies start getting anywhere close to reasonable, deregulation-era cost structures. 20 years ago isn't entirely relevant.

Quoting commavia (Reply 100):
Exactly. Isn't it remarkable how there was no CNN report, let alone government inquiry, when airfares declined so dramatically in the decades before 2010?

Because it was reasonable and proper for airline fares to decline, since the cost of the industry was excessively high before the mid-2000's bankruptcies. Again, your view of the situation is precisely backwards.

Customers today are not paying 'what they should be paying.' They are being gouged for base fares, never mind all the nickel-and-dime nonsense such as baggage fees that are now common. As for the 'proof' one person asked for, Google "falling oil prices and airline fares" and that alone is proof, before we get to other factors.

Airlines are *a common, public good* and thus have an obligation to make their investors money while being good stewards of their public trust by controlling costs, and competing on *capacity and airfares* as well as service, FF programs, networks, etc.

Jim
Need a new airline paint scheme? Better call Saul! (Bass that is)
 
alfa164
Posts: 1619
Joined: Sat Oct 06, 2012 2:47 am

RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 6:18 pm

Quoting QualityDr (Reply 138):
Oil makes $2B profit per week. Why haven't we taken a crack at them?

No pun intended...   

Quoting DCA-ROCguy (Reply 147):
Customers today are not paying 'what they should be paying.' They are being gouged for base fares, never mind all the nickel-and-dime nonsense such as baggage fees that are now common.
Quoting DCA-ROCguy (Reply 147):
Airlines are *a common, public good* and thus have an obligation to make their investors money while being good stewards of their public trust by controlling costs, and competing on *capacity and airfares* as well as service, FF programs, networks, etc.

Make up yuor mind. Now that airlines are finally able to "make their investors money while being good stewards of their public trust", you claim that the public is being gouged - ignoring the fact that average airline fares, adjusted for inflation, have barely risen in two decades.
  
 
commavia
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RE: Airlines Stocks Plunge After DoJ Probes Collusion

Thu Jul 02, 2015 6:58 pm

Quoting DCA-ROCguy (Reply 147):
In the last decade, there was sufficient price and capacity competition, and passengers had appropriate airfares.
Quoting DCA-ROCguy (Reply 147):
Because it was reasonable and proper for airline fares to decline

And that - right there - underscores the crux of this fundamental philosophical disagreement, and the ultimate futility of arguing over these irreconcilable differences of perspective.

Any system that deems levels of competition and airfares that bankrupt companies and wipe out shareholders and employees as "appropriate," or believes that any "visible" hand of regulation should determine what constitutes "reasonable and proper" pricing, is simply not a view I subscribe to, or ever will. As a consumer, taxpayer and citizen - I simply completely, 100% disagree.

I'm quite happy with the system we have now, where the market sets prices based on supply and demand, I do not want to live in a country where any such systems of artificial market manipulation by politicians or unelected bureaucrats exist. And as I said, I will be telling my elected representatives as much.

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