Matt D
Topic Author
Posts: 8907
Joined: Fri Nov 19, 1999 6:00 am

I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 8:32 am

I cannot imagine that there would be anyone out there that would allow themselves to be sodomized like this.
Talk about a testament to not allowing mergers to go through...it's like watching the Pope give Sunday mass, and midway through the sermon watching him burst into flames. If that's not time to re-assess your faith, I don't know what is:
Anyway, just out of curiosity, I checked the American Airlines price search and I'm still scraping my chin off the ground:

Last minute fare, between SNA (Orange County) and SJC (San Jose)......leaving on flight #2820 on Monday, jan 15 on the outbound, and returning on flight #2861 on jan 16 for the return....
are you ready for this?????
$402.50 USD
yes, FOUR HUNDRED AND TWO DOLLARS!!!!!!!!
For a one hour flight that they don't even have a monopoly on???????
I know that last minute fares are usually larceny, but even on Southwest (the other carrier on the route) would probably charge no more than half.

Can someone please explain why there is a price this egregious?
When Reno Air operated the route, last minute fare was about $225 r/t.
 
Matt D
Topic Author
Posts: 8907
Joined: Fri Nov 19, 1999 6:00 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 8:37 am

Just for comparison, I checked Southwest, and the refundable fare (last minute) on the same route is $184 r/t.
Regarding Big Air....
class, can any of you spell C-A-R-T-E-L??????
 
BranVan3K
Posts: 163
Joined: Sun Jul 16, 2000 6:58 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 8:39 am

Hey Matt,
Aren't republicans supposed to financially well off?

I remember paying $450 for a ticket from MSP-MKE once.

If you've got to be somewhere quickly at the last minute, airlines never give you a break!
 
Matt D
Topic Author
Posts: 8907
Joined: Fri Nov 19, 1999 6:00 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 8:40 am

Well, yes!!!!

If this merger comes under too much scrutiny, and routes and prices like this come into question, AA is going to have some 'splainin' to do!!!! 
 
Matt D
Topic Author
Posts: 8907
Joined: Fri Nov 19, 1999 6:00 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 8:45 am

Perhaps you missed my point (which now that I think about it, didn't explain very well).

How can airlines such as AA justify charging fares like this when the red bellied competition can do it for half AND THEN COMPLAIN ABOUT SOUTHWEST STEALING THEIR MARKET??????? That is like drinking a two ounce cup of glass shards, and then as the the shards make their way through the soft tissue of your intestines, you complaining about a tummy ache!!!
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

Wanna Real Jawdropper

Mon Jan 15, 2001 10:21 am

Try pricing a round trip flight for tomorrow from ATL to BNA on Delta. Say you had an important client you had to meet that day. Fly out in the morning and back that afternoon. Take your seat, Matt D, because according to www.delta.com, the roundtrip fare for that one hour flight is $899.50. Oh, that's a COACH fare. Wonder what kind of meal you get for that price.
 
txagkuwait
Posts: 1388
Joined: Fri Aug 27, 1999 7:39 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 10:31 am

Here is another terrific example. The Asst Principal where my wife teaches called last night. Her husband's brother is ill in Charlottesville, VA. Wanted me to see what I could find for her husband to get up there...leave this Tuesday (16 Jan) and return Saturday (20 Jan). We are down here in Killeen TX (ILE)...AUS is about 70 miles and DFW is about 140. At the destination end both BWI, DCA, IAD, or RIC are do-able if CHO proved too expensive to fly into. So I got on the phone and on the computer and priced out the iteneraries. It was pretty ugly. ILE-CHO $ 1968 RT AUS-CHO $ 1715 RT DFW-CHO $ 1590 RT DFW-RIC $ 1172 RT DFW-BWI $ 1006 RT AUS-BWI $ 528 RT Guess which route has Southwest service? Guess which flight the husband is taking?
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 12:48 pm

First, it can not be "gouging" if you have alternatives and as you stated, WN flys the exact same route and sells tickets same as AA does.

Second, the high price is justified by the fact that there are only 3 empty seats on the northbound flight and only 10 empty seats (2 days away) on the southbound flight. Airline seats become high value commodities the closer one gets to departure time and the fewer available seats there are. The flights you listed are both getting closer to departure time as well as having very few seats available for purchase. Hence the high price.... supply & demand.

Lastly, AA has not "complained" about WN "stealing" passengers. AA management has previously complained (primarily to itself) about its inability to compete with WN on price alone, but has not attempted to do so (compete on price alone) for a very long time. In fact, the flights you listed are not operated to compete with WN, but rather to compete with UA.

The typical AA (UA/DL/NW) passenger does not prefer to fly WN and the typical WN passenger does not prefer to fly AA (yes, there is some overlap).

In the end, when the passenger (read: customer) has options, the passenger always wins. Simply choose what is best for you. When enough passengers (read: demand) reject AA's pricing schedule for an alternative (read: supply), AA prices will adjust (mostly done automatically anyway). Only problem in the market you listed is SNA's slot restrictions place (government imposed) artificial restrictions on availability (read: supply) of alternatives.  
*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
sccutler
Posts: 5603
Joined: Thu Jan 27, 2000 12:16 pm

Bull- AA Gouges And Intends To Continue

Mon Jan 15, 2001 2:08 pm

AA-

Spare the marketing cr*p- AA is gouging North Texas pax and has for years. Their vigorous defense of the the Wright Amendment and predatory competetive practices are focused solely upon keeping prices high, and they will only offer less-abusive pricing where the absence of reasonably-priced competition mandates it.

Want proof? You can get all you need from AA.COM.

Note the two itineraries below; one AUS-BWI, and one DFW-BWI (sorry about formatting, but you can get the gist);

I used the same dates referenced by the wise Aggie (TxAgKuwait), and you'll note that the AUS-BWI itinerary goes through DFW both ways, and uses the same flights from DFW-BWI and BWI-DFW as the second itinerary, priced from Austin.

AA will fly you to from AUS to BWI through DFW for $555.00 r/t; but if you make the profound error of originating in DFW, you pay $1755.50.

Any questions?

++++++++++++++
AUS-DFW

555.00

US Dollars
Per Person No. of Travelers Price (includes taxes/fees)
555.00 1 Adult(s) 555.00 USD
Total Price for all travelers: 555.00 US Dollars
Flight Departing Arriving Class of Service Aircraft
City Date & Time City Date & Time
American Airlines 2409
American Airlines 622 AUS
DFW 16Jan 07:15am
16Jan 11:04am DFW
BWI 16Jan 08:18am
16Jan 02:46pm Coach
Coach 757
72S
American Airlines 1817
American Airlines 1921 BWI
DFW 20Jan 03:31pm
20Jan 07:04pm DFW
AUS 20Jan 06:05pm
20Jan 08:03pm Coach
Coach 72S
S80

DFW-BWI

Your Price (US Dollars)
Per Person Taxes/Fees No. of Travelers Price
1622.31 133.19 1 Adult(s) 1755.50 USD
Total Price for all travelers: 1755.50 US Dollars
Tickets MUST be purchased no later than Tuesday, 16 January 2001 Midnight, Central Time or your reservation will be automatically canceled.
Fares are NOT guaranteed until tickets are purchased.
Flights other than American Airlines/American Eagle are on a request basis only.


Your Itinerary
Flight Departing Arriving Class of Service
City Date & Time City Date & Time
American Airlines 622 DFW 16Jan 11:04am BWI 16Jan 02:46pm Coach
American Airlines 1817 BWI 20Jan 03:31pm DFW 20Jan 06:05pm Coach


...three miles from BRONS, clear for the ILS one five approach...
 
toxtethogrady
Posts: 1710
Joined: Sat Dec 23, 2000 12:33 pm

'Raise Your Goddam Fares...'

Mon Jan 15, 2001 2:11 pm

Anyone remember that famous phone call from almost 20 years ago? Thanks Mr. Crandall for being so brazen.
 
FlyPNS1
Posts: 5288
Joined: Wed Dec 01, 1999 7:12 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 3:03 pm

You may call it price gouging and indeed you might be right, but these exorbitant prices do have an economic basis. It's all about willingness to pay. Pure and simple, AA charges these prices because there are people out there that are willing to pay them. If these prices were so high that no one would pay them, then AA would be forced to lower their prices. But AA has apparently found people who will pay these high fares and is therefore maximizing its profits. It's pure capitalism at its best or worst, depending upon how you look at it.
 
sccutler
Posts: 5603
Joined: Thu Jan 27, 2000 12:16 pm

Whoa- It's About Protected Markets And...

Mon Jan 15, 2001 10:50 pm

...in the North Texas area, AA is protected from meaningful price competition (meaning, for most destinations, competition from Southwest) by legislation, in the form of the Wright Amendment, which precludes price competition on long-haul interstate service.

It is not a case of people being "willing" to pay the fares; AA's domination of the DFW market assures that they have the ability to price flights as noted above, and get away with it. Simply put, N. Texas travelers have no real choice.

It may not be illegal; and the business morality of it is a debate I'll leave to others, but the airline which is (as they used to advertise) "Based here, best here" is using abusive O&D fares in and out of DFW to subsidize lower fares in other markets. You cannot rationally conclude otherwise.
...three miles from BRONS, clear for the ILS one five approach...
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

Sorry PNS...gotta Agree With Sccutler

Mon Jan 15, 2001 11:26 pm

<< Pure and simple, AA charges these prices because there are people out there that are willing to pay them. >>

Out of DFW to non-WA states, people have no choice. Pay up or don't go.

<< If these prices were so high that no one would pay them, then AA would be forced to lower their prices. >>

Unfortunatly, there are an awful lot of corporations that are based in DFW. If they have business in NYC, they will have to pay the price for their employees to travel.

<< But AA has apparently found people who will pay these high fares and is therefore maximizing its profits. >>

The people they have "found" are the ones who are not willing to drive to AUS to save $1,000.

This is one of the reasons that I don't think AA will maintain a strong presence in STL after the "feel good" news of saving jobs has had a chance to subside. Why funnel money into a hub operation where passengers really DO have a choice, and one where your fares are dramatically lower than they are out of your main hub at DFW?

 
Guest

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 11:42 pm

Sorry guys, but AAR90 and Sccutler are right. It is basic supply and demand and someone out there is willing to pay for it. By the way, it is a bit wrong to say that there is no competion out of DFW. TW, UA, CO, US, and DL also fly out of DFW to NYC. Maybe you have to make a connection, but you pay for the convenience of nonstops. You can also fly Air Tran to ATL and on to LGA or EWR. Again the schedules might not be great but you pay for convenience.

Incidentially, I needed to fly from Houston to DC and saw an interesting fare in the market. BWI is always cheaper since WN flys there, but if I flew WN from HOU to BWI, nonstop, the fare was around $500 bucks the day before departure. CO from IAH to BWI was about $900. However, if I flew on the COexpress plane from HOU to IAH then connected on the same flight to BWI the fare was the same as WN. It's the same city! But CO has systems that automatically match competitive fares in certain O&D markets. WN filed fares out of HOU, so did CO they matched. Incidentially, I flew the IAH BWI direct on CO since the return schedule was not that great. But that was my choice.
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Mon Jan 15, 2001 11:43 pm

>Spare the marketing cr*p- AA is gouging North Texas pax and has for years.

None of my comments are "marketing cr*p." It is economics 101.

>Their vigorous defense of the the Wright Amendment

The defense of the Wright Amendment was a defense of application of the law equally to all airlines. Right or wrong, AA and the city of Fort Worth lost that arguement in court. Effectively, the law was changed and AA sought to compete in the newly created marketplace.

>and predatory competetive practices are focused solely
>upon keeping prices high,

There are NO restrictions that prohibit ANY airline from entering the DFW marketplace and competing with AA? Matching the price & service of a competitor is NEVER "predatory." If you believe so, then ALL businesses would be guilty of "predatory" activity. Again, economics 101.

>...and they will only offer less-abusive pricing where the absence
>of reasonably-priced competition mandates it.

I think you mean "existence" not "absence." You are correct, AA (all businesses for that matter) charge as much as the market will bear.

>It is not a case of people being "willing" to pay the fares;
>AA's domination of the DFW market assures that they have the
>ability to price flights as noted above, and get away with it.

And what provides AA with its "domination" of the DFW market? Since there are no artificial restrictions to competitors entering the DFW market, AA's "domination" has been determined by the consumers in that market. Recall that DL used to operate their second largest hub operation at DFW and used to have almost 40% of the passenger traffic at DFW. Nothing forced DL to reduce DFW operations except DL's decision to do so on its own.

>Simply put, N. Texas travelers have no real choice.

If more travellers choose a different airline, those airlines would see the increase in traffic and offer more flights. AA would see the shift in passenger preferences and adjust accordingly. Economics 101 and DFW marketplace is one of the few hub airports where government has done little interference and allowed economics to work. Some may not like the winner at DFW. Then again, some don't like the winner at DEN, ATL, MSP, DTW, MIA, IAD, etc., etc., etc.

Of course you could always push for your government to re-regulate the industry again. Fares would be 2-5 times higher (depending upon which economic study one reads) and my pay would probably be twice what it is now.
*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

AAR90

Tue Jan 16, 2001 1:38 am

<< Economics 101 and DFW marketplace is one of the few hub airports where government has done little interference and allowed economics to work. >>

Little interference? How about trying this for a month - kill the Wrong Amendment. Let Southwest start serving DAL-STL, DAL-BNA, DAL-ISP, DAL-BWI. Wonder what AA's fare structure would look like.

In fact, lets use Econ 101 to compare Chigago airfares to Dallas Airfares. Using Travelocity as a source, AA will fly you to STL from ORD tomorrow for $289.50. Southwest will fly you from MDW to STL for $189.50. Now, Chicago's a big town. Is it worth the extra $100 to fly out of Ohare? If so, then THAT's Econ 101 in action.

Now, lets do the same thing from DFW, shall we? Why, goodness gracious - the fare on AA is $1,191.50. I look on Southwest, but low and behold, because Missouri doesn't border Texas, I can't book a flight there on Southwest. Well, I could fly TWA -but their fare is the same $1,191.50. Well, I could fly Continental, but I'd have to change in Houston. That fare is $736. It'd save me little bit. Northwest (hey, it's the same direction) would cost me $1,197. Oh what the heck, let me do the two step it takes to fly SWA. I'll book two trips - DAL-LIT and LIT-STL. Let's see how much it'll cost. $382. Of course, I've gotta dodge the laws to get that fare, but I wonder, if the Wright Amendment weren't in place, how much would the airfare on AA/TWA be then?

I know - there's nothing stopping Southwest from flying out of DFW. In fact, it wouldn't surprise me to see Herb ask for those former TWA gates out there at DFW. Just for a few flights a day to STL, BNA, BWI, ISP, MDW and maybe LAS. It's a big enough airport...west sides not nearly as congested as the east side. Who knows....might just work. But as it stands today, there ARE limitations on traffic into the Dallas area.

AA has let economics dictate that they can charge a $100 "convenience premium" for flying out of O'hare (if you call waiting in line 45+ minutes to take off "convenient"). They can call the shots out of DFW because they have no real low fare competition.
 
jfidler
Posts: 368
Joined: Wed Aug 23, 2000 3:32 pm

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 4:13 am

Oh goodness, this is totally Econ 101.

Imagine if no passengers wanted to pay that high rate for service. Would the prices go down? Of course.

Charge what the market will bear -- this is nothing new.

I live in DC and there are 3 airports I can fly out of -- BWI, IAD, DCA. Some are more convenient than others, and those that are usually less convenient have lower prices. So as a consumer, I choose whether I want to drive 45 mins to BWI for a lower fare (sometimes I do), or hop on the subway to fly out of DCA.

I think Amtrak should really start doing more marketing -- they can steal away fliers on price alone in some areas, I bet.

Justin
 
wolfpacker
Posts: 343
Joined: Tue Jun 29, 1999 2:35 am

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 4:33 am

Lets try another tact.

I start an airline at DFW and have lower fares than AA. AA drops their fares to match mine, great for the consumer. AA should be allowed to drop prices, just like gas stations or grocery stores when new competition moves in.

Who will the consumer fly on? AA or newbie airline? 90% of the time they will choose AA because they are a known entity. Eventually newbie will go out of business because they cannot afford to run an airline with 25% full aircraft.

 
Guest

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 4:40 am

Now this is an example of a good topic on this forum with well thought out replies. Lots a good readin.'

I'm certainly looking forward to AA and WN locking horns at Lambert. The consumer should be the winner (for a while at least).



 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 4:43 am

Great example wolfpacker, but what if that "newbie" were Southwest? On routes that they both serve, AA has pretty much relegated that service to Eagle? I suppose that's where I say that Econ 101 is NOT alive and well in the DFW market.

Drop the Wrong Amendment and I am sure that AA would lower fares to match Southwest. And I'm equally sure that not everybody would abandon AA to fly Southwest. But...and this is the second part of Econ 101... Southwest would make money at those reduced fares - something the "newbies" have trouble doing for a few years.
 
LoneStarMike
Posts: 2802
Joined: Sat Jul 01, 2000 1:02 pm

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 4:44 am

Who will the consumer fly on? AA or newbie airline? 90% of the time they will choose AA because they are a known entity.Eventually newbie will go out of business because they cannot afford to run an airline with 25% full aircraft.

And then AA (or any other major) will jack their prices back up to where they were before and once again people will complain about high airfares on the route.

Sigh...it's a vicious cycle, ain't it? You'd think people would learn, but they don't.

LoneStarMike

 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 11:27 am

>Little interference? How about trying this for a month - kill the Wrong Amendment.

Talk to your politicians. Texas politicians created the Wright Amendment, not AA.

>Let Southwest start serving DAL-STL, DAL-BNA, DAL-ISP, DAL-BWI.

There is nothing that prevents WN from flying to those destinations from DFW... just as every other airline must do. If you don't like the fact that WN does not operate in those markets, blame WN for deciding not to operate in those markets. Do not blame AA (or anybody else) for WN's decisions.

>Wonder what AA's fare structure would look like.

Probably a whole lot less. So the real question is why WN has voluntarily decided to not enter those markets.

>Is it worth the extra $100 to fly out of Ohare?
>If so, then THAT's Econ 101 in action.

Apparently so, and yes that is econ 101 in action.

>...but low and behold, because Missouri doesn't border Texas,
>I can't book a flight there on Southwest.

You could IF WN _wanted_ to be in that market... same as any other airline, it must be DFW originating due to Wright Amendment. That is something WN has elected to _not_ do. Your problem is with WN not being in a market you want them to be in.

>But as it stands today, there ARE limitations on traffic into the Dallas area.

The only limitations you mention, you provided the answer to:

>I know - there's nothing stopping Southwest from flying out of DFW.
>In fact, it wouldn't surprise me to see Herb ask for those former TWA
>gates out there at DFW. Just for a few flights a day to STL, BNA, BWI,
>ISP, MDW and maybe LAS. It's a big enough airport...west sides
>not nearly as congested as the east side. Who knows....might just work.

So stop blaming others because WN elects to remain out of DFW marketplace.

Elsewhere someone writes:
>I'm certainly looking forward to AA and WN locking horns at Lambert.
>The consumer should be the winner (for a while at least).

I suspect only for a while since primary AA customers are not primary WN customers. AA & WN operate near simultaneous flights in SNA-SJC and LAX-SJC markets and both fly mostly full aircraft with significant price differences. WN management freely admits its greatest competitor is the automobile.

>Great example wolfpacker, but what if that "newbie" were Southwest?
>On routes that they both serve, AA has pretty much relegated that
>service to Eagle? I suppose that's where I say that Econ 101 is NOT
>alive and well in the DFW market.

In markets where the consumer has decided to not pay the premium fare required for AA service, AA has withdrawn from that market and AMR has replaced it with American Eagle -- its "no frills" service provider. Yes, that is econ 101 at work as well.

>Drop the Wrong Amendment and I am sure that AA would lower
>fares to match Southwest.

Only to a point. OTOH, Crandall said that if the Wright Amendment were repealed, AA would be operating 250-350 flights a day from DAL. IMHO, Carty is currently more competitive in the airline business than Crandall was in his later years, so I suspect that statement holds true today.

>And I'm equally sure that not everybody would abandon AA to fly Southwest.

Probably not since they primarily market their primarily different services primarily to different customers.

>Sigh...it's a vicious cycle, ain't it? You'd think people would learn, but they don't.

It's called a business cycle and it will always be there no matter what the business, no matter who the providers nor who the customers are. U.S. domestic air travel market is one of the least restrictive marketplaces that can be readily observed. No provider of air travel can afford to not publish his offerings (schedule) nor his prices. The consumer has access to near perfect information with which to make decisions. The product (seat for travel) is totally perishable and must be sold or "destroyed" (empty seats can not be filled after departure). It is about as close to a classical economics model (supply & demand) as can be seen anywhere today, yet folks continue to miss the obvious.... supply & demand curves are ever changing... always seeking a balance... never achieving a balance.

*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
Guest

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 12:30 pm

You are right, AAR90, the domestic air travel market is close to a classical model of a competitive market. Unfortunately, it's not -- the key difference being tremendous barriers to entry aggravated by high fixed costs and non-price competition. The problem is that it is very difficult for new entrants to establish themselves in the market. For instance, let's say new entrant NewJet decides to enter the DFW market and compete against AA with cheap fares. Let's say AA matches fares and increases capacity to compete. In a perfectly competitive market, both AA and NewJet would get an equal share of passengers. But because of brand loyalty, FF programs, and other types of non-price competition, AA would get the lion's share of the pax, and NewJet would get none. NewJet is then stuck with high startup and fixed costs that it cannot support because it has no passengers. Result -- NewJet goes out of business. I'm not saying this is right or wrong, legal business practice or predatory behavior, I'm just making the point that the market is not perfectly competitive because new entrants, even if they are more efficient and have lower average costs than their competitors, never last very long.

As a result, the major airlines ARE frequently given what is essentially monopoly power on many routes extending from fortress hubs. You all are right when you say that airlines only charge fares that people are willing to pay. But that can be said for any monopoly. Of course they're going to charge prices that some people will pay, otherwise they have no revenue. But the problem is that the price that produces maximum monopoly profit is not the ideal market price that maximizes benefits for consumers, and society in general. Remember deadweight loss? The only way to remedy this problem is to facilitate entry by new airlines and drive the market toward more competition. But given the way the airline industry is structured, I have no idea how this might be accomplished.
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 1:49 pm

>and other types of non-price competition, AA would get the
>lion's share of the pax, and NewJet would get none.

It sound like a better business decision would be for NewJet to look to other markets where it can better compete prior to attempting to compete where large established and successful carriers operate. The marketplace does not decide who will enter the market, just who will be successful at meeting the demand in that marketplace.

>I'm just making the point that the market is not perfectly competitive
>because new entrants, even if they are more efficient and have lower
>average costs than their competitors, never last very long.

I disagree. Price, cost, efficiency alone do not make up the marketplace. As you correctly point out, many non-price features are also part of the offered product. A prudent business decision would be to not directly compete with a large, successful airline until significant advances are made to address those non-price feature discrepancies. [WN is very good example of this selective non-competition].

>But the problem is that the price that produces maximum monopoly
>profit is not the ideal market price that maximizes benefits for
>consumers, and society in general.

Depends upon what your definition of "maximizes benefits for consumers and society" is. Is this based upon economics? Or sociology? Or something else? And at what level does your definition stop? DFW users only? North Texas economy? Entire U.S. air travel marketplace? etc., etc., etc. Classical economics suggests nobody should "define" anything, but rather allow the dynamics of supply and demand define both the marketplace and the appropriate levels of supply and demand within that marketplace.

*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
Guest

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 2:12 pm

"A prudent business decision would be to not directly compete with a large, successful airline until significant advances are made to address those non-price feature discrepancies."

That is exactly the point. The air travel market has become so dominated by large established carriers that new entrants are relegated to small niche markets. Even if they can operate more efficiently with lower costs than established carriers, it is not a "prudent business decision" to do so, since there is no way they can overcome the substantial non-price factors. This is not a characteristic of a competitive market.

"Depends upon what your definition of "maximizes benefits for consumers and society" is. Is this based upon economics?"

If you'll hearken back to Econ 101, you'll recall that the reasons monopolies are economically undesirable is because they cause "deadweight loss." This is a purely economic concept related to the market in question only (nothing to do with DFW users, north texas economy, etc). We agree that we should allow the dynamics of supply and demand to define the marketplace and the appropriate levels of supply and demand within the marketplace. But what deadweight loss resulting from monopoly pricing means is that the market is no longer operating at the optimum level of supply and demand. By setting the price to generate maximum monopoly profit, the monopolist is essentially artificially restricting supply. What this ultimately means is that the benefit of the monopoly that accrues to the producer is less than the loss of benefits felt by the consumers. There is a net loss of benefit to consumers/producers (aka society) relative to a perfectly competitive market that is operating at the optimum (where the demand curve meets the supply curve). In laymen's terms: pax get screwed more than airlines benefit. Take home message -- economic inefficiency.

Sorry about the economics jargon, (I used to TA an economic policy analysis class in college) but it's hard to draw a supply/demand diagram here. Bottom line is that we both agree that we want supply and demand to do their magic. However, my point is that barriers to entry prevent the market from being competitive, and non-competitive markets don't allow supply and demand to set price and quantity in the marketplace. Therefore, we should try to make the marketplace more competitive, and there are no easy answers.
 
Guest

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 2:44 pm

Actually, I just wanted to add that the previous post dealt only with pure economic theory on why monopolies are bad. It doesn't even begin to address the ethical issue of whether monopolies should be able to screw consumers over in the first place, even without deadweight loss.

Finally, I don't mean this in any offensive way, and certainly don't want to come across as snooty or anything, and AAR90, you are one of the people I most respect on this board, but it's really difficult to explain economic theory in posts like these, so if any of you are interested, perhaps you might want to reference a basic economics textbook and look up how monopolistic market failures occur? I'm sure the same info is on the web someplace.
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 4:24 pm

>That is exactly the point. The air travel market has become so
>dominated by large established carriers that new entrants are
>relegated to small niche markets. Even if they can operate more
>efficiently with lower costs than established carriers, it is not a
>"prudent business decision" to do so, since there is no way they can
>overcome the substantial non-price factors. This is not a characteristic
>of a competitive market.

I disagree. It seems we are speaking of similar theories, but on different levels. All the major carriers are highly competitive in all major markets and significantly competitive in most sub-markets. Simply being a lower cost or more efficient carrier is not enough in a sophisticated marketplace as the consumer has proven himself to have little interest in the lowest cost or most efficient provider. The consumer is setting the marketplace.

>Sorry about the economics jargon, (I used to TA an economic policy
>analysis class in college) but it's hard to draw a supply/demand
>diagram here.

Been 20+ years since my BA in Business. I'm sure terms have changed considerably.

>Bottom line is that we both agree that we want supply and
>demand to do their magic.

Yep. And I suspect they will... given enough time to do so.

>However, my point is that barriers to entry prevent the market
>from being competitive, and non-competitive markets don't allow
>supply and demand to set price and quantity in the marketplace.

I suspect we are talking at different levels of competition. Majors will compete with majors in full service marketplace. WN and other niche players will compete with each other for low-fare, no-frill marketplace. There will be some overlap, but overall not too much.

>Therefore, we should try to make the marketplace more competitive,
>and there are no easy answers.

Remove all the government imposed artificial restrictions. Build lots of new runways and airports. Eliminate slot controls. Require all gate leases to be short term only. etc., etc., etc. Realistically, it isn't going to happen [I hate politics], but in theory that is what needs to happen.

>Finally, I don't mean this in any offensive way, and certainly don't
>want to come across as snooty or anything,

Heck no! Interesting and educational discussion. Certainly one that gets the brain working just a bit overtime.  

>...but it's really difficult to explain economic theory in posts like these...

No kidding. It's been 20+ years since I discussed these theories in any detail. OTOH, I witness the market segmentation phenomenom on a daily basis with my small service business in San Diego. My company is certainly not the low cost, most efficient provider [my employees are compensated about 35% over market rates], but it remains the oldest and one of the most successful service providers because our customers are willing to pay a premium to recieve the superior service we provide. With 36-40 (or more) competitors at any one time and just a $50.00 cost to enter the marketplace, it remains a highly competitive industry where new entrants come and go, all advertising "lower prices." The few long term survivors are those with the highest prices and best service. Very similar to major full-service airlines vs. low-cost airlines marketplace. Go figure!  
*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
sccutler
Posts: 5603
Joined: Thu Jan 27, 2000 12:16 pm

RE: I've Heard Of Price Gouging, But...

Tue Jan 16, 2001 9:25 pm

My final comment on the matter, more to make a point than to convince AAR (your alliegance is clear, and your loyalty laudable, but not entirely without a measure of contempt for the "self-loading cargo" behind the cockpit door).

As a pilot, you must recognize that the cost of opening up a second base, for WN, would make operations from DFW economically unattractive. North Texas has more than enough air traffic to justify two airports- a dominant, international-class airport (that would be DFW); and a secondary airport (Love). Plenty of metropolitan areas have multiple airports, and competition flourishes; but, here, the Wright Amendment restricts the nature of flights which may operate out of Love. This is unique.

Your last post had a fine point-

">>Bottom line is that we both agree that we want supply and
>>demand to do their magic.

>Yep. And I suspect they will... given enough time to do so. "

Removal of the Wright Amendment restrictions (which are in no way analogous to slot restrictions) is the only way the market can be allowed to work.

Is it naivete, or cynicism, that makes you suggest that the continued existence of the Wright Amendment has nothing to do with AA's vast political and financial influence? If, as you have also observed, "Majors will compete with majors in full service marketplace. WN and other niche players will compete with each other for low-fare, no-frill marketplace. There will be some overlap, but overall not too much. ," why does AA persist in so vigorously resisting repeal of the WA?

Finally, you state (with regard to a business which you operate): "My company is certainly not the low cost, most efficient provider [my employees are compensated about 35% over market rates], but it remains the oldest and one of the most successful service providers because our customers are willing to pay a premium to recieve the superior service we provide." Presuming you are drawing an analogy to AA, why, then, does AA not simply maintain dramatically-higher fares in markets in which it competes with WN, with those higher fares suppoprted by all the travelers who are willing - eager- to pay triple-price for an assigned seat and a Bistro Bag?

My sister recently left AA's employ after 11 years there; it's remarkable to note how much her (once vigorous) defense of the Wright Amendment has dwindled since she lost her non-rev perks.

AA is a fine airline, steeped in a well-earned tradition for excellence in may facets of its operations. But, too, North Texas is an artificially-restricted market; and AA gouges its "based here" customers as best it can.
...three miles from BRONS, clear for the ILS one five approach...
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

Sccutler - You Forgot

Tue Jan 16, 2001 9:38 pm

<< AA is a fine airline, steeped in a well-earned tradition for excellence in may facets of its operations. But, too, North Texas is an artificially-restricted market; and AA gouges its "based here" customers as best it can. >>

You forgot that when it comes to gouging they are not only "based here" but "best here".

I wonder though, if WN were to end it's silence on the WA and send a lobbyist or two to Washington to discuss abolishing the Wright Ammendment, how many more lobbyists would AA send to argue against it?
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 12:30 am

>but not entirely without a measure of contempt for the
>"self-loading cargo" behind the cockpit door).

It is not "contempt" but rather an unemotional economic discussion of facts.

>As a pilot, you must recognize that the cost of opening up a second
>base, for WN, would make operations from DFW economically unattractive.

Not as a pilot, but as a businessman. WN voluntarily made the decision to remain at Love Field _knowing_ the restrictions would both prohibit it from competing in some markets and protect it from competition in other markets. WN fought for its current position in court and won. AA and all other airlines moved to DFW knowing that was where the non-stop flying was to be permitted. AA became the most successful of all those other airlines so opening up a second hub operation at DAL is economically unattractive --same as WN opening DFW hub ops.

>Removal of the Wright Amendment restrictions (which are in no way
>analogous to slot restrictions) is the only way the market can be allowed to work.

One can easily eliminate DAL altogether and expand DFW more to accomodate WN's operations. Removing Wright Amendment is not "the only way."  

>Is it naivete, or cynicism, that makes you suggest that the continued
>existence of the Wright Amendment has nothing to do with AA's vast
>political and financial influence?

Neither as I have not suggested AA influence has not had a factor in the continuation of the Wright Amendment. It probably does. Were you AA, would you not do the same?

>...why does AA persist in so vigorously resisting repeal of the WA?

After spending billions of dollars building DFW operations only to see the reason you left in the first place removed, would you not behave the same way? Repeal of Wright Amendment means AA will be _required_ to spend billions re-entering DAL market because so many of its customers would choose DAL's convienence over DFW. AA has been attempting to maintain the rules that are in place today. Those that wish to repeal Wright Amendment are attempting to change the rules. Such a significant change in the rules would require AA to spend billions to adapt to the new marketplace. If you were AA, would you want the rules changed --after the fact?

AA's active support of the Wright Amendment makes perfect sense to me. It is a study in self-preservation. WN's lack of open support for repeal also makes perfect sense to me. It is a study in self-preservation as well.

Beyond that you'll need to study the history of the relationship between the cities of Dallas and Fort Worth, GSW Airport, DFW and its bond covenants, and the reasons for the Wright Amendment in the first place to gain a better understanding of legal and moral reasons behind its creation. There would be no DFW without it and there would be little of today's Metroplex without DFW. But that is a different subject matter entirely.

>Presuming you are drawing an analogy to AA,

Yes I am.

>why, then, does AA not simply maintain dramatically-higher fares in
>markets in which it competes with WN, with those higher fares
>suppoprted by all the travelers who are willing - eager- to pay triple-price
>for an assigned seat and a Bistro Bag?

For the same reason my company can not charge "dramatically higher" prices for its services -- there are not enough customers willing to pay "dramatically higher" prices to justify that pricing. But there _are_ enough customers willling to pay "significantly higher" prices (somewhere less than "dramatically higher") to justify that pricing structure. The marketplace determines the prices. My company (and AA) determine where within that pricing structure it wishes to operate. Actual price paid is determined by the consumers' willingness to pay.

>...your alliegance is clear, and your loyalty laudable

It is alliegence to classical economic theory, not to AA that I point out that consumers that have alternatives to any airline's price/schedule can not call that airline's price structure "price gouging." As has been pointed out, there are alternatives to AA in the North Texas marketplace. While the alternatives may not be exactly what each individual consumer wants, they are available and in proportion to the number of consumers who are willing to pay the appropriate price for these alternatives. When enough consumers are unwilling to pay these price premiums, the price premiums will reduce or go away. That is economics, not airline loyalty or alliegence.

FWIW, my preferences are to pay premium fares to obtain non-stop flights with reserved seating (can't stand the WN "cattle-car" operation). OTOH, I too would be unwilling to pay $400+ for one hour flight when WN offers similar service at $200 --even with my detest of the "cattle-car" service. Those are my choices as a consumer. It would appear that I am in the minority in the SNA-SJC marketplace, and in the majority in most DFW-wherever marketplaces. Simply put, if more consumers would be willing to choose the $200 fare over the $400 fare knowing the level of service that comes with it, then you'll see fewer $400 fares and more $200 fares. Simple Supply and Demand at work.
*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
Guest

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 1:16 am

http://www.bizjournals.com/dallas/stories/1996/07/29/editorial2.html

A quote from the above link...from 1996 (but it still applicable today)
The [Wright] amendment does not regulate noise, number of flights or safety. It only regulates consumer destination and choice. The Wright Amendment was enacted in 1979 strictly as a means of market control. Ironically, this was done during the deregulation of commercial aviation in this country.

Why? The Wright Amendment prevents level competition between airlines using Love Field and those using Dallas/Fort Worth International Airport. Airlines at D/FW are protected by the amendment's restrictions, which exist only in Dallas. This makes D/FW the most expensive airport of its size in America. As Business Travel News recently reported, "Airlines have long been known to take advantage of the dominant market position by hiking fares."
 
Guest

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 3:29 am

To say that price gouging doesn't happen because people are willing to pay the high prices is illogical. No company, no matter how evil and monopolistic, is going to charge to the point where no one can afford their product. That's stupid and suicidal. But they CAN increase their prices beyond what they would be in a truly competitive market, enriching themselves at the expense of consumers. In other words, price gouging. AAR90 said, "But there _are_ enough customers willling to pay "significantly higher" prices (somewhere less than "dramatically higher") to justify that pricing structure. The marketplace determines the prices." That is incorrect. American Airlines determines the prices if it has monopoly power. Not market forces. American Airlines looks at the demand curve and finds the price at which increasing prices even more will cause too many people not to fly -- a simple maximization of profit exercise. If the marketplace could determine the price, a bunch of new competitors would come in and offer fares well below American's gouging price. American would be forced to lower prices to compete. Unfortunately, the airline market is not competitive and new entrants DON'T come in. That's why American gets to gouge not only the people who are willing to pay "signficantly higher prices" but who would otherwise not have paid these prices, as well as those who could have afforded to fly but now can't.

I think your point about Southwest proves this exactly. Southwest chooses not to compete at DFW. Why not? Because it knows it's a bad business decision. American has so much market power that they can drive even Southwest's low fares back out of the market. If Southwest can't compete, how can we expect new entrants to compete? The Wright Amendment isn't the problem. It's the concentration of market power and the ability of Big Air to keep out new competitors.

I also disagree with the contention that there are adequate alternatives on routes. Every fortress hub has some subset of routes that offer little or no competition. Upstate New York is held hostage by US Airways, the Dakotas are held hostage by Northwest. People there are clearly being gouged. Now add up all of these noncompetitive routes and you get a substantial number of non competitive city pairs. Further, many routes out of fortress hubs may face only one, or maybe two competitors. But because of the non-price competition factors I stated before, these smaller competitors are essentially relegated to the role of "new entrant" and are forced to fly very small capacities on the route in order to make any money. Not only that, the high prices and perfect matching of fares on many of these weakly competitive routes lead one to suspect that the majors are all colluding with one another. We know about Bob Crandall's infamous phone call -- but we only know about it because Crandall was extraordinarily brazen and he got caught. Can you seriously think there isn't collusion going on among the Big airlines? On some routes they're virtually a cartel. If you add up non-competitive city pairs with city pairs on which there is virtual collusion among a few "competitors," you begin to see a serious problem.

So we all agree that monopolies are bad. The question is, do airlines have monopoly power on some routes? The answer is definitely yes.

Incidentally, when I lived in DC, my neighbor worked on the NW/CO investigation at the antitrust division of DOJ. It struck me that many of the economists at DOJ don't really understand the airline industry at all -- they don't spend all their free time looking at route maps and checking fares and following alliances. I'd have to say that DOJ should hire some of the folks on Airliners.net as consultants.
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 4:34 am

<< One can easily eliminate DAL altogether and expand DFW more to accomodate WN's operations. Removing Wright Amendment is not "the only way." >>

I think if anyone came up with the proposal to shut down DAL, AA would be at the forefront of opposition. AA would be sh*tting green twinkies at the mere thought of that.

 
wolfpacker
Posts: 343
Joined: Tue Jun 29, 1999 2:35 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 6:13 am

What would happen if the WA was repealed?

WN expands to cities outside the adjoining states and fares drop.
AA does what it does in other cities, drops its fares to match while limiting the number of seats.

What else would happen?
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 8:39 am

Nothing else would happen. The thing is, AA would have to match the last minute (read -business) fares to match WN. So in the DFW-STL market, that $1,200 fare would drop to somewhere around $300. Wonder how much first class would go for?
 
bacardi182
Posts: 1029
Joined: Tue Jan 04, 2000 2:47 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 12:54 pm

AA once tried to make my dad pay about $1000 for a round trip ticket to msp from dfw (coach). so he flew suncountry and they gave him a row of three seats. (did they know he was executive platinum?)
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 2:37 pm

>What else would happen?

>Nothing else would happen. The thing is, AA would have to match
>the last minute (read -business) fares to match WN. So in the
>DFW-STL market, that $1,200 fare would drop to somewhere
>around $300. Wonder how much first class would go for?

What would happen is all guess-work. But what is known is what AA management has repeatedly said it would be forced to do by the change in economic marketplace removal of Wright Amendment would create.
1. Move at least 1/3 to 1/2 of DFW hub operation to DAL.
2. Significantly reduce DFW international flights.
3. Significantly reduce all other DFW flights to reflect 1/3 to 1/2 of all traffic going to DAL.
4. Eventually closing DFW hub operations and relegating DFW to O&D traffic only. Alternatively,
5. Move the Hub to a more receptive location.

Essentially DFW ceases to be the major economic engine for the North Texas economy that it was created to be. This was not the intent of the POLITICIANS who created both DFW and the Wright Amendment.

Ticket prices would probably be lower... at least for a relatively short while.
*NO CARRIER* -- A Naval Aviator's worst nightmare!
 
goingboeing
Posts: 4727
Joined: Sat Dec 04, 1999 1:58 am

RE: I've Heard Of Price Gouging, But...

Wed Jan 17, 2001 9:55 pm

What have you been smoking AAR90 - DAL doesn't have the capacity to accomodate even 1% of AA flights at DFW, much less 1/3 to 1/2. Yeah, AA would tell Ft Worth that they would pull a third of their flights or threaten to move their hub. I suppose that's Econ 102... how to hold a community hostage in more ways than one. That way, they can count on the taxpayers of Ft Worth (read customers) to help pay for the lawsuits. Wonder what town is more receptive? Denver? Omaha? COS?

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