From the comments — a further note on planes and flying

by on September 3, 2017 at 2:49 pm in Economics, Law, Travel | Permalink

You need to look at ticket prices inclusive of fees, not just fares. Those have continued the long run trend of falling in inflation-adjusted terms, although not every year.

Airline products across carriers have become less variable/more standardized. Price is only one element of competition. There are significant barriers to entry in the airline industry, not least of which is the prohibition on foreign ownership of US airlines. However that is hardly the only one.

The major reason Alaska Airlines purchased Virgin America was access to gates and in some cases slots at major congested airports. You not only have government-owned airports entering long-term leases with incumbent airlines, you frequently have capture of the bureaucrats running those airports by their major incumbent airline tenants. And where you have multiple airports in a metropolitan area, they’re frequently jointly run by the same bureaucracy rather than competing.

Airlines are highly profitable, though not nearly as profitable as two years ago, the biggest delta has been fuel cost tied to the price of oil. Consolidation allowed airlines to capture much of the gains of lower fuel prices for a period of time, but the smaller number of carriers returned to expansion and competition on the basis of price competing away some of those savings-driven prices.

All that said the only monopoly air routes in the US are the ones no one wants to fly and that require government subsidies in order to entice carriers into the market. Which isn’t to say that consumers wouldn’t benefit from more competition than we have today.

That is from Air Genius Gary Leff.

1 Scott September 3, 2017 at 3:40 pm

…so all is good in US airline industry — airlines make nice profits, passengers/consumers are happy, and no monopoly/cartels in sight. Why then would anybody complain about this current US airline situation?

2 Careless September 3, 2017 at 4:51 pm

Because I’m tall?

3 Mike W September 3, 2017 at 4:05 pm

Where does he get that “airlines are highly profitable”? A quick look at American Airlines financial results for the past ten years shows it has barely broken even and its cash flow is negative for seven of those years. How does he define “profitable”?

4 Ray Lopez September 3, 2017 at 4:17 pm

JFGI? “IATA – Another Strong Year for Airline Profits in 2017”

5 Mike W September 3, 2017 at 6:49 pm

What else would the IATA say?

From Morningstar, 9/1/17:
“As a result of consolidation, we believe U.S. carriers’ operating margins will now fluctuate between a high-single-digit trough and a midteens peak versus a history of negative trough margins coupled with peaks of roughly 10%.”

6 Anonni-Nonni September 5, 2017 at 5:42 pm

Airline profits don’t show in *airline* balance sheets! They show in aircraft leasing firm balance sheets and unionized pilot (and other airline worker) pay packets. Phil Greenspun explained how pilots’ (and other trades’) unions extract most of the profits from airlines after the aircraft lessors take their shares:

http://philip.greenspun.com/flying/unions-and-airlines

You’ve heard of Hollywood accounting? How no movie is ever profitable but somehow the studios and all sorts of nominally-separate though related businesses are very lucrative? Well, airline accounting is like that.

7 Scott September 3, 2017 at 4:19 pm

yes, that’s a good point. A quick Google shows many highly contradictory hits — some say airline profits are good, others say they are terrible. Must be something very fuzzy about how the airline profits are calculated and expressed. If only we had access to professional economists who could definitively clear this up?

8 Moo cow September 3, 2017 at 4:06 pm

It costs me more to fly to Indianapolis than it does for me to fly to Hong Kong.

I’ve been flying since I was 2 years old so I don’t know what to say about this really. There are differences. I can pretty much figure out the least worst option given whatever alternatives. My spouse is 100% focused on price and it is usually a heavy lift to bump him off that lowest fare. But I eventually do.

Don’t ask me to invest any money. Though I probably have through index funds.

9 Ray Lopez September 3, 2017 at 4:15 pm

Yeah that’s true in the Philippines too: flying to a provincial city that’s relatively close is more expensive than flying to far away Malaysia or Hong Kong.

Air Genius Gary Leff has quite a few laughs on his website: “Michelle Lavin of New York is “putting JetBlue on the legal hot seat” over an incident on a Las Vegas flight that occurred over Labor Day weekend in 2014, but she’s only just now suing. She claims “the airline torched her keister with hot tea” causing her to suffer third degree burns on her butt. The spill resulted from two passengers arguing over a barking dog.”

Bonus trivia: this site among others is excellent for reporting safety incidents, there are some every day: http://aviation.globalincidentmap.com/

10 A clockwork orange September 3, 2017 at 4:11 pm

Intervals became marks of somnolent intimations. In one iteration, Montague street’s pebbled spine sank as a strip of grout in the Madelina Projects. In another instance, the wine pours from the Brunson Yards flowed along the Laffer Curve into the gray of the Fulsome Tar Pit.

11 A clockwork orangea September 3, 2017 at 4:21 pm

Intervals became marks of somnolent intimations. In one iteration, Montague’s pebbled spine sank as a strip of grout in Vila Madelina. In another instance, the wine pours from Brunson Yards flowed along the Laffer Curve into the gray of the Fulsome Tar Pit

12 Art Deco September 3, 2017 at 4:37 pm

Airlines have famously thin profit margins except where they have local monopolies.

The airline / TSA bitch-and-moan is exceedingly tiresome. Ann Coulter had a good point about abuse of discretion by low level employees and the whole mess about the AC-DC doctor getting himself bloodied while refusing to leave a plane from which he’d been bumped was indicative of bureaucratic flat-footedness by the airline responsible. The thing is, you hear about these incidents because they are not particularly common. Ann Coulter claims to fly twice a week.

13 A clockwork orange September 3, 2017 at 5:05 pm

If hawke ravens, are havens for toothsome applebaums then discrete Socrates discussions fur elise napalmed into into into assuredness byline by sign language. Incidents of indiscretion can be punished by forced chugs.

14 Anon September 3, 2017 at 10:32 pm

So someone who can’t stand being switched back to a window seat and lets loose a tirade against other passengers is the expert to be trusted?

https://www.washingtonpost.com/news/dr-gridlock/wp/2017/07/16/ann-coulter-had-to-switch-seats-on-a-delta-flight-then-came-the-tirade/?utm_term=.46efcb329abb

15 Art Deco September 4, 2017 at 7:34 am

So someone who can’t stand being switched back to a window seat and lets loose a tirade against other passengers is the expert to be trusted?

She’d pre-paid for a seat with extra legroom (Coulter is 6′ tall). As she was boarding the plane, her boarding pass was seized and she was issued a seat without the extra legroom. No explanation was given to her as to why this was done. The seat she had been issued was given to a short woman about 25 years old. Coulter thought the woman was given her seat because she wanted to sit next to her husband. It’s a reasonable inference the woman in question is an airline employee. It’s really not that difficult to understand why Coulter found this incident disgusting. Try harder.

16 A clockwork orange traveaux September 3, 2017 at 4:45 pm

In one iteration, a marionette yoked a strip of grout in Vila Madelina to Montague’s pebbled spine. The wine pours from the parapet flowed across the Laffer Curve and churned into the gray of the Fulsome Tar Pit.

17 Thiago Ribeiro September 3, 2017 at 6:40 pm

The American Dream has gone sour. Living standards are down, entire demographics fall prey to drugs, corporations own the government. The State of the Union is not good.

18 Anon September 3, 2017 at 10:33 pm

Meanwhile Brazil is only alphabetically ahead at the BRICS summit.

19 Thiago Ribeiro September 4, 2017 at 5:56 am

Yet, only President Temer could go to China. His visit has been successful, he has met the top Red Chinese leaders and taught them his free market reforms. Some people have more to do in life than yelling at Kim Jong-un at Twitter.

20 Roy LC September 3, 2017 at 7:04 pm

Oh yes monopolies only exist on routes between cities nobody wants to fly. All this along with the admission that Airlines have power over their regulators, airport governance, and that Alaska bought another airline just for the right to use certain airports. Now if we used the word Duopoly…

I would ask Leff to explain the history of Northwest, now Delta, and Minneapolis-St Paul. But if you read through his back issues with any crotical eye at all you will see he is effectively a complete shill for the major airlines, like almost every other travel writer. Just look at the evolution of his position in the days after the United-Police beating in Chicago back last April, as he bends over backwards to defend United until that position becomes both untenable and very unpopular.

Corruption takes many forms and often it is not very visible to the corruptee, but his enthusiasm and identification with an industry that is a model of regulatory capture should put one on notice.

21 sirr September 4, 2017 at 11:13 am

+1

22 Jack September 3, 2017 at 8:07 pm

Airlines have historically been unprofitable in the US but recently with the consolidation in the industry they are highly profitable, which is why, e.g., Warren Buffett now has large stakes in all three of America’s big carriers. This is his first large investment in this industry since his (poor) investment in US Air some twenty years ago.

The indifference with which the big three treat their customers indicates that the market is not exactly competitive — as does Buffett’s investment.

A large reason for the dismal experience in flying in the US has to do with the low quality of the infrastructure. E.g., the NYC airports and transport in and out are all quite dismal compared to say London, HK, SIngapore, Delhi, Stockholm, Frankfurt, a few airports i am familiar with. Many second tier Indian cities and probably China as well have far better airports than say LaGuardia in NYC.

23 Harun September 3, 2017 at 9:39 pm

I love how you cite many foreign cities and then one US city, NYC.

Why doesn’t NYC improve its airports?

24 Moo cow September 3, 2017 at 9:46 pm

LGA in the midst of a 4 billion dollar redevelopment plan.

http://laguardiaairport.com/redevelopment/

25 Dr. D. September 3, 2017 at 10:54 pm

Having no need to fly out of Laguardia, I avoid it like the plague. Both as a pilot and a passenger I can second the comment that Frankfurt and Singapore are exceptional airports. I find it risible that India Gandhi International in Delhi would be included on this list both from an air traffic control standpoint and the generally miserable experience in the terminal.

26 Art Deco September 4, 2017 at 7:54 am

Airlines have historically been unprofitable in the US but recently with the consolidation in the industry they are highly profitable,

The ratio of gross operating surplus to gross output for private industry as a whole is currently 0.233. That for air transportation is 0.149. They’ve had some good years lately. In 2008, that ratio was 0.063.

27 Brian Donohue September 4, 2017 at 12:28 pm

You should write a post about how gas stations all collude on price next.

Seriously, if you can’t show outsize returns to investors over a sustained period of time, any monopoly argument is weaksauce.

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