Independence Air

May 28, 2004 4:19 AM

Independence Air is coming to where I live. It will be the first low-fare airline in this area. Rates will be cut in half to compete with this "threat." My question is: Where has all my money gone that was twice as much as needed? The local paper has a story that says that the big airlines who had to cut rates in half will still be profitable. So they were skimming $200 in pure profit over and above whatever profit they can make with competition? Thief! Oh wait.
posted by ajpresto to Travel & Transportation (8 answers total)

Taking a look at the latest charts and balance sheets for the major U.S. carriers (finance.yahoo.com is an amazing tool, btw) it doesn't look like many airlines are really profitable at all. Southwest is the only one with a positive figure at the bottom of the balance sheets, though its stock performance could be better and it just announced a buyout of employees to help avoid a round of layoffs. Of all the other carriers, Continental is doing less poorly than any of the others -- US Airways, United, American, Delta -- but they're all in the red. (Note: Northwest holds its info close to the vest, so it doesn't figure into that assessment.)

The smaller, cost-contained and/or no-frills airlines like AmericaWest, Frontier, JetBlue and the like are doing better, but they're not the ones who have to do deep cuts to compete with Independence.

I'd think your local paper was either working from an interesting definition of "profit" or the article was only focusing on local performance in some way. This is an industry that's still in massive trouble and in need of a serious shake-up. The emergence of carriers like Independence are helping make that happen, but not really fast enough to save a lot of money and jobs from being lost.
posted by Dreama at 4:52 AM on May 28, 2004

There's a long and short answer. The short answer is no. Dreama is spot on when she points out that the local reporter's use of the word profit is "interesting". I'd go a step further and say "incorrect".

An old airline such as United Airlines rarely releases financial statistics at a local scale, as they factor in way more than just operation costs into their profit threshold on a single planeload. Moreover, their pricing methodology may be what ends up seriously threatening, if not destroying, the cosy short haul market cartel that has been in place for decades in the US.

This story from Travel insider covers the issue and explains how the old airlines such as American Ailines and UA are in serious trouble due to the legacy of their pricing structures. Furthermore, it argues that the big carriers practice of slashing their prices and doubling the number of flights when competition appears on a domestic route may not help them "remedy" the situation this time.

Essentially, the cost of keeping a flight in the air for AA is about twice that of a low cost carrier such as Independance Air. In the past, new operators tended to have neither wide enough networks nor deep enough pockets to weather the undercutting onslaught that was thrown at them. Now though, the competition is more organised, better funded and has a strategy that allows them to operate at a profit even when their larger competitors slash their prices by half.

That $200 "extra" you were spending before was not profit. It was probably propping up some other part of their network or repairing an old high-maintainance aircraft.
posted by davehat at 6:15 AM on May 28, 2004

This is one part... some of that money you are saving is not being used to pay pilots and airline attendants and other airline workers. In the olden days, a lot of these positions were union and they had built in pay increases and pensions and all sorts of other benefits assocated with them. As a result, if you were a pilot who had been working with say, Delta for 20 years, you'd be making a sweet $150-180K or so and would have a good pension for the rest of your life. You might remember there were pilot strikes when many of the bigger airline companies were trying to cut pilot's salaries and a lot of people got all flippy that pilots made so much. Airline companies claimed that these large salaries were one of the things that was keeping them from being competitive. Incoming pilots for these smaller airlines are generally non-union and their salaries max out much lower than in the olden days with fewer benefits and more irregular schedules. Pensions are dramatically smaller [if they exist at all] and airport and ground crews [as well as those airport security folks who all got hired post-9/11] are non-union and making less money. I'm not saying everything is peachy-keen with the unions either, but the whole way these newer discount airlines are staffed is totally different from the older more entrenched big airlines.
posted by jessamyn at 8:32 AM on May 28, 2004

Also, newer airlines like JetBlue have all-new airplanes (I think average age less than 5 years old), which have drasticly lower maintenance costs compared to other airlines' fleets.
posted by falconred at 10:48 AM on May 28, 2004

And likely have all the same model of airplane, further reducing maintenance costs.
posted by five fresh fish at 11:45 AM on May 28, 2004

jessamyn, that’s a very good point. To quote the article I linked, it asks the question:

[overpricing] criticisms should not exempt the labor forces of the [establishment] carriers, but who deserves the greater share of blame - a pilot for demanding $300,000 a year plus massive benefits to fly planes for less than half normal working hours, or the airlines for acceding to those demands?

Furthermore (and re-iterating your points falconred):

.....part of the [low cost carrier] advantage is that they typically are recently formed companies, flying nearly new planes, and with relatively junior and still freshly enthusiastic work forces. Their planes will never have the same low cost as they currently offer (especially the ones still under warranty), and as their staff become more senior and - potentially - disillusioned and avaricious - there is a danger that both their operating and labor costs might increase closer to those of the dinosaurs.

Even if these new carriers win the majority of the short haul market, there is no guarantee that they will be remain at their current low levels.
posted by davehat at 12:27 PM on May 28, 2004

It's the walmartization of the airline industry.
posted by mecran01 at 6:19 AM on May 29, 2004

Er, no, it isn't. These are dozens of small companies in competition with each other. Walmart is a single huge conglomerate with little competition. Walmart:Old Airlines::Corner Store:Regioinal Airlines.
posted by five fresh fish at 2:13 PM on May 29, 2004