The airline industry is dominated by four players -- and you're paying for it

[Maverick74]

The graph still shows how the market has gotten more expensive. You have to infer it from the data as other moving parts obfuscate the reality.

In 2011, airfare was approx. 305 and jeta was approx. $3. Today jeta is around 1.6 (per your chart) and airfares are down about 5% to 290ish. We should probably ignore the last datapoint because it seems like an outlier.

When you take your same airline fares data further back, (same source) airline fares were approx. 240ish in 2007. Today they are 295ish. And in 2007 jet fuel prices (again from FRED) were around $2 then and 1.3 today.

There's no doubt relative to input costs fares have gone up and the only qualitative change in the US is capacity has been taken out through mergers. It's also no surprise that airlines are earning record profits as this trend was formed.

https://fred.stlouisfed.org/series/CUSR0000SETG01
https://fred.stlouisfed.org/series/WJFUELUSGULF

You are a smart guy so I don't need to tell you this. But there are a lot of moving parts here and you are skipping over a lot of them to over simplify this. Why don't you start here.

http://www.forbes.com/sites/uhenerg...lion-lost-in-hedging-fuel-costs/#54bd8e416d02

And Delta is not the only airline getting decimated on their hedges. Oil volatility is NOT good for the airlines. It does not matter if oil prices go up or down, large fluctuations causes them to over react and put on bad hedges at bad prices. Imagine that. Most airlines got caught hedging their fuel costs at MUCH higher prices. Nobody thought oil was going to get this low 2 or 3 years ago, the airlines included.

 

[chisel]

...the market has gotten more expensive.

I'm not so sure about that. I'd like to see a multi-decade graph which shows the airlines' fare as a percentage of total ticket cost. From what I've seen, taxes and govt./airport fees are a significant part of the total ticket cost.

 

[Maverick74]

I'm not so sure about that. I'd like to see a multi-decade graph which shows the airlines' fare as a percentage of total ticket cost. From what I've seen, taxes and govt./airport fees are a significant part of the total ticket cost.

This is true to a point. I think a lot of travelers don't realize that you pay a tax every time you touch down at an airport. For example, if you don't fly round trip and you have a connecting flight at Ohara from JFK on to San Diego. You will pay a tax to land in Chicago and San Diego. And the tax varies by airport. The 9/11 add on fees are the same and not leg dependent.

Here are some of the taxes you have to pay:

Domestic Passenger Ticket Tax: collected for FAA; 7.5% of ticket price

• Domestic Flight Segment Tax: collected for FAA; $4 per segment, defined as "a flight leg consisting of one takeoff and one landing by a flight"

• International Arrival Tax: collected for FAA; $17.70

• International Departure Tax: collected for FAA; $17.70

• September 11th Security Fee: collected for TSA; $5.60 one-way for flights departing the United States, but not to exceed $11.20 round-trip

• Passenger Facility Charge: collected for "commercial airports controlled by public agencies"; up to $4.50 per passenger

Now to be fair, there is some gamesmanship being played by the airlines by stripping services and then charging for them such as charging for snacks and even extra carry on bags. I also think airlines are holding back seats months in advance and making it look like a flight is full and then releasing those seats within a week of departure and charging higher rates for them. But....if you can get a seat 3 weeks in advance, I think the fares are cheaper but again it really depends on the route. Which is why I stated there are a lot of moving parts and you can't make gross generalizations.

The fuel hedges have killed the airlines though.

 

[newwurldmn]

Okay. Here is the data I had been searching for:

http://web.mit.edu/airlinedata/www/...r Revenue per Available Seat Mile (PRASM).htm

This is passenger revenue per available seat per mile. This is the primary metric that airlines use.

Look at the graph. It goes back 20 years. Notice how the years vary small and range around 8-9 cents. Notice how in 2009 it dips (makes sense, the recession really hit the real economy in 2009). Notice how it's largely and upward trend after that and at unseen levels of 12 cents. Notice how there are all these airlines that no longer exist in the dataset. (Northeast, Continental, AirTrain, etc).

Since the mergers started, the number has reached uncharted territories. Clearly hedges in place don't help.

Further (and I don't know if this is in the PRASM data) you can see the increase in other fees:

http://web.mit.edu/airlinedata/www/...lated/Other Revenue/Ancillary Fee Revenue.htm

Again this really kicked into high gear when the oligopoly model started.

Hedging, etc is relatively small. Most airlines don't hedge most of their fuel exposure (like 30% or less) and when they do, they typically trade oil which as Mav pointed out is not the same as JetA. The reason they don't hedge a lot is because when prices go up they can issue surcharges and when prices go down they could compete in price wars. And you can see in the graph in 2008 the PRASM spiked because oil got expensive.

 

[Sig]

Notice how there are all these airlines that no longer exist in the dataset. (Northeast, Continental, AirTrain, etc).

Most of of those that no longer exist aren't around because they went bankrupt (chap 7), and even a number of the mergers took place only happened because the acquired airline was on the verge of bankruptcy or already in chapter 11 and the merger was their exit. Continental, for example, filed for chapter 11 twice. As Branson once said, the best way to become a millionaire is to start with a billion dollars and start an airline.

There's something to be said for the idea that this industry has really never been sustainable and the previous low revenue per seat/mile represented an unsustainably low number.

 

[newwurldmn]

Most of of those that no longer exist aren't around because they went bankrupt (chap 7), and even a number of the mergers took place only happened because the acquired airline was on the verge of bankruptcy or already in chapter 11 and the merger was their exit. Continental, for example, filed for chapter 11 twice. As Branson once said, the best way to become a millionaire is to start with a billion dollars and start an airline.

There's something to be said for the idea that this industry has really never been sustainable and the previous low revenue per seat/mile represented an unsustainably low number.

I don't know about Northeast, but the rest were takeovers.

ATA wasn't on the list and they declared bankruptcy in 2007 (they had the cheapest fare from LaGuardia to Chicago).

Like I said the mergers took out capacity and stabilized the market (an oligopoly euphemism for eliminating price wars). Perhaps it will be better in the long run for America to have an oligopoly in the airline business, but fares have definitely gone up as a result of it.

 

[Maverick74]

Most of of those that no longer exist aren't around because they went bankrupt (chap 7), and even a number of the mergers took place only happened because the acquired airline was on the verge of bankruptcy or already in chapter 11 and the merger was their exit. Continental, for example, filed for chapter 11 twice. As Branson once said, the best way to become a millionaire is to start with a billion dollars and start an airline.

There's something to be said for the idea that this industry has really never been sustainable and the previous low revenue per seat/mile represented an unsustainably low number.

I would have to agree with this. I believe Carl Icahn said owning an airline was the easiest way for one to rid themselves of their wealth (he bought TWA in the mid 1980's).

 

[Maverick74]

And here is what Mr. Buffet thinks of the airline business:

At the recent Berkshire Hathaway annual meeting, Buffett responded negatively when asked a question about airline investing. “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” Buffett said, “It’s been a death trap for investors,” he said of the airline industry, after he was asked whether airline consolidation has altered his long-standing view that investors should stay away from airlines.

From a 2002 interview with the London newspaper The Telegraph: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”

 

[newwurldmn]

And here is what Mr. Buffet thinks of the airline business:

At the recent Berkshire Hathaway annual meeting, Buffett responded negatively when asked a question about airline investing. “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” Buffett said, “It’s been a death trap for investors,” he said of the airline industry, after he was asked whether airline consolidation has altered his long-standing view that investors should stay away from airlines.

From a 2002 interview with the London newspaper The Telegraph: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”

All that might be true. But that doesn't change the fact that consolidation has led to airline fare increases.

 

[Maverick74]

All that might be true. But that doesn't change the fact that consolidation has led to airline fare increases.

See I still disagree with this. You have to be more specific. It's never been cheaper to fly into cities like NY. Have fares gone up in St. Louis? Maybe. It's hub specific. The issue is not just the oligopoly but at what hubs are airlines competing for seats and where are they not. You cannot say across the board fares are going down or fares are going up. The airline business is a lot like real estate. Real estate on the coasts is at record highs, in the rust belt, scrapping the lows. The "where" in this equation is very important.

On a secondary note, I hope you are not trying to recommend airline stocks because most of them are trading like shit. I still don't understand the main point on this thread. Healthcare, food, and education costs have seen much more inflation then airline fares. And if airlines didn't have corporate expense accounts filling up over priced business class seats, we probably would have nationalized the airline business.