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

Maverick74 said:
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.
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Real estate (as an industry) is different than airline routes because it is intensely and solely local. However, overall real estate prices did go up in 2007 even if some locales didn't. Here PRASM is up uniformly for all airlines at levels never before seen. Unlike real estate, PRASM is an accurate number - like saying the market went up today because the SPX was up. Not all stocks went up today but most did.

My only point is that consolidation has caused increased airfares. I'm disputing your point that it didn't.

I'm not making claims that airline stocks are good investments or that the airline business is a good business to be in.
 
newwurldmn said:
Real estate (as an industry) is different than airline routes because it is intensely and solely local. However, overall real estate prices did go up in 2007 even if some locales didn't. Here PRASM is up uniformly for all airlines at levels never before seen. Unlike real estate, PRASM is an accurate number - like saying the market went up today because the SPX was up. Not all stocks went up today but most did.

My only point is that consolidation has caused increased airfares. I'm disputing your point that it didn't.

I'm not making claims that airline stocks are good investments or that the airline business is a good business to be in.
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No, you are saying PRASM is higher. The specific revenue metric you are using. I was simply saying "airfares" in general are lower and I cited the trend in the FRED graph. Yes, I cherry picked the start date of 2011 so my comment should read, since 2011, the CPI Airfare price index has been trending lower. I could care less if PRASM is going higher if I'm paying less for for my airfare. I know 20 years from now there won't be a free standing airline, so let them make what they can now because their business model is dead.
 
Maverick74 said:
No, you are saying PRASM is higher. The specific revenue metric you are using. I was simply saying "airfares" in general are lower and I cited the trend in the FRED graph. Yes, I cherry picked the start date of 2011 so my comment should read, since 2011, the CPI Airfare price index has been trending lower. I could care less if PRASM is going higher if I'm paying less for for my airfare. I know 20 years from now there won't be a free standing airline, so let them make what they can now because their business model is dead.
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The CPI airfare index is only 70% airline fare. the other 30% is cost going to and from the airport.

PRASM is a reflection of only the airline part of it.

Further, CPI data does not include the use of extras like baggage fees. Also, CPI assumes some percentage of discount fares.

PRASM is the actual data. Not an interpolation and not mixed in. It's clear that PRASM has gone up. It's unclear what has caused CPI to go down.

Further, CPI is a sampling (similar to your real estate coast analogy). PRASM is the whole population.

http://www.bls.gov/cpi/cpifacaf.htm
 
newwurldmn said:
The CPI airfare index is only 70% airline fare. the other 30% is cost going to and from the airport.

PRASM is a reflection of only the airline part of it.

Further, CPI data does not include the use of extras like baggage fees. Also, CPI assumes some percentage of discount fares.

PRASM is the actual data. Not an interpolation and not mixed in. It's clear that PRASM has gone up. It's unclear what has caused CPI to go down.

Further, CPI is a sampling (similar to your real estate coast analogy). PRASM is the whole population.

http://www.bls.gov/cpi/cpifacaf.htm
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OK, well this is more detail then I was looking to go into. I know for a fact that the routes I fly the most have gone down and in some cases substantially. Perhaps overall they are higher. It does not change my view of the industry that its dead and not sustainable long term. Airlines cannot control costs long term and they simply will not have pricing power without a sustainable uptick in real incomes. I give the industry 20 years but if we get parabolic energy prices before that, you can stick a fork in the lot of them. Just one man's opinion of course....I'm often wrong.
 
Maverick74 said:
OK, well this is more detail then I was looking to go into. I know for a fact that the routes I fly the most have gone down and in some cases substantially. Perhaps overall they are higher. It does not change my view of the industry that its dead and not sustainable long term. Airlines cannot control costs long term and they simply will not have pricing power without a sustainable uptick in real incomes. I give the industry 20 years but if we get parabolic energy prices before that, you can stick a fork in the lot of them. Just one man's opinion of course....I'm often wrong.
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Fwiw, my airfares have consistently gone up.

I don't have an opinion on airline stocks. In the past they have not been good investments because fixed costs were high, variable costs were high, and barrier to entry were pretty low. However, with the industry trending towards oligopoly, they might be able to put up barriers to entry and maintain pricing stability to fund the fixed and variable costs. Airlines might become an MBA case study in deregulation and the evolution of the market from there.
 
vanzandt said:
With only a handful of players on the major routes, these things are becoming like utilities in the sense that profitable operation long term is pretty much guaranteed.
Despite what what someone on this thread posted... there are high barriers to entry.
I'm with Buffet.
Long DAL
http://archive.fast-edgar.com//20170713/AB2Z762CZ22HQZZ2222G2ZXZLOAQZZL2IW92/
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Except utilities are in a death spiral much like the long distance phone market 20 years ago. Sometimes monopolies (or oligopolies in this case) end up making the players lazy and they end up getting their lunch eaten by disruptors. I also see some parallels to what Fedex and UPS did to USPS, the LCCs can cherry pick the lucrative routes and the legacy carriers are left by their business model serving the on aggregate less profitable routes. Finally, unlike utilities where the demand curve is very inelastic, the demand curve for air travel extremely elastic so any time they have to raise prices for reasons beyond their control like high oil prices their revenue plummets. Tie that with huge fixed costs and this just seems like a poor market to be in from a strategy point of view. Plus I'm not sure any industry has destroyed more value since its inception than air travel. And this coming from a former professional pilot, so I'd love to be able to love airlines!
 
Sig said:
Except utilities are in a death spiral much like the long distance phone market 20 years ago. Sometimes monopolies (or oligopolies in this case) end up making the players lazy and they end up getting their lunch eaten by disruptors. I also see some parallels to what Fedex and UPS did to USPS, the LCCs can cherry pick the lucrative routes and the legacy carriers are left by their business model serving the on aggregate less profitable routes. Finally, unlike utilities where the demand curve is very inelastic, the demand curve for air travel extremely elastic so any time they have to raise prices for reasons beyond their control like high oil prices their revenue plummets. Tie that with huge fixed costs and this just seems like a poor market to be in from a strategy point of view. Plus I'm not sure any industry has destroyed more value since its inception than air travel. And this coming from a former professional pilot, so I'd love to be able to love airlines!
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Well.... when I say utilities, I only mean that in the sense that people really have no choice. There's no doubt the history of the commercial aviation biz is comical, but I think its different now. These things are well run, they really are. Heavy investment in technology has made all the difference; the historic bugaboos that have plagued the model have been minimized to the greatest extent. It'll never be perfect, but these are not the "legacy" carriers of yore. And if costs go up, they go up across the board for all the players.

Elastic demand? Perhaps for the cheap seats, but the money has always been with the business sector anyway. And one can certainly argue that technology has shrunk this demographic as well, but the world is still growing. Who knows... they can always blame it on the wx.
 
vanzandt said:
Well.... when I say utilities, I only mean that in the sense that people really have no choice. There's no doubt the history of the commercial aviation biz is comical, but I think its different now. These things are well run, they really are. Heavy investment in technology has made all the difference; the historic bugaboos that have plagued the model have been minimized to the greatest extent. It'll never be perfect, but these are not the "legacy" carriers of yore. And if costs go up, they go up across the board for all the players.

Elastic demand? Perhaps for the cheap seats, but the money has always been with the business sector anyway. And one can certainly argue that technology has shrunk this demographic as well, but the world is still growing. Who knows... they can always blame it on the wx.
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I should have been more specific, electric utilities are in a death spiral in the face of solar plus storage.
I agree consolidation has helped the industry be better run and obviously mitigates the devestating price wars they always engaged in. However I'd submit the LCCs are still eating their lunch by picking off the lucrative routes, Southwest and JetBlue in domestic and near offshore vacation market and players like Norwegian (awesome airline btw) in the transatlantic market. That leaves them serving the Waukeegan to Detroit market that's low margin pita. The legacy carriers look good at $45 a barrel oil, go to the low hundreds and businesses definitely cut back both because of elasticity and the fact that the overall economy is probably impacted as well. I'm surprised the legacy carriers don't have a higher beta then they do, they seem like a classic high beta stock but are close to 1.
 
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