How is it that Southwest Airlines -- which is also a publicly-traded company -- continues to offer low fares, while remaining laser-focused on customer service in this environment? It's unfortunate that the reporter doesn't take any time to explore this long-standing exception.
It's easy to blame the public market system, but when exceptions like this are readily found, it's worth investigating whether there are other factors in play than the income statements alone.
I've admittedly not done extensive research, this is mostly from memory, so if someone else remembers differently please correct me.
BUT - the reason Southwest was the "low fare" leader was because they locked in fuel prices back before we had the massive spike in prices in the early 2000s. That gave them a tremendous advantage over the other airlines given fuel is such a massive part of their overall costs. That combined with standardizing on a single plane (less impactful but still helpful) allowed them to both claim and honor the "low-cost leader" title.
Now that fuel prices have returned to a more "normal" state, their prices had to revert to the mean. They may be cheaper on some legs, but it's not universal anymore.
Its worse than that. A hedge on oil price is a bet on the way it will swing.
When oil prices went up, Southwest got to make record profit. When oil prices went down, Southwest got to make record losses.
Southwest also just offers no service to many unprofitable markets. If Southwest were the only carrier, many smaller airports would shut down. There would be maybe 40 larger airports, with high volume flights.
Yes it was a bit in jest. But the same amount they save as price goes up, they lose when the prices go down. And yes stability is good, but it's not as big of a deal as ppl make it out to be
A simple example suppose if price of commodity increases by x your company fails and that has say a 10% chance of happening. If you usually profit 10 billion per year and you can hedge for say 1 billion per year then money wise it seems like a break even. However, failure costs not just this years profits, but every year after that. So, your expected profit over the next 10 years increases even if the hedge does not save you any money over that same 10 years.
"A bit in jest"? You made a strong and easily falsified statement. Why is it so many people on this message board are incapable of admitting they're wrong?
"A hedge on oil price is a bet on the way it will swing."
Well I mean it's implemented that way (buying long-term futures) but it's really just locking in a set price. Oil prices skyrocketing doesn't make them infinite money, because they have to either take contract delivery at the price they originally bought at, or use their futures profits to buy at the spot market. In the same way, falling oil prices doesn't cost them huge amounts of money, they just won't be able to take advantage of the fall in prices like a non-hedged carrier would.
I assume they try their very best to hedge to actual predicted usage and not try to profit from swings either way. If they could do that they'd be better off running a hedge fund.
>How is it that this one exception differs from majority of sample which can be explained by hypothesis X, that clearly disproves hypothesis X.
This is a similar argument to "this year is cooler than the last year so climate change is a hoax." Taking a single exception as a stand-in for the mean IS an invalid argument. At best, it points out that the world is more complicated than explanation X, but it certainly doesn't invalidate X for the sample it is predictive for.
If you're claiming that overall temperate (or energy content etc) of the atmosphere is on an upward trend because of specific drivers, then one anomalous year doesn't refute that (so long as the rest of the years and samples are in line with the claim/theory).
If you're claiming that a certain ubiquitous dynamic exists that forces all providers in one market to do X to stay profitable, then it would refute that claim to point to one provider that is able to consistently, year after year, stay profitable without doing X.
No one is making the argument with ∀. It would be preposterous to do that in the real world because "for all" quantifiers only work in mathematics. Almost always when someone says "all" in common conversation they either mean some form of "almost always" or "a good majority"; Otherwise, they are thinking too simplistically if they really think it applies to a true "all." Taking exception to "no true Scotsman" arguments of course.
I know they didn't say "for all", but it's functionally equivalent when the claim is that the very nature of the market forces providers into these patterns. That explanation would indeed be refuted by a persistent counter example.
Yes, I grant that a persistent counter example would point to other factors that could exist. Counter examples usually point to "the world is more complicated" rather than disprove X if X applies to a majority the set it talks about, as I said.
I'd imagine if X explains a good fraction of what you're talking about, you'd want to pursue X as an explanation over chasing explanations that effect the exceptions.
Again, depends on the claim. If the claim is that "factor X dominates to the point that it can't be ignored", then a persistent counterexample refutes it. If the claim is that "factor X makes it so that the most reliable business model is to do Y", then it wouldn't. My reading of the article is much closer to the former.
Well part of it is that there's an oligopoly in the airline industry that prevents competition.
First, it's a hard market to get into for new carriers (regulation, high capital costs for planes, etc.). Airports also only have a certain number of gates, and until expansion of the airport, it can be hard to accommodate new flights. This is how we get to the 'hub and spoke' model of airline carriers, where it can be cheaper to fly through their hub city on a longer flight with 2 planes, than to fly direct.
And if you're not competing with another airline, you're competing with yourself. This means lowering costs and trying to increase your margin, knowing it's a race to the bottom and people will have to fly anyway, no matter how bad it is.
Basically, you may or may not be on a route that has competition between two cities. Or another way to put it, if Southwest does great (and I do love Southwest), why aren't they in every airport and on every route stealing market share by doing it better?
One factor is that employees own a significant fraction of the available shares in the company. So, as the company does better on Wall Street, they get a benefit.
In part, this helps each employee have a deeper investment in each and every event that happens in relation to a flight -- they work harder and more efficiently, get better turnaround times, more on-time flights, and better customer satisfaction.
When I fly, I choose to fly Southwest whenever that is possible. If that's not possible, then I might fly JetBlue, because they usually also do a decent job in these areas. I loved Virgin America as a second choice, before they got bought by Alaska Airlines.
But ever since my first flight on Southwest many years ago, they have been my favorite airline.
The fares on Southwest aren't really low any more. At least, comparing them with United for flights out of Chicago, I don't find any real difference in prices, even on regular Economy fare. The only advantage that Southwest has at this point (and it's a very important one in some contexts) is that it doesn't have any change fees.
There's many things Southwest does to remain profitable, but many wouldn't scale out to be useful for every airline.
Not listing your fares on any channel other than your own, for example. People assume you're the cheapest, even when you aren't. And, no big fees to pay the sellers.
Picking only profitable airports and routes. They avoid airports with high fees and slow procedures that keep aircraft on the ground. And they avoid routes that don't support fares or load factors they want.
There's only so much space for other airlines to do the same. Sure, things would correct over time, but no airline has been willing to try it and bleed cash waiting for the normalization.
southwest used to be the low fare leader, but not anymore. now they are just average. the only advantage they have is the easy ability to cancel a flight and reuse the money later, without paying a pointless 100 or 200 dollar fee.
This is how Southwest Airlines differentiates itself from other airlines. Since Southwest exists already, other airlines can't differentiate themselves anymore in the market by doing this.
SWA hasn't offered lower fares from SFO, SJC, or OAK in many years now, as far as I've noticed. And good luck finding a direct flight that's both from and to your preferred airports. YairMMV...
It may depend on the airport! I live in New Orleans and regularly fly to SFO/OAK, and to LGA and ISP(Islip-MacArthur, on Long Island). Southwest is usually cheapest, even before taking free bag check into account.
I am saying that revenue has no baring on employee cost structure. They have a much younger workforce, didnt have the issues with pensions that the other major carriers had and still pay their people less on average.
Their only real advantage was a speculative bet on fuel prices.
Again, they are already reverting to the mean and will continue to do so.
Basically people shop based on price then have a miserable experience, but somehow not miserable enough to stop shopping based on price.
My favorite airline is awful. Uncomfortable, slow, frequent delays, etc. But it's also cheap enough that I would never fly anything else. So I am the problem, but there's no way I'm paying an extra $50/flight.
Exactly. If you want a better experience, you can have it, but you have to pay for it.
Airline crap bothered me a lot less once I realized this. I still shop almost exclusively on price, but now that I've internalized that tiny seats are ultimately my choice, it's less annoying.
Blaming Wall Street doesn't make sense to me. Companies would still want to make more money regardless of Wall Street. Blame the customers. Airlines are just giving us what we want! Ask the typical airline passenger what they want and they'll probably say they want a double-wide seat with 6ft of legroom and a free filet mignon meal, but when you watch what they buy it's obvious that they much prefer a cheaper seat that they can barely fit into. Turns out I prefer that too.
Sure, but the price differential is crazy. I will frequently pay extra for an exit row, at $50-$75. But an upgrade to business class is often three times the price of economy. And it's just not worth that much.
The market is segmented reasonably. Most people won't pay for business, so most seats are economy. On certain routes, the flight is so unpleasant that economy would be unbearable for most, so airlines have planes that don't have economy (e.g. SIN-JFK on Singapore Airlines used to be all business class; when the route comes back with their A350-10 deliveries, it'll be all premium economy and business).
Personally, I fly only in business or first on long flights, and buy economy on short flights. It's worth it to me to avoid the jet lag and be able to bear the amount of travel I do (in the past year I've probably done over 40 flights >5h and close to 100 flights total). Flying domestically in economy becomes a lot more comfortable if you give a legacy airline your loyalty. e.g. I get upgraded to first two third of the time and always get the best seating, priority lines, free drinks & food onboard, and lounge access as a United 1K frequent flyer.
That's my whole point. People say they want these things, but the reality is that they don't want to pay what these things cost.
Of course I want bigger seats and great food while still paying the rock-bottom prices we currently have for cattle-class tickets. But that's not realistic.
If you say you want X, but always choose Y because it's cheaper, then you have no room to complain about how bad Y is.
One concern is work forcing you too book the cheapest flights for business travel. In that case, it is in your interest for the lowest fares to be more comfortable.
Those policies will just have to change. I don't see people arguing that sleazy motels need to up their game because business travelers are required to book the cheapest room available, or that McDonald's hamburgers should be more nutritious because business travelers are required to eat the cheapest meal available.
Is there a general solution to that problem though?
What stops the "race to the bottom" in company-provided hotel accommodations? Do corporate policies say something like "2 star hotel less than X minutes from where business will take place..."?
>Do corporate policies say something like "2 star hotel less than X minutes from where business will take place..."?
Effectively, yes...that's why corporate travel booking tools exist...policy management. Your example is doable in those tools.
What they usually do is negotiate corporate rates with specific chains, and limit bookings to those places. With some additional policy to keep you in the basic rooms.
It really depends on the business and the traveler. Some companies are happy to pay a lot of money to keep their people comfortable while traveling. Others want to be as cheap as humanly possible.
And, as a word of advice, if you're in a company that is reasonably successful and makes you travel as cheaply as humanly possible, it's usually a sign that they don't respect you and that you should probably start looking somewhere else.
I have found AA at higher, about equal, and lower prices than Delta and United for the same destination/date based on when I was searching. A specific flight's price depends on so many variables and is not the best indicator of the quality.
Most of the times when I look for flights, one or two airlines (with nearby hubs) cost half or third of other airlines. When AA and Delta cost $800 for a flight while United costs $300, it is pretty much a no-brainer. Only rarely do I even see comparable prices ($25-$75 differences) between multiple large airlines for the same flight paths / dates.
So even if consumers become more price inelastic, they still do not have enough power to vote with their money because the choices are not always comparable. If every AA flight cost x% more than every United flight, consumers could show United that they care more about service than a few dollars. But since there is such a high variability in the fares, there's no easy way to send a message within the market.
This. It's easy to point fingers at evil executives and Wall Street investors, but ultimately the reason airlines squeeze seats and service options is because not enough people will pay more for a couple of extra inches of legroom to make fitting aircraft with fewer seats and more legroom a viable competitive option. I mean, a single digit percentage of seats on an aircraft are exit row seats with extra legroom and they still sometimes end up randomly assigning them because not enough people have paid the tiny premium they ask for! And that Basic Economy ticket where you don't get cabin baggage is being introduced because they know some people want that.
Likewise, it's easy to blame consumers for always going with the cheap option when they don't have tools that allow them to easily understand the tradeoff. Which travel sites makes it easy to input (something isomorphic to) a utility function over all the ways that you can save on the flight? Or know how many inches of legroom you need?
Is there some other way to shop? When I search for a flight, I make my choice based on flight times and price, because that's the information available. If I could sort the options by least to most awful, I might pay more for less awfulness, but I have no way of knowing that, so I don't.
If you are a very frequent business traveller, I can see how you might have enough familiarity with the different airlines to know what their brands mean, but all I've got to work with is "never fly United".
I don't think $50 a flight is going to get you much on a low-price domestic flight, other than maybe a slightly better itinerary, or priority boarding.
There is exactly one airline (United) that can go from where I live to where my parents live with only one stop. The experience of that is so bad that we drive for 4 days each way rather than fly. We get to see family in the midwest we other wise would see less often, and now that we have 4 kids it's cheaper too.
If someone offered consistently better service I would consider paying more but so far I haven't found that airline. They all seem to suck in their own ways.
Having recently bought a mortgage, a car, and a family vacation, I am convinced that the internet has made all of these transactions worse. Maybe there was a time when the internet tilted things in the consumer's favor but nowadays thre are no deals. These industries have figured out how to collude to control all information channels, obfuscate the actual product and discriminate prices to the maximum extent possible.
The internet has made buying a car worse? I'm assuming you have either never bought a car without the research and pricing tools available via the internet, or are looking back with rose-colored glasses.
It seems to me that at some point Economy class will be miserable enough that passengers start comparing metrics of service (seat width, seat pitch, etc.) rather than just price and price alone. We just haven't gotten there yet.
But as it is now the Economy class tickets are a fourth of the price of the business class, and the only thing you get is more of everything. Where is the alternative to pay 25% more for the ticket, yet skip the extra stuff, but just get a nicer smoother experience?
That's what Delta calls Economy Comfort, which is economy with a little more leg room and earlier boarding. At 6'7" it's well worth the extra cost for me.
It's called "premium economy" generally. You get slightly bigger seats, maybe better food options (or it's included as part of your ticket) and sometimes early access to the cabin.
I don't fly US domestic routes but for a transoceanic flight it'll typically cost you twice the price of standard economy (and in turn business is about 2x eco+, and first 2x business).
Really? As I recall, Delta and United premium economy are normal economy seats in the forward half of the airplane. It saves you a few minutes deplaning, but does nothing for the comfort level in flight.
> As I recall, Delta and United premium economy are normal economy seats in the forward half of the airplane. It saves you a few minutes deplaning, but does nothing for the comfort level in flight.
On United it is the same economy seat, but it does have more legroom due to increased separation between rows of seats, compared to standard economy.
Won't happen unless the metrics by airline become drastically different (right now they are declining at roughly the same rate), different enough to justify the price and schedule differences between competing flights. Otherwise it could be done today.
We have seen it in the past. I remember when JetBlue launched many would take a higher priced seat, for the in flight entertainment. Or Virgin for the service and seat room.
Sleeper economy: Something that will let me lie flat that isn't 4x the price, for trans-pacific 12 timezone flights that take 12+hrs. I would be totally fine with beds that stack, it's too bad it doesn't exist.
If a flight is waking hours long then economy or economy+ is good enough for most people.
Something that lets you lie flat usually takes >4x the space of economy seats, so must cost >4x the price to be sustainable for the airline.
Air New Zealand tried that with their "SkyCouch" concept, though, where you could join 3 economy seats together into a flat couch/bed thing. It failed and they're removing it from their fleet, however.
A new "basic economy" class, that doesn't allow you to take carry on baggage and makes you sit in the middle of the row? That's exactly what I want, pissed off people in the middle of every row.
Now introducing "coffin economy" - once you climb into our sleek new fully reclined seatboxes, you'll wish you were dead!
One thing the article doesn't point out is that oil prices have been on a tear lower, which allow the airlines to get more profitable. We'll see how long that lasts. There's a reason why the P/E multiples of the airlines is well below that of the rest of the S&P
If I could fly capsule-hotel class I'd love to try it. I think it'd be less awkward and uncomfortable. But it's not going to happen because airlines need to get passengers on and off quickly.
http://philip.greenspun.com/flying/unions-and-airlines is a compelling explanation of why the pilot's unions have the industry by the throat. I can't imagine investing in a business where every labor negotiation is an unconditional surrender because saying no means you have to shut down indefinitely.
A new "basic economy" class, that doesn't allow you to take carry on baggage and makes you sit in the middle of the row? That's exactly what I want, pissed off people in the middle of every row.
Until aircraft get completely redesigned, someone is going to be sitting in the middle of a row. Why shouldn't they pay a lower price?
I have no problem with basic economy for a short flight (say around an hour). It's no worse of an experience than dealing with an hour commute on public transit.
People call United's 772 and 747-400 2-4-2 seat business class configuration "coffin seats" because of how stacked and narrow they are. I've flown it, it's not particularly comfortable; but at least it's a lie-flat seat.
If you want to call it a discount, that's fair, but it's not really. People aren't willing to pay 15 or 20x earnings, they want to pay 9 - 12x earnings. You might call this "value" investing, or a "value" trap. This generally suggests that the income stream is less reliable to maintain, and allows for heavier discounting of future earnings.
On the other hand, for a "growth" company, a high P/E might be justifiable, because in a few years they will have higher earnings.
I just watched the 1974 movie "The Parallax View". There's a scene aboard a 707, and I was amused how flying is just the same as today. Except that the aisles were wide enough that someone could squeeze by the drink cart.
Fun, tangental fact - that's probably more down to it being a movie set than an actual plane. There's actually a soundstage in Hollywood that's dedicated to plane sets. Here's their 737:
It's easy to blame the public market system, but when exceptions like this are readily found, it's worth investigating whether there are other factors in play than the income statements alone.