Friday, December 10, 2004

Airline Economics I - Going Broke Flying Full

Have you been on an airliner lately? I don't care which airline, but did you notice that it was pretty full? Even on the airlines that are in bankruptcy the airplanes seem to be full. With full airplanes, how can the industry be swimming in an ocean of red ink?

Now, have you noticed what airlines are charging to take you thousands of miles in relative safety and efficiency? (Yes, Virginia, flying is safer than driving...A lot safer). The airplanes are mostly new employing state of the art technology and the airports and terminals for the most part are new or being remodeled and improved.

The answer on a per mile basis is almost nothing. Flying is dirt cheap. For short haul flying, it can easily cost more to park for a few days than a ticket to a nearby city.


Competition and the vagaries of the airline business. You see, airlines have virtually the most perishable product possible. If Safeway doesn't sell a bunch of bananas today, they can sell them tomorrow and maybe the day after until they show brown spots. An airline seat is completely lost revenue as soon as the airplane pushes back from the gate. The marginal cost of producing that seat is near zero as the airplane, fuel, crew, and ground facilities are all already paid for whether that seat is filled or not. Therefore, any revenue at all which can be made from filling that seat is gravy on top of fixed costs. That means that if the airline can sell the seat for $20.00 just before pushback, that's $20.00 of revenue with almost no additional cost.

That, then is the reason that airlines have incentives to undercut each other to fill otherwise empty seats. Unfortunately, they tend to collectively bring too many seats to market and can't make any money while fighting each other in a race to the bottom. Hence low prices, full airplanes, and broke airlines

Why do they do this? That will be the subject of a future post.


I always get a kick out of passengers who when getting off the airplane will look at me earnestly and say something like: Thank you for getting us here safely. As if they weren't on the plane, I would have flown a little less safely. Newsflash: I fly safely to keep my own pink backside from hitting the terra firma, not necessarily that of someone paying $29 for a weekend jaunt to see their boyfriend who's probably going to dump them after this next weekend.

This last trip we really had some rough rides over the Sierra Nevada prompting quite a few such comments. Usually, if we hit some rough air, we just change altitude or slow down or both and it soon passes. On our last leg, we hit continuous moderate turbulence that just wasn't going away. Turbulence is classified as light, moderate, or severe. Actually, there are only two useful categories which are light and moderate. When it turns severe, we won't fly.

When the average passenger experiences moderate, they usually think they've experienced severe because the ride is fairly rough. Walking is impossible. Drinks jump out of cups and land in laps. And this evening was a little unusual in that there was no escape from the bumps. We were travelling over the mountains while a weather front was blowing into Northern California. Airplanes at all altitudes were complaining about some bad rides. Luckily for us, we had only 14 passengers on board so the liklihood of someone yakking and causing a sympathy yak was minimal.

Finally the rides smoothed out as we descended below 10000ft into Vegas.