Why airlines are like airlines

Great piece by aviation editor Scott McCartney in today’s Wall St. J., “If the World Were Run Like Airlines, Sandwich Prices Would Spike at Peak Hours and ‘Priority’ Elevators at the Hotel Would Cost Extra.” (paywall)

My first thought is, “Be patient, Scott. Give them time.”

In the meantime, here are some off-the-top-of-my-head ideas for why airlines, uniquely among modern industries, can get away with this type of pricing (comments apply to US airlines; I don’t know that much about the others):

  1. They can get away with it because there’s really not that much competition. They may look like they compete, and sometimes they do, but in fact, they’re an oligopoly. If the American-US Air merger is approved, we’ll be down to four major carriers: Delta, United, American, and Southwest.
  2. It is said that when you die and are on your way to Hell, you’ll change planes in Atlanta. Which means Delta in all probability, giving them pricing power at the country’s busiest airport. In Chicago or Houston, it would be United. American gets Dallas.
  3. The customers they want don’t care about the irritations McCartney mentions because business and first class passengers aren’t paying bag fees. Like all industries, airlines want to make a healthy profit at a manageable risk. Easiest way to do that is cater to the folks with lots of money. You can see an obvious sign of that in the new spending requirements for elite status. You can also see the oligopoly element at work.
  4. This suggests a strategy of divvying up those who can afford premium travel. Delta, for example, will get these passengers from Atlanta and most of the South.
  5. The hollowing out of the middle class — and wait until the boomers see how much their 401Ks and interest on CDs will leave them for niceties like air travel — means fewer coach passengers and less margin from those who are left. If you run an airline, lock in your share of the high profit premium passengers now! By any means necessary (to coin a phrase).
  6. Southwest may be a special case and could be where all the coach passengers, those who can afford more than a bus, end up. I don’t know how many that will be, even for Southwest (if they choose to go this route). Southwest started off competing against the bus, but recently they’ve been making eyes at business travelers, too. JetBlue started off in an all-coach configuration, too, but is now adding business class (with mini-suites, no less).
  7. Over time, this will lead to a shrinking down of at least the legacy industry to a luxury provider for those who can afford to pay the price, as I suggested in an earlier post. Because we don’t have much in the way of alternatives in this country for long distance travel, I can only speculate what this means for our continued prosperity.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s