You are not going to read a lot from me on the latest revelation that the U.S. Department of Justice (DOJ) is investigating the airlines for possible collusion on pricing. While I do have a strong opinion on that, suffice it to say that I think the DOJ has a difficult case to prove, the issue itself flies just close enough to my day job orbit that I’m going to refrain from a great deal of pontification. I will say that it makes for an interesting headline, but it is likely to be years before anything comes of it, if ever. There’s no real need dwell on it at the moment. I’ll also repeat a quote from a piece I wrote on March 5, 2014.
“I can think of no other industry where so much wealth has been transferred from the pockets of shareholders, the companies they own, and the people they employ into the pockets of consumers than that of the U.S. airline industry in the last 30 years or so, especially since 9/11/01.”
Airlines serve a lot of different masters –
- Customers
- Shareholders
- Employees
- Aircraft and Engine Manufacturers along with leasing companies
- Wall Street analyst types
It’s quite the circle of interest groups, some of whom haven’t made the mental move past the days when airlines routinely gave away product below cost in the name of driving market share. The newcomer in all this is Wall Street. No, there have always been stock analysts that followed the industry, it’s just that airline stocks have become, for the first time in my memory, a potential longer term investment. With DOJ coming down on airlines for things like “capacity discipline,” am I the only one who noticed that Wall Street has been beating up on airlines for growing too fast? (Image courtesy of Shutterstock.com)
But what about us? The customer. The frequent flyer. I have always believed airlines went about the necessary work of remaking their business models the wrong way – they tied things like baggage fees too closely to the singular idea of high fuel prices. Mind you, fuel prices are still not “cheap,” but they are definitely off their highs. When the oil bubble popped, the airlines had handed politicians an ideal talking point to hammer them on. In the end, I don’t think anything changes for customers in the near to medium term. Like I said, it is likely that any outcome from the DOJ investigation is years away, if ever. However, could one speculate that it might give airlines pause when they are thinking about what hammer to drop on us next in the loyalty space? I’m not sure, but I’ll be watching with great interest to see how all this plays out.
-MJ, July 3, 2015
I would disagree that there has been any transfer of wealth to consumers because some airlines sold a product below their cost. The problem is with the airlines’ costs and business model not consumers. WN has had industry leading wages and benefits (also liberal work rules) for years and still turns a profit every quarter even though its prices are often lower than the big three. Just like I would disagree that there was a transfer of wealth from the automakers to the public merely because those companies could not run their businesses in a way to make a profit at market prices for automobiles. If there was any wealth transfer, I’d argue the wealth went to the inputs that were over priced, not to consumers. Perhaps not a classic economic analysis, but that’s the way I look at it.
Agree with pretty much all you’ve said…and said it myself. It’s crazy that the DOJ is beating up on the airlines for finally putting some business discipline into their operations and making profits after decades of losing money, going through bankruptcies and merging so they could become rational businesses. And then when they muse about adding capacity — which the DOJ seems to be saying they should be doing (albeit they are doing slowly as fleets are transformed) — Wall Street starts selling off their shares. What’s an airline exec to do? Those who follow blogs and BBs like FT and MP know there are still good deals to be had — and I don’t mean the glitch fares — and I’ve had my share of them this year: twice to HKG on AA for C$450×2, twice to SIN on UA for C$625, and I’ll be doing GIG for C$375 next month on AA…all legit market-driven fares. In the meantime, Washington will play its games to avoid dealing with the real culprits of the business world: the Wall Street bank execs who tanked the world economy, the currency and flash traders who play games manipulating the markets, and of course that old bete noir, the oil companies!