American's Pilot Fighting for Compensation Restoration Once Again

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  Occam's Razor08/09/08 Report as spam
  1

  RE: American's Pilot Fighting for Compensation Restoration Once Again

  Crank said...
  " The thing that???s really just amazing here is that the laws of supply and demand show that when fares go up, demand goes down. So, what happens when demand goes down? The pilots lose their jobs."
  
  
  I'm not sure I share you crankiness with respect to the pilot's ad. The impact of the wage demands is no more out of line than $50 bag fees and upgrade charges. Why aren't the same job-loss claims made about fuel increases? The message is clear, industry executives don't want to give pilots pay increases ever. And folks like you....applaud this effort.
  
  Did you do the math for quarterly changes in the new baggage fees? It adds up to hundreds of millions of dollars per quarter. Why aren't you screaming about job-losses related to these cost increases?
  
  Related to your "understanding" of economics I offer the following insights....
  
  You're mis-applying the "perfect competition model" to the airline industry. You're assuming that the market clearing price for air travel is in a current state of equilibrium. It's not. It hasn't been since 9/11. The airplanes can't get any fuller. According to the perfect competition model....market clearing price is one which establishes a mutually beneficial exchange between airline and passengers. There is none. It is a one-sided exchange with the passenger reaping all the benefit of exchange. So...there's something terribly wrong with your model and the logic it's based on.
  
  The model of competition in the airline industry is the oligopoly model. In the oligopoly model, "price" is NOT set by the market, but by the competitors themselves. Price is often "independent" of supply and demand. The oligopoly model implies a "kinked" demand curve....meaning that "price" CAN be well below an a much higher market clearing price that passengers are willing to pay.
  
  The kinked demand curve implies price INelasticity. Your simplistic model leaves no room for this REAL world phenomenon. But like most...you parrot that which you don't understand.
  
  Prices can rise much higher and passengers (willing to pay the market clearing/mutually beneficial price) will not disappear.
  
  We have a long way to before we reach this point....As load factors and unprecedented fare and fee increases point out.
  
  The pilots wanting to make as much as cargo pilots is not unreasonable. Pilots now understand the nature of airline competition and are simply no longer willing to play along. Executives had both cheap labor (B scale) and cheap fuel ($12 barrel) and STILL managed to lose more than the entire industry ever made since the "dawn of aviation".
  
  So....the pilot cost and fuel prices are not the problem. Never were. What is? The destructive nature of the competitors themselves.
  
  As Crandall said recently in his Wings Club speech....."Some industries can not achieve a market solution when exposed to unfettered competition....3 decades of experience have should us all that the airline industry is one of them."

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  brett snyder08/26/08 Report as spam
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  RE: American's Pilot Fighting for Compensation Restoration Once Again

  Occam's Razor - I'm really sorry I didn't respond to your very detailed comment earlier. There was a glitch in the system and I didn't see that there was a comment until now. I appreciate all the time it must have taken to write this out. Let me see if I can change your mind here.
  
  > I'm not sure I share you crankiness with
  > respect to the pilot's ad. The impact of the
  > wage demands is no more out of line than $50
  > bag fees and upgrade charges.
  
  I don't quite follow this line of reasoning. The $50 bag fees and upgrade charges generates revenue while wage increases are costs. Yes, higher fares/fees means demand should drop somewhat, but you argue later on that demand is inelastic. So if you believe that, how are these fees having a negative impact on the airline's income?
  
  > Why aren't the same job-loss claims made
  > about fuel increases?
  
  They are, but fuel costs aren't a controllable expense. If airlines could just turn around to fuel suppliers and say, "No, I'm going to pay you half that amount," then they would do it. But they don't have that option.
  
  >Did you do the math for quarterly changes in
  >the new baggage fees? It adds up to hundreds
  >of millions of dollars per quarter. Why
  >aren't you screaming about job-losses related
  >to these cost increases?
  
  Again, I don't understand. Baggage fees are not cost increase for the airline. If anything they discourage people from checking bags so it ends up being a cost savings. For the record, I'm not a fan of these fees at all, but that doesn't really impact the argument.
  
  > You're mis-applying the "perfect competition
  > model" to the airline industry. You're
  > assuming that the market clearing price for
  > air travel is in a current state of
  > equilibrium. It's not. It hasn't been since
  > 9/11. The airplanes can't get any fuller.
  > According to the perfect competition
  > model....market clearing price is one which
  > establishes a mutually beneficial exchange
  > between airline and passengers. There is
  > none. It is a one-sided exchange with the
  > passenger reaping all the benefit of
  > exchange. So...there's something terribly
  > wrong with your model and the logic it's
  > based on.
  
  Historically, this is caused by high fixed costs and low variable costs. While airlines would prefer to be much more flexible with capacity, they can't afford to do so because the fixed costs are so high that it still becomes worth it to fly the aircraft to recoup some of the costs, even if it isn't profitable on a fully amortized basis.
  
  This dynamic has changed significantly with the run-up in oil. That has shifted the balance of fixed and variable costs to be much more heavily weighted in terms of variable costs. That's why airlines have really begun to aggressively park aircraft. The higher the variable costs, the less incentive they have to keep flying planes around. This might actually be good for the airlines in that they will have greater capacity discipline than they've ever had before. There actually is an opportunity now to reach that equilibrium.
  
  > Prices can rise much higher and passengers
  > (willing to pay the market clearing/mutually
  > beneficial price) will not disappear.
  
  I disagree. There is a segment of the air travel market that is inelastic, but that is not a large segment. Even business travelers have been cutting back on travel in favor of teleconferencing. Even those people who are traveling are booking further in advance and avoiding the higher walk-up fares, as you usually see in an economic downturn.
  
  As fares rise, demand drops, and that's why capacity has been dropping so quickly. If the airlines could profitably fly more aircraft, they would do it, but the demand isn't there at these higher prices.
  
  The planes have been full this summer, but just wait to see what would happen in the fall if these tremendous capacity cuts hadn't been put in place. It would have been a bloodbath. Even with the cuts, profitability will be elusive for some.
  
  > The pilots wanting to make as much as cargo
  > pilots is not unreasonable.
  
  Pilots wanting to make more money isn't unreasonable at all, but airlines are not able to pass along increased costs the way cargo carriers can. If they could, they never would have been able to get the concessions they did after 9/11. It's just the reality of the business.
  
  
  > Pilots now understand the nature of airline > competition and are simply no longer willing
  > to play along. Executives had both cheap
  > labor (B scale) and cheap fuel ($12 barrel)
  > and STILL managed to lose more than the
  > entire industry ever made since the "dawn of
  > aviation".
  
  I'm not sure what time period you're talking about here, but executives have never had cheap labor for a long period of time. Any time an airline shows strong profits, labor finds a way to take a piece of that. Look at the incredible pilot wage increases in the late 1990s/early 2000s. The airlines had tremendous profits and labor took big pieces of that. (Which I think is perfectly acceptable, by the way, but labor should only be able to take big chunks when times are good - variable compensation.)
  
  Since 9/11, yes, labor costs have been much lower, but the high price of fuel has completely negated that benefit.
  
  The reality is that if the pilots get a ton more in wages, fares will have to go up to cover that and demand will go down. That means more pilots will lose their jobs.