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I know atleast Delta hedges oil prices. I would suspect that the
other biggies do, too. One problem with the industry is that the
whole thing runs on debt. It seems like they are constantly paying
out their profits in interest payments. SouthWest is an exception to
this and I suspect there are others.
Another problem is that despite the fact that there are a lot of small
airlines that vie for passengers, the industry is still an oligopoly.
The little guys only get the routes that the big guys give them. And
the big guys can take the routes back if they really want to by
cutting prices.
This has led me to an interesting idea to regulate markets like this.
Here's the scenario: Delta flies Atlanta to New York and charges let's
say $450. JetBlue comes in and charges $99. Delta drops their price
to $99. How can we prevent this? Currently, it is illegal to price a
good or service at below market rates to drive out competition, but
this is never taken to court. So what would happen if a law was
created that limited the speed at which you could drop the price of a
good or service IF you were dropping price solely in response to new
competition.
Let's say there was a law that said that you could not drop prices
more than 10% per year if you are doing it in response to new
competition. How would the above scenario play out now. Delta owns
Atlanta to New York. Let's say they don't think ahead and continue
charging $450. Now JetBlue can come in and charges $300, still makes
more money than Delta and enjoys a nice profit. Delta of course will
drop prices by the maximum allowed amount each year in response to the
competition so in the first year, they drop prices to $405. JetBlue
still has an edge and can reduce prices to compete if needed. This
will continue for several years until they both get down to their
minimum but in the mean time, JetBlue has pocketed a nice chunk of
change and eaten away a substantial amount of Delta's market share.
Now let's consider the same scenario if Delta thinks ahead. They own
Atlanta to New York. They say to themselves, "We are vulnerable to
competition here. We should price agressively in case JetBlue comes
calling." So they price at $250 in a market where they have no
competition. Consumers win.
There are other problems with the airline industry. I saw an
interview with the economist who architected deregulation of the
industry under Reagan. According to him, the reason why deregulation
didn't work so well is that the plan wasn't carried out completely.
It was one of those half-deregulations like what California did with
it's energy markets. One point he made was about the landing/take-off
slots. Those are not competitively auctioned to the airlines so once
an airline gets a hold of rights to the slots, they don't have to
really use them or pay very much for them on a continuing basis.
Kent
Tuesday, October 15, 2002, 11:17:18 PM, you wrote:
> Hello Omega,
> I've had several conversations with friends recently about why the
> large airlines are so screwed up and going/gone bankrupt. But no one
> has a really good explanation for why they are so bad and why they
> have made not money in 15 years or so. Oil doubled--OK. interest
> rates have generally been decreasing. Personnel costs--all businesses
> have that. if your business was so dependent on fuel costs, wouldn't
> you be the world's best at hedging; same goes for interest rates. Or
> have contingency plans for something that is virtually inevitable--oil
> price spikes, rate increases, recession?
> It sure looks to me like just plain management incompetence.
> Anybody have an informed opinion about this?
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