Raise the #@!$% Fares: Part II
Just as I was thinking the plight of the airlines couldn't get any worse, it devolves from ridiculous to pathetic. The latest chapter unfolded this week as a dozen of the CEOs of the major airlines sent a mass letter to their customers asking them to pressure Congress to enact legislation to curb oil speculators.
"This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers," the letter states, arguing that some $30 to $60 of today's record oil prices are due to speculators bidding up the price with futures contracts. The airlines want their customers to ask Congress to limit speculation in the oil markets, especially by stopping the practice of shifting contracts overseas, where they can't be monitored.
Coming from an industry that has now raised bait-and-switch to a high art, this is disingenuous at best, laughable at worst. Blaming speculators for the economic ill du jour has a long and colorful history. When you just can't face the music that supply and demand drive costs and you refuse to adjust your prices accordingly, heaving a dead fish at the closest speculator is as good a response as any.
And these CEOs ought to know better, given the fact that they have the intellectual wherewithal to analyze economic trends. There's little reliable agreement that speculation in oil contracts drives actual prices to a measurable degree. Just you go and try to find some data linking the two that isn't anecdotal or, well, speculative. There are very strong indications that it's the physical market--the actual buying and selling of the commodity at hand--that really determines what people will pay for a product.
Speculators are simply buying contracts that amount to bets on what the price of a commodity will be at some point in the future and for everyone who goes short, another goes long. Further, the amount of money in play on futures expressed as a percentage of the total physical market is so small that it's not credible to claim this can move the markets as much as some people think. Here's a nice explanation of the theory by James Surowiecki. If the airlines are whining that speculation amounts to market mismanagement, they should muck the manure out of their own stalls first. Specifically, they continue to send the wrong signals to customers by quoting fares that are below cost then trying to recover their costs with an ever growing list of hidden charges--for baggage, for curbside check in, for agent-assisted booking, for aisle seats and so on. On Friday, ABC ran a story analyzing the economics of two Continental flights, one from Houston to Richmond, a second from Newark to Los Angeles. Read it here.
On the first flight, ABC found that the average fare for the 49 seats was $152, for a total of revenue of $8,450. But it cost the airline $8,600 to conduct the flight, resulting in a net loss of $150. The California flight lost even more--$500. This is suicidal economics. It attempts to deny the underlying cost of goods with layers of irrelevant and irritating charges unrelated to the cost of delivering the basic service. What should those fares have been? How about $225 from Houston to Richmond? That's still a good value and it sends the right signal to the customer about what it really costs to provide the service on a sustainable, profitable basis.
If there is demand for these services--and there most assuredly is--there ought to be companies who can price them correctly and fairly and make a profit at it. If the fares are set correctly, customers will receive accurate signals about cost/value and they can then decide if they want to pay that fare. Or not. The market will then find its natural, unimpeded balance. One reason the airlines are reluctant to raise fares meaningfully is that there's still too much capacity for the demand, thus, too many seats are flying around below cost. In the end, if the majors do survive this crisis, there are going to be a lot of airplanes parked in the desert in United and American livery.
Just after this asinine e-mail arrived from the airlines, I got a couple of invoices from FedEx for overnight letters. The last time I used FedEx, I seem to recall the tariff was about $15 for standard overnight letters. These were $25 each for the same service. Digging into this, I discovered that FedEx is--surprise!--tacking on a fuel surcharge. But they don't charge me extra to use the corner drop box or to call with a question. In other words, FedEx is sending unambiguous signals to its customers: the service now costs more and here's how much more. They aren't blaming it on speculators or burying me in hidden charges. And guess what? I'll use FedEx less because for me, the cost/value relationship is now out of balance. I will find another, cheaper means of doing the thing that FedEx does. So may others, so FedEx may park a few airplanes, too. But want to bet that it'll survive?
That's how supply and demand works. The airlines that hope to survive will figure this out sooner or later because the people who run them really aren't that dumb. But the wisdom won't come from writing pathetic letters to their customers asking for help.
What they need to ask for is more money.