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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (853286)	4/30/2015 12:58:02 PM
From: TimF	Respond to of 1576991

A quick and dirty analysis about why airline margins tend to be low ----- Just for the MBA geeks, let's do a Porter's 5 Forces analysis of the airline industry. For those who don't know, the '5 Forces' are those industry factors that militate AGAINST high profit margins. So in any industry, the HIGHER the 5 forces, the lower the profit margins, and vice versa. They are: 1. Bargaining Power of Customers: This is HIGH, because nowadays there are many competing airlines and many customers, and customers can always find an alternative carrier. This drives down airlines' pricing power. 2. Bargaining Power of Suppliers: This is also HIGH. As the article says, airports (with their high landing fees) are monopolies. No bargaining with them. Aircraft providers (Boeing & Airbus) are a duopoly. No bargaining with them. Fuel prices are determined by global oil markets, so airlines are price takers. No bargaining there either. Even employees tend to be unionised, so not much room for cost savings there either. Result? High and inflexible cost structure. 3. Threat of Substitute Products: This threat is MEDIUM. If you're travelling from London to Hong Kong, you don't have many alternatives to flying. But from London to Paris, you can drive or take the train. Some would say Skype is a substitute product to air travel. Either way, air travel is rarely an absolute necessity. 4. Threat of New Entrants: This threat is MEDIUM to LOW. Two college kids can't just start up a new airline in their garage due to the regulatory and capital requirement barriers to entry. Then again, it's not the hardest thing in the world to lease two aircraft and start up by operating out of small, regional airports. 5. Competitive Intensity among Incumbents: This is HIGH. The airline industry features cutthroat price competition, because customers are price sensitive, services are hard to differentiate (basically, you're just moving people, everything else is peripheral) multiple carriers service the same routes, and fixed costs are high so selling even a highly discounted seat is better than flying with that seat empty. Put these together in aggregate, and you see why margins are so low. High (mostly fixed) costs combined with low pricing power is the sad lot of the industry. - from a comment to economist.com I'm not quite so sure about the lack of bargaining power with the aircraft manufacturers. Sure its mainly only two companies but I don't see it as a cosy duopoly.

To: TimF who wrote (853286)	4/30/2015 1:14:24 PM
From: tejek	Read Replies (2) \| Respond to of 1576991

Southwest Airlines isn't small, and apparently has been profitable every year for over 4 decades. Its a middle sized airline and is one of the exceptions. The other is Alaska Airlines. Overall the larger airlines have had very meager profits, with profits from good years barely beating losses in bad years. But they have a better record than long distance rail. It depends what year you start looking. Over time, most airlines have lost money and have had to file bankruptcy. As for subsidies- The airlines get much smaller per passenger mile subsidies then the railroads. (In the US it seems that Amtrack gets more subsidies per passenger mile then the entire average cost per passenger-mile for air flight). But if you want to push to end air travel subsidies I'd also support that idea. That's because Amtrak is pint size compared to the airlines.. Without the subsidies marginal airports would close (esp. because the subsidies are largely targeted at marginal airports and flights to or from them), and some airlines might go out of business, but the bulk of air travel wouldn't be all that different. Without rail subsidies most rail lines would close. That's right. Public transport tends not to be profitable. A concept Rs struggle with mightily.