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Rick Durden
Top Gun


Reged: 06/07/04
Posts: 4366
Re: USAir to Buy Delta?
      11/16/06 09:19 AM

Bob,

You reference overcapacity in the airline industry; and I have read a number of articles indicating that overcapacity is the true problem leading to the current, wonderful fiscal health of the U.S. airlines. My problem is that I have not seen an explanation as to why "overcapacity" is the problem nor how cutting the number of airlines will affect it in any fashion.

Were we to drop to two or three carriers, they would still be using their current management and market plan of cutting prices as far as possible to try and obtain market share (and brand loyalty, although that's long since gone away despite what they believe); they will have no problem having more than enough airplanes for whatever routes they chose to fly and they will continue to hire pilots at bus driver wages and have to fight off the applicants. If one carrier holds a line at prices, the others will undercut and move into the territory and, again everyone will continue to lose money.

I am not disagreeing with the premise of overcapacity, I just have not heard it explained - commentators mouthe the word and move on, rather than discuss why it is a part of or the root of the problem.

I can't help but think of my econ history class in college and compare this to the railroad competition of the 1880s and '90s as the oligopolies went at each other hammer and tongs and cut their own throats on routes where there was competition and raised rates to "what the market would bear" where there was no competition (I just rode the United commuter to Riverton, WY and wow, they do know how to price their tickets when no one else wants to fly the route).

The purely compeitive market model has airlines doing precisely what they are doing until one buys out the rest and establishes stable, monopolistic pricing that pays the actual costs plus whatever profit the managers desire. Even though our anti-trust laws were pretty well gutted during the Reagan administration (or at least no longer enforced), I still doubt that we'll get down to just one airline (or even 2); so the market will not be allowed to take its course. We'll have an oligopoly as we have now, only with a few fewer companies, and they will either carve up geographical sectors and put on a little pretend competition along the edges or continue trying to be everywhere and cut prices in the vain hope of obtaining a greater market share.

I need a discussion as to why overcapacity is the problem or whether it is merely a symptom of an industry where overcapacity is so very easy to arrange and there is no real penalty for it (but a very definite penalty for not having it in that you get your legs cut from under you on your own turf unless you have the excess capacity to go onto your neighbor's home court and undercut him there, thus maintaining an uneasy, money losing status quo for everyone). Braniff did not have overcapacity and stuck to its historic routes, American came in and undercut them on every single route that was making money for Braniff (and did some interesting ticket dumping on the clearinghouse and other fascinating little ethically-challeneged actions) and Braniff didn't have the capacity to take it to American's money making routes. American used its money makeing routes to subsidize the ones where it competed with Braniff to force Braniff out. Then of course, American had its tactics used against it by everyone else and the games began.

I don't have a horse in this race, other than as an old econ major who once did a major research paper on what would be expected if the airline industry were deregulated. I'm just watching what I predicted in terms of the overall economic health of the airlines as well as the dimunition in numbers of airlines and wondering whether we will follow the railroad pattern of 120 years ago as the downside of a relatively pure free market wreaked its havoc, or whether there will be some recognition that a natural monopoly (or oligopoly) requires some degree of oversight to prevent what occurs without an external pressure relief valve. (In contrast to the 19th century railroads, at least the FAA is requiring some minimal maintenance and safety equipment, so we are not repeating the slaughter that occurred on the railroads during the worst of the fights for economic dominance. Accordingly, there is some check already in place and we do not have a purely free market. I'm just wondering whether the public will eventually demand more. Side bet - not until the number of competitors drops to where they raise prices and actually make money <g>.)

Interesting subject and one that pits those who believe that there is not a downside to pure compeition (and don't know the history of how bad it can be) versus those who want a purely regulated industy (and don't know the history of how bad it can be).

Me? I'm just standing and watching (and taking advantage of incredibly cheap airline tickets from time to time while complaining about the hell of a center seat on a 757).

Hmm, and this long post all started with a question about overcapacity <g>.

I'd really appreciate your comments.

Warmest regards,
Rick

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Entire topic
Subject Posted by Posted on
* USAir to Buy Delta? Tom Tyson [SUW] 11/15/06 03:24 AM
. * * Re: USAir to Buy Delta? Robert Mann [HPN-NY]   11/16/06 08:15 AM
. * * Re: USAir to Buy Delta? Richard Duxbury (Dux)   11/16/06 12:04 PM
. * * Re: USAir to Buy Delta? - One Pundit's view Steve Stombaugh (IND)   11/16/06 07:45 AM
. * * Re: USAir to Buy Delta? Stephanie Belser   11/16/06 07:16 AM
. * * Re: USAir to Buy Delta? Bruce Gorrell [EQY]   11/15/06 05:14 PM
. * * Re: USAir to Buy Delta? Don Peters (CMH)   11/15/06 08:28 AM
. * * Re: USAir to Buy Delta? Robert Mann [HPN-NY]   11/16/06 07:40 AM
. * * Re: USAir to Buy Delta? Rick Durden   11/16/06 09:19 AM
. * * Re: USAir to Buy Delta? Robert Mann [HPN-NY]   11/16/06 01:54 PM
. * * Re: USAir to Buy Delta? Ron Natalie   11/17/06 11:43 AM
. * * Re: USAir to Buy Delta? Robert Mann [HPN-NY]   11/17/06 11:57 AM
. * * Re: USAir to Buy Delta? sreyoB yrraL   11/16/06 10:05 AM
. * * Re: USAir to Buy Delta? Rick Durden   11/16/06 10:47 AM
. * * Re: USAir to Buy Delta? Stephanie Belser   11/16/06 09:04 AM
. * * Re: USAir to Buy Delta? Don Brown (ZTL-Retired)   11/15/06 11:29 AM
. * * USAir to Buy Delta? Scott Dyer [HPN/NY]   11/15/06 09:26 AM
. * * Re: USAir to Buy Delta? Joe Budge (W29)   11/15/06 03:54 AM
. * * Re: USAir to Buy Delta? Robert Mann [HPN-NY]   11/16/06 06:36 AM
. * * USAir to Buy Delta? Stephanie Belser-2   11/15/06 04:48 PM
. * * Re: USAir to Buy Delta? Joe Budge (W29)   11/15/06 05:34 PM

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