AVSIG: USAir to Buy Delta? wwswsigarch.jpg (7236 bytes)

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Robert Mann [HPN-NY]
AVSIG Member


Reged: 05/15/04
Posts: 11777
Loc: NY
Re: USAir to Buy Delta?
      11/16/06 01:54 PM

Rick,

Let me take a stab at this without going into a long dissertation.

At its roots, the problem is too few dollars chasing too many seats. Such a state of affairs is going to drive down prices, often to unprofitable levels. The biggest problem with overcapacity is that once you have it, it's hard to get rid of it. Not impossible though. But once you have that overcapacity in place, you're willing to sell seats at ridiculously low levels because even if you sell a RT ticket for $50, that's $50 more revenue than you would have gotten if you didn't sell the seat. The root cause of this Hobson's choice is that the seat is available in the first place.

Quote:

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




Maybe, but probably not. I suspect that they would cut prices in competitive markets to try to obtain profitable market share. Any idiot can buy market share.

Quote:

they will have no problem having more than enough airplanes for whatever routes they chose to fly. 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.




Once again, that exists because they've already created an overcapacity situation.

It's no different than if you, as a practicing attorney, leased 20,000 ft of space, hired 20 associates, and saw that 70% of them were sitting around and doing nothing. So now, you decide to cut your billing rate from $300/hr to $30/hr, because $30/hr of revenue is better than nothing. Word gets around and you get more business (i.e., market share). You put pressure on your competition. But Rick, how long can that last for? How long can you pay your people $75/hr and bill them out at $30/hr? Well, the answer is: not too long. So, you file Ch 11. You wipe out all your debts and your creditors wind up holding the bag.

BUT . . ., if you decided to get a fresh start from your Ch 11 Reorg, what's the chance of your landlord leasing you property again? What's the chance of the computer company who leased you 50 PCs that they repossessed leasing you more brand new computers? Etc, etc ,etc. Not too good. This is where things start looking different between The Durden Law Firm and the airline industry.

In the airline industry, for reasons I have not entirely figured out, there seems to be an endless stream of stockholders and bondholders who are always willing to invest and capitalize distressed and start-up airlines. I believe this irrational willingness is somehow related to a certain fascination and romance with flying and aviation. So long as this willingness exists, so long as the stockholders and creditors are willing to get burned and burned again, there will be overcapacity in the industry. Maybe this is what you were alluding to when you said, "where overcapacity is so very easy to arrange and there is no real penalty for it." But I am an optismist - eventually that capital will dry up and capacity will return to normal.

Quote:

and they will continue to hire pilots at bus driver wages and have to fight off the applicants.




That's more of my theory of an "irrational willingness is somehow related to a certain fascination and romance with flying and aviation."

As far as the Braniff/AA situation you described, I don't see that as anything more than the big guy beating up the little guy. Happens every day in America, and that's the price we pay to live in a free market economy. WalMart and Home Depot put a lot of little stores out of business. Not because WallMart and Home Depot are evil, but simply because they're bigger, they have economies of scale, they have lower costs, they have more cash to cover the lean periods, and finally, being bigger is often an advantage in a fight.

Where do I see things going? Eventually, I see capacity coming down through mergers, bankruptcy liquidations (not Ch 11's), and what I referred to above re the bondholders and stockholders getting tired of holding the bag. I wouldn't be surprised to see an oligopoly in the industry in another 10-15 years where there are one or two or three carriers flying a particular route, but they all want to stay in business, so, without needing to speak to one another, they will not lower prices to levels that will put them out of business. I don't think that scenario is a bad one. Antitrust laws are in place to keep the field from getting too narrow.

Quote:

Even though our anti-trust laws were pretty well gutted during the Reagan administration




Oh no no no, you're not going to get me to go after that bait and wind up in a bar room brawl with you. Anyway, you're bigger than me.

--------------------
Best,

Bob

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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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