Money? Markets? Autoregressive heteroskedasticity? Ask me about it.
Typically, selling your product below cost is something that they teach you not to do in Economics 101, or even before. Unfortunately, amidst our current "oil crisis", airlines have not gotten the message.
My parents were complaining, after my flight back to Houston, about why the price of a ticket has gone up by 50 from $300 to $350. To attempt to answer the question, I did a bit of handwaving explanation using 1600 miles (from Berkeley to Houston) as a guideline. Taking 20 MPG as a standard and $4 gas, we get about $320, and the time savings and "customer service" you get with a plane ticket suddenly seems like a bargain by comparison.
Seekingalpha has more to say about this:
Below are some startling statistics comparing year 2007 to year 2000 for the 7 largest US major airlines. [American (AMR), United (UAUA), Delta (DAL), Continental (CAL), Northwest (NWA), US Airways (LCC) and Southwest (LUV) control 71% of the US market share.]
| * Total Operating Revenue was nearly the same at around $95 billion. |
| * Capacity as measured by Available Seat Miles [ASMs] decreased by 7% (Southwest capacity increased by 66%). |
| * In the past 7 years, the average one-way passenger fare has only increased by $18 (+11%) going from $153 to $171. (Note: This is the passenger revenue kept by the airlines and does not include large increases in taxes, fees security charges etc. that airlines are required to charge but do not keep.) |
| * Fuel Expense increased by $15.5 billion (+128%) going from $12.1 billion to $27.6 billion. |
| * Employee wage/salary expense decreased by $7.6 billion (-30%). |
| * Employee wage/benefit percentage of operating revenue decreased by 22% going from 35% to 27%. |
| * The labor cost of the average one-way passenger fare decreased by $25 (-41%) going from $60 to $35. |
| * The fuel cost of the average one-way passenger fare increased by $34 (+154%) going from $22 to $56. |
| * In the last 7 years over 162,000 jobs (-38%) have been eliminated from the largest 6 major airlines as they went from 430,000 to 268,000 employees. (Southwest had an increase of 5,000 employees ending 2007 with 34,378 employees). |
| * While fuel costs rapidly increased and labor costs and total employment rapidly decreased, the average passenger ratio to airline employee increased by 430 (+36%) going from 1,198 to 1,628. In other words, that reservation or ticket agent or flight attendant must now, on average, resolve issues and provide customer service to 36% more passengers than they did seven years ago. |
| * During this same time period the average revenue productivity per employee increased by an astounding $107,442 (+52%) going from $206,370 to $313,812. |
So why again are plane tickets so cheap by comparison?
