With American Airlines filing for bankruptcy, seem like a good time to dust off a slide I use in my class re: airlines revenue management practices.
My students hear often that I think airlines are pricing masters.
Which begs a question: why is their profitability so low?
Warren Buffett’s answer:
“A great management in that business will not necessarily get a great result …
In the airlines, you have a huge amount of capacity … something close to a commodity product with high fixed costs and no marginal costs
Since that extra seat doesn’t cost you anything, the temptation to sell it at a terrible price is overwhelming.”
As a result, inflation-adjusted air fares have been essentially flat for decades.
Even extra baggage fees can’t save the day …
The Homa Files 
December 1, 2011 at 12:42 pm |
Flights are as long and less comfortable than they were 20-years ago. Airline customer service is EASILY the worst of any industry I can think of.
I don’t believe these guys are the master of anything.
December 2, 2011 at 3:05 am |
You need to analyze the whole value chain — and then you start finding that the main assets (the aircraft) are often owned by special entities located in offshore tax havens, and leased to the airlines at monthly rates designed to ensure that the airline pays no taxes. Added advantage is that the consumers and unions are told that the airline is “losing money” so they have to accept higher fares and lower pensions.