Thursday, September 15, 2005

Airlines and economics

I heard that two more airlines declared bankruptcy, Delta and Northwest. The airline industry is an interesting one because for years, the airline industry made money off of high end vacationers and businessmen (and women). The industry could charge a higher price because of their target audience, the grasp they had on high speed travel, and the barriers to entry into their industry. A little company came into play called Southwest Airlines and decided to follow one business model, "the low cost provider".

What is a patron of an airline buying? A type of lifestyle? no. Great service? Heck no. A great time? No one has had a great time on a flight. Consumers are buying passage from point A to point B, they just care that they get to Point B alive and their baggage is there. Southwest understood this and also realized that as the skies opened up to middle and lower class vacationers, they could capture market share through cheap ticket prices.

The thing that is marvelous about Southwest (besides their oil purchasing hedge which saves them cash) is that the low cost model proved to be the method of survival in a market where price wars are common. In the evolutionary theory of business, being the low cost provider has proven to be wise for Southwest. When you are the low cost provider and do everything cheaper than everyone else, you start at an advantage when prices are slashed in a price war. I think that airlines are a bad investment. I think that the industry is not going to see big profits again until oil prices decline and everyone jumps on the Southwest model bandwagon.

I think back to the movie Wall Street. The last deal is to buy an airline, which Charlie Sheen wants to turn around and run as the CEO. Michael Douglas sees the airline for what it is, junk, something that is worth less than the sum of its parts (if that makes sense). Douglas plans to sell off bit by bit to make a killing...it's the surest way he can turn a profit on the airline investment. That was nearly 20 years ago, fictional, but nearly 20 years ago.

I love to travel. I am enrolled in every major mileage program. There is one problem. I am addicted to paying peanuts to fly on Southwest compared to accruing miles on the majors for that free ticket down the road.

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