In recent stories, we have lamented the loss of a certain level of standards in the airline industry. We’ve commented on our disappointment with JetBlue for giving into industry trends and Delta for increasing the divide between the haves and the have-nots.
So, to be 100% fair…it’s time to tell the other side of the story. Why are airlines racing for the bottom? According to them, it is all your fault.
IATA’s 2014 Mid Year Report(link) comments, “Investors should expect to earn at least the normal return
generated by assets of a similar risk profile…The average return on invested capital (ROIC) in the airline industry has been improving, and this year is expected to reach 5.4%. However, that is more than 2% points lower than it should be in an industry that is highly competitive. In most industries it’s higher. Such is the intensity of competition, and the challenges to doing business, that average returns are rarely as high as the industry’s cost of capital.”
While airlines did make a profit this year, investing in the airline industry results in lower than average returns, which means there is pressure to get to a better return on investment.
It was noted investor Warren Buffett who said, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”
But, we said it was your fault. Investment and finance talk aside, you have unrealistic expectations. You want the meal, the blanket, the pillow, a checked bag…flight attendants at your beck and call. You want it all. But you don’t want to pay for it.
Meanwhile, airlines have to pay for fuel, which amounts for a third of their costs. They are expected to keep their fleet refreshed…planes are not a cheap proposition.
There is very little brand loyalty. Most people will go with the airline that is the cheapest. As much as people complain about Spirit Airlines, people fly on them.
So, what happens? You want that low fare…you aren’t going to get the amenities you used to. And we’re not against that in principle. It just seems that the base flying experience keeps going down. We keep hoping that someone will define what is a reasonable base minimum.
We all want to get the best deal. But if you want better service, you need to vote with your wallet. And while we think the approach these companies are making is not the best, they are responding to the situation.