Systems Archetypes – Shifting the Burden
Refering to the following article
U.S. Airline Industry Runs Into Turbulence In Its Shakeout Course
- The Asian Wall Street Journal, 20 September, 2005
Northwest Airlines and Delta Airlines, which are the two of U.S. six legacy carriers, filed for bankruptcy last week. This adds the number of the legacy carriers operating under bankruptcy-court protection to four in the country. Both airlines suffer losses because the costs exceed revenue, and yet traditional methods – cut costs or raise fares – are not applicable. Interestingly, this also applies to other major carriers operating in the U.S.
As the article points out that, in classic competitive markets, least-efficient players in an industry would be killed, freeing the survivors to raise prices enough to make a profit. But in this case, despite being inefficient, these two airlines still remain in the market. As a result, the competitors are not able to raise their prices.
When raising price is not an option, it is desired that more seats would be filled during each flight. It means, however, to lower the price to stimulate demand and have direct fight with low-cost carriers. The low-cost carriers which have lower operating costs, at the same time, have attracted the main bulk of the major airlines’ customers, that is, business travelers. This leaves nothing much for them and makes them farther apart from their objective to raise the revenues, not to mention the soaring fuel price.
Low revenue is the problem symptom. If they cannot sustain it, by the force of the open market, they should have gone out of the industry or find other way out. Staying in the industry in an artificial manner, though, allow them to attempt to increase the revenue, hoping that they could turnaround someday in the future, does not guarantee anything.
Declaring bankruptcy is just a symptomatic solution that tries to overlook the reality. In the short run, it saves jobs among other things. Investors and debtors are longing that they would still be able to take back their money. Already the artificially low price has been the side effect that could be harmful to any industry. All players are inevitably being pulled into the vicious cycle to offer even lower prices. Failing to deal with fundamental problem would one day cause the real problem to surface and hence leading to disastrous outcome, for instance, the collapse of the industry.
At that time, survivors may take revenge (to earn higher margin to offset the loss) and set the price so high that only accessible to rich people as oppose to today’s situation. In the face of forever increasing fuel price, we as the passengers will be the victim. Air transport may be forbidden for us. The effect does not stop there. Dominoes effect would cause freight prices to increase and perhaps price of imported goods as well. This is simply undesirable.
Anyhow, it would not be appropriate to propose a fundamental solution due to the author’s lack of knowledge pertaining to the industry and its potential impact.
In conclusion, this should not be an endurance test for these airlines. As consumers, we would be too grateful to benefit from the competition in a free market. Due to the uncertainty in the future of airline industry, we could only hope that increase of air fare, if any, would still be affordable.
U.S. Airline Industry Runs Into Turbulence In Its Shakeout Course
- The Asian Wall Street Journal, 20 September, 2005
Northwest Airlines and Delta Airlines, which are the two of U.S. six legacy carriers, filed for bankruptcy last week. This adds the number of the legacy carriers operating under bankruptcy-court protection to four in the country. Both airlines suffer losses because the costs exceed revenue, and yet traditional methods – cut costs or raise fares – are not applicable. Interestingly, this also applies to other major carriers operating in the U.S.
As the article points out that, in classic competitive markets, least-efficient players in an industry would be killed, freeing the survivors to raise prices enough to make a profit. But in this case, despite being inefficient, these two airlines still remain in the market. As a result, the competitors are not able to raise their prices.
When raising price is not an option, it is desired that more seats would be filled during each flight. It means, however, to lower the price to stimulate demand and have direct fight with low-cost carriers. The low-cost carriers which have lower operating costs, at the same time, have attracted the main bulk of the major airlines’ customers, that is, business travelers. This leaves nothing much for them and makes them farther apart from their objective to raise the revenues, not to mention the soaring fuel price.
Low revenue is the problem symptom. If they cannot sustain it, by the force of the open market, they should have gone out of the industry or find other way out. Staying in the industry in an artificial manner, though, allow them to attempt to increase the revenue, hoping that they could turnaround someday in the future, does not guarantee anything.
Declaring bankruptcy is just a symptomatic solution that tries to overlook the reality. In the short run, it saves jobs among other things. Investors and debtors are longing that they would still be able to take back their money. Already the artificially low price has been the side effect that could be harmful to any industry. All players are inevitably being pulled into the vicious cycle to offer even lower prices. Failing to deal with fundamental problem would one day cause the real problem to surface and hence leading to disastrous outcome, for instance, the collapse of the industry.
At that time, survivors may take revenge (to earn higher margin to offset the loss) and set the price so high that only accessible to rich people as oppose to today’s situation. In the face of forever increasing fuel price, we as the passengers will be the victim. Air transport may be forbidden for us. The effect does not stop there. Dominoes effect would cause freight prices to increase and perhaps price of imported goods as well. This is simply undesirable.
Anyhow, it would not be appropriate to propose a fundamental solution due to the author’s lack of knowledge pertaining to the industry and its potential impact.
In conclusion, this should not be an endurance test for these airlines. As consumers, we would be too grateful to benefit from the competition in a free market. Due to the uncertainty in the future of airline industry, we could only hope that increase of air fare, if any, would still be affordable.
posted by seememyip at 4:37 PM
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