Comments: Airlines Aim for Expense Reduction in Payments (FC != banking)

If Airlines could take it a step further like the shipping business and express their rates in terms of air miles per monetary unit then the full nature of their commodity services could be streamlined. As it stands now the refinancing and expense of keeping up a fleet of planes is driving them to the poor house along with high labor cost. If the consumer could buy air miles segmented by general routes the cost savings would be complete and the arbitrage would level the playing field. Of course this simplification of distribution would leave the travel industry short changed but the consumer benefit would grow as far as cost. Government sponsorship of the airline industry could end when it comes to rates and the market could determine the value based on demand. The standards for air miles sold on consumer flights could be adjusted to safety standards like older fleets or none experienced flight crews might provide a sub standard price. The allocations of flights routes would go to the highest bidders per year and a fully disclosed operation would allow for the fleet replacement value of an air mile to be determined. Eventually the lowest cost larbor markets would win unless the more advanced technological economies could counter with greater speed and more automation. The banks and other friction creators of commerce are driving the cost to do business and travel supported by fake government efforts to provide safe travel and allocate routes. In the end the less friction between the producers of a commodity and the consumers the better the product and the more is availible. Banks, government, bankrupt airlines, and reduced flights are what we can expect in the future if the scenario is not changed.

Posted by Jimbo at March 6, 2005 01:56 PM

Not necessarily appropriate to the original post by iang but ... airline tickets are a futures market waiting to happen. Does anyone have any ideas as to why this hasn't already happened?

Posted by Darren at March 6, 2005 05:18 PM

Yes, I do know why futures markets haven't been set up for air tickets. Because the airlines and travel agents are hoping for increased revenues through price discrimination and therefore they do everything in their power to keep air tickets untransferable.

Nevertheless, the free market is already creeping in through the cracks of bureaucracy: airmiles are already traded trough so-called brokered flights. But the liquidity of that market is still abysmal when compared to its true potential.

Posted by Daniel Nagy at March 6, 2005 09:29 PM

I second the futures market -- I've been thinking about trading options on airline route-seats for a few years now. A rich and liquid market is just sitting there dormant, and the airlines, vendors, and end customers are all paying for the resulting lack of capacity planning signals and limited hedge ability. I think it's only going to take one cooperative carrier to allow some third-party exchange to start -- trading would be restricted to contracts on that carrier's seats and routes, but I'd think the benefits should provide enough of a demonstration for other carriers to want to join the exchange in relatively short order. The historic precedent here is probably SABRE.

Posted by Steve Traugott at March 9, 2005 02:08 AM

...by the way, at least a few travel agents are likely to welcome a ticket derivatives market; for many this could mean a fundamental transformation in their basic business, from that of retail agent to more of a broker/dealer. Considering the pounding their industry has taken in the last decade, this could be very good news.

The airlines' self-interest is served here as well -- when a speculator buys an underlying seat, it's *sold* -- no passenger cancellations. In an open market the carrier should typically get less for a given seat-mile, but there are many offsets to that. With investors buying seats months in advance, the lead time will be longer before the carrier has to deliver on the contract -- long enough to juggle routes, long enough to plan aircraft lease and maintenance schedules. The market assumes the capacity-planning risk; the carrier will have the cash up front, and the seat could fly empty without affecting the carrier's revenue -- or the carrier can overbook anyway, and undertake a buyback in the market rather than at the gate. On weak legs, the carrier will be able to sell calls on many otherwise-empty seats, adding to the revenue stream in a way they can't do right now at all.

Posted by Steve Traugott at March 9, 2005 03:18 AM

The problem with the tickets argument is that it flies in the face of marketing theory of discrimination. If seats are commoditised in a market, then there will be no way that the airlines can charge high prices for the seats, which is essential for their business model. It is for this reason that the airlines support the identity requirement without a whimper, as it kills the grey market in ticket sales.

Posted by Iang at March 9, 2005 08:45 AM
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