Since deregulation – and where there is competition on a route – prices will tend to
decline to the incremental cost of operating the flight (regardless of the airlines’ overhead or capital investment).
It’s collectively suicidal for the industry, but there’s always someone willing to sell seats or kg’s of cargo capacity at close to their incremental cost of that flight (fuel, incremental crew payroll, landing fees, etc), to try to redirect your business away from you to them. And they’ll tend to add capacity (flights) if they can recover anything much more than just those variable costs. Competitive pricing too often does not support the very substantial, fully loaded costs of operating the airline supporting the flight.
That’s great for customers, at least while it lasts, but terrible as a business model. In the case of airlines, it’s a pretty observable activity. We also see the result, with serial bankruptcies, where the borrowing for tthose unabsorbed investments and costs need to get periodically wiped away. But any industry with similar high-fixed-cost, high-investment, or high product-development or model-update costs, which also has this free-for-all competitive pricing for similar or identical goods or services will have the same earnings characteristics.
Some years back I went in front of some pilot union reps to explain one teetering airline’s financials. It became pretty clear that the pilots had a different perspective from me – which was that the actual planes they were flying were likely going to continue to fly anyway, regardless of what happened to the company’s equity or whose logo was painted on the tail. They’d heard it all before, and they’d continue to fly through bankruptcies, through a revolving door of owners/shareholders. At the time, their perspective was something of a revelation for me.
It also became clear that the very capable, bright, sincere pilots in the group had no idea whether any given flight they flew made money or not, or what a breakeven load might be. Not their job, of course. Nor should it be, except that here we were talking about the business’ capacity – their own planes’ capacity--to pay them. Aircraft types have different economics, and make sense for different length routes and loads. Speaking to the pilots individually about their own aircraft types in economic terms drew blanks. I’m not say it’s necessary knowledge for a pilot - of course it isn't - but a 'more granular' (I cringe at that term) understanding of the economics of their business might be useful for their purposes. And their future.
While the airlines themselves are crappy businesses, some of the ancillary businesses are interesting. FlightSafety for example. While overall simulator activity fluctuates with the economy’s and airline industry’s fortunes, the beauty of this business is that continuing training is mandatory, and depending on aircraft types, there sometimes is not much viable competition. The initial capital outlay per simulator is enormous, but the idea is to keep each machine booked at hourly billings 24/7/365. The trick is that the provider has to have the right mix of machines by aircraft type.
Many of the good businesses in the industry tend to be privately owned.
I don’t know the actual economics of the business segment, but privately owned Kalitta (better known as the drag racing etc family) has an intriguing specialty niche which could conceivably be of NetJets interest. Kalitta has a large – as far as I know largest - fleet of air ambulances, which are just modified corporate jets, Lears and such. (I can understand the appeal to the Kalitta's - the jets are entirely stripped out of unnecessary interior weight). The pricing doesn’t seem to be particularly flexible – if you need the service, you need it - and though there might seem to be a lot of operators in the business, many or most are really just brokers who then put clients on Kalitta jets.
Some other interesting services are the specialized 'must-have' segments, like the flight-plan and international overflight management business. But again these are typically private. (ie, they don't need to go to the public for equity).
decline to the incremental cost of operating the flight (regardless of the airlines’ overhead or capital investment).
It’s collectively suicidal for the industry, but there’s always someone willing to sell seats or kg’s of cargo capacity at close to their incremental cost of that flight (fuel, incremental crew payroll, landing fees, etc), to try to redirect your business away from you to them. And they’ll tend to add capacity (flights) if they can recover anything much more than just those variable costs. Competitive pricing too often does not support the very substantial, fully loaded costs of operating the airline supporting the flight.
That’s great for customers, at least while it lasts, but terrible as a business model. In the case of airlines, it’s a pretty observable activity. We also see the result, with serial bankruptcies, where the borrowing for tthose unabsorbed investments and costs need to get periodically wiped away. But any industry with similar high-fixed-cost, high-investment, or high product-development or model-update costs, which also has this free-for-all competitive pricing for similar or identical goods or services will have the same earnings characteristics.
Some years back I went in front of some pilot union reps to explain one teetering airline’s financials. It became pretty clear that the pilots had a different perspective from me – which was that the actual planes they were flying were likely going to continue to fly anyway, regardless of what happened to the company’s equity or whose logo was painted on the tail. They’d heard it all before, and they’d continue to fly through bankruptcies, through a revolving door of owners/shareholders. At the time, their perspective was something of a revelation for me.
It also became clear that the very capable, bright, sincere pilots in the group had no idea whether any given flight they flew made money or not, or what a breakeven load might be. Not their job, of course. Nor should it be, except that here we were talking about the business’ capacity – their own planes’ capacity--to pay them. Aircraft types have different economics, and make sense for different length routes and loads. Speaking to the pilots individually about their own aircraft types in economic terms drew blanks. I’m not say it’s necessary knowledge for a pilot - of course it isn't - but a 'more granular' (I cringe at that term) understanding of the economics of their business might be useful for their purposes. And their future.
While the airlines themselves are crappy businesses, some of the ancillary businesses are interesting. FlightSafety for example. While overall simulator activity fluctuates with the economy’s and airline industry’s fortunes, the beauty of this business is that continuing training is mandatory, and depending on aircraft types, there sometimes is not much viable competition. The initial capital outlay per simulator is enormous, but the idea is to keep each machine booked at hourly billings 24/7/365. The trick is that the provider has to have the right mix of machines by aircraft type.
Many of the good businesses in the industry tend to be privately owned.
I don’t know the actual economics of the business segment, but privately owned Kalitta (better known as the drag racing etc family) has an intriguing specialty niche which could conceivably be of NetJets interest. Kalitta has a large – as far as I know largest - fleet of air ambulances, which are just modified corporate jets, Lears and such. (I can understand the appeal to the Kalitta's - the jets are entirely stripped out of unnecessary interior weight). The pricing doesn’t seem to be particularly flexible – if you need the service, you need it - and though there might seem to be a lot of operators in the business, many or most are really just brokers who then put clients on Kalitta jets.
Some other interesting services are the specialized 'must-have' segments, like the flight-plan and international overflight management business. But again these are typically private. (ie, they don't need to go to the public for equity).
