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Thursday, January 27, 2011

How I Became Rich The First Time-- And Why The Big Airlines Are All Failing Miserably

On my first day of college-- actually freshman orientation, so even before my first day-- all I wanted was to find someone who would sell me some pot. (This was 1965 so it wasn't as readily available as it has been subsequently.) The beat-types and "heads" were a little closed to rambunctious freshmen wanting to score dope but I noticed that the student body president had long hair and in those days the only males with long hair were drug fiends-- or so I thought; he was the only person with long hair who didn't smoke pot, but it took forever before I figured that out. Anyway, I approached him after his address to the freshmen class. He was eager to find someone with a left-wing perspective to run for freshman class president. I was willing to make believe I knew what a left-wing perspective was if I could get some pot. (He helped me understand the major issues of the day-- from the little thing brewin' up in Vietnam to the stuff Martin Luther King was doing down South-- and he turned me on to rock music, especially the Stones and the Doors-- and helped me become freshman class president, which totally radicalized me. But not pot.)

Ironically, when I finally did score some, he popped up as I was lighting up and was quasi-aghast. It was so hard to get and so expensive-- like $65 an ounce... and what a paranoid hassle. Anyway, eventually I met a real NYC dealer who agreed to sell me awesome California weed for $120 a pound. There are 16 ounces in a pound-- so that was less than $8.00 an ounce. Even if you're not a math major you know that $8.00 is a way better deal than $65.00, right? So what do I do? My grandfather was a Russian democratic-socialist so... I organized a cooperative in which we would all take turns going to the city (90 minutes by train) and scoring and dividing it up and each of us would pay $10 and ounce so the guy who did the work that week would get his free. Everyone loved the idea. I went first. It worked great. But no one wanted to go second. Or third.

So I said I'd do it but I decided to charge $25.00 an ounce, a lot better than $65.00 but still very profitable for moi, although most of the profits went up, so to say, in smoke. In any case, it was just a matter of time before I was the biggest drug dealer in Suffolk County. I learned a lot about business, something that served me well as I eventually started my own business and then ran a corporate one.

Next month I'm going to Mexico for a little vacation. The country's tourism is in the toilet and hotel occupancy rates are way down. Hotels can approach this from a number of directions, none of them ideal from a business perspective. One is to figure that if they can get a customer and charge as much as possible, maybe they can make up for the lack of quantity. Another is to give the customer a great deal in the hope that, a) you'll get some business and, b) others will hear about it and come to your hotel instead of the one charging a lot. The hotel we picked has suites with a rack rate at $950 a night, very high. But the hotel management isn't high and they offer a "discount:" $700 a night. I'm not high either and I'm not shy and was willing to point out that $700 may have been a discount in 2006 but let's be real here, José-- business sucks and you're going to have another empty suite for another week. So we're paying less than $200 a night. Many people are doing this all over Mexico.

Most major airlines have been dealing with the global downturn in other ways. For starters, service has gotten frighteningly bad. In fact, it's at the point that the service is so bad that it kind of makes you want to look for an alternative to taking the trip. David Koenig did a piece about it for A.P. a few days ago.
After a decade of multibillion-dollar losses, U.S. airlines appear to be on course to prosper for years to come for a simple reason: They are flying less.

By grounding planes and eliminating flights, airlines have cut costs and pushed fares higher. As the global economy rebounds, travel demand is rising and planes are as full as they've been in years.

Profit margins at big airlines are the highest in at least a decade, according to the government. The eight largest U.S. airlines are forecast to earn more than $5 billion this year and $5.6 billion in 2012.

U.S. airlines are in the midst of reporting fourth-quarter results that should cap the industry's first moneymaking year since 2007.

"The industry is in the best position-- certainly in a decade-- to post profitability," says Southwest Airlines CEO Gary Kelly. "The industry is much better prepared today than it was a decade ago."

The airlines' turnaround has benefited investors-- the Arca airlines stock index has nearly quadrupled since March 2009-- but it's been tough on travelers.

Fares in the U.S. have risen 14 percent from a year ago, according to travel consultant Bob Harrell. Flights are more crowded than they've been in decades. On domestic flights, fewer than one in five seats are empty. Space is even tighter over the summer and holidays. That's why it took a week to rebook all the travelers who were stranded by a snowstorm that hit the Northeast over Christmas weekend.

Travelers also face fees these days for services that used to be part of the ticket price, such as checking luggage (usually $25 to $35 per bag) and rebooking on a different flight (usually $150 for a domestic flight, more when flying overseas).

"I'm not averse to anyone making money-- that's great-- but (to) take things away and then charge for them, that's not right," said Rick Jellow, an executive who travels in his job for a lighting-systems company in Virginia.

From 2000 through 2009, U.S. airlines lost about $60 billion and eliminated 160,000 jobs, according to an industry trade group, the Air Transport Association.

During that tumultuous decade, airlines were hit with a series of events beyond their control: two recessions; the Sept. 11 attacks; an avian flu outbreak that scared away many travelers, and rising fuel costs.

The industry was profitable in 2000, 2006 and 2007, when the economy was roaring. But those boom years masked the industry's underlying problems, including high costs and more seats than travelers demanded. During 2008 and 2009, airlines lost a combined $23 billion, but they were also attacking their problems, setting the stage for a comeback in 2010.

• They eliminated money-losing flights. When travel demand recovered, airlines could raise ticket prices for the smaller supply of seats.

• They grounded older, gas-guzzling airplanes. The government says the major U.S. airlines, plus freight delivery companies FedEx and UPS, used 11.39 billion gallons of jet fuel in the first nine months of 2010, down 11.4 percent from the same period a year earlier. The price of a gallon of jet fuel jumped 20 percent year over year, but overall fuel spending rose just 6 percent.

• They added fees. In the first nine months of 2010, airlines collected more than $4.3 billion from fees for checking baggage and changing tickets, up 13.5 percent from the comparable period in 2009.

• They consolidated. Delta Air Lines Inc. bought Northwest in 2008, and United and Continental combined last year. That leaves four so-called network carriers that operate from hub airports, down from six. And Southwest Airlines Co.'s pending purchase of AirTran Airways will combine two of the biggest discount carriers. Fewer airlines should mean higher fares.

Delta, Southwest, United Continental and US Airways are expected to have earned nearly $4 billion combined in 2010. The latter two report results on Wednesday. The parent of American Airlines, which suffers from higher costs than the others, said last week it lost $389 million.

The economy is expected to grow faster in 2011 and 2012 than it did in 2010, and this should give the industry a lift. But, there are some challenges on the horizon.

The biggest, is higher fuel prices. With oil hovering around $90 a barrel, jet fuel on the spot market costs about $2.60 a gallon, the highest it's been in more than two years. This will temper industrywide profit margins. Still, Soleil Securities analyst James Higgins says most airlines would make money this year even if oil hits $100.

Another factor that will determine how long the industry's profitability lasts is how individual airlines manage growth. Rightly, the airlines so far have been cautious about adding more flights as travel demand picks up. In the past, they added flights and brought back grounded aircraft too quickly. That led to a glut of seats and falling airfares.

"The wild card is always capacity discipline," says William Swelbar, a director at Hawaiian Airlines' parent and an airline industry researcher at MIT. "All it takes is one carrier to begin to add capacity aggressively, and then we follow and we undo all the good work that's been done."

Yes, capacity discipline... it's always been what makes the capitalist world go round. I know there are some very inexpensive rooms available in Cairo right now. But I bet you can't get a cheap flight.

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