Comment by rapatel0
14 hours ago
Fundamental problem: Flights don't make money. Airlines actually make all of their money through loyalty programs and credit card payments. They basically should have turned into regulated utilities long ago, but loyalty program revenue saved them.
Unless this initiative will turn into a credit card company (which nobody likes or wants to do) it won't go anywhere
Private equity will likely sell the company for parts. There is no operational improvements for cash flow that they can do.
Useful watch (skip to 2:20): https://youtu.be/ggUduBmvQ_4?si=cyysP7aH_CIEDZRq
Why does any of this imply they should become a regulated utility? This seems like a textbook case of the free market pushing prices down to cost. Having alternative revenue streams pushed that minimal price down; but even without that, there is no reason to think the market would have done anything other than push prices to the lowest level possible in that environment as well.
Power companies are the classic example. If power companies were forced to compete, their costs + competition tend to drive them out of business. As a result most power companies are forced to operate in really tight constraints with very limited but predictable margin.
I'm not saying that this a better outcome (power companies have their problems too). I was just commenting that this issue parallels the historical solution that was applied to utility companies.
Company makes too much money: "they're extracting monopolist rents! They need to be a regulated utility!"
Company makes too little money: "there's no money in this industry! They need to be a regulated utility!"
Yea that's a good one. The problem is folks don't have patience. They see an airline fail and instead of waiting until a new competitor enters the market, as they inevitably will, they want to start regulating or look to other "solutions" but these things take time to work themselves out. It's a free market, not an instant free market.
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A more fair assessment would be: company runs a utility => they need to be a regulated utility!
The core part of air travel doesn’t really feel any different to a bus or metro or train. Off the tarmac then yes it absolutely feels like a Verizon store, as does some of the in-flight service, but there’s always been this weird feeling as a traveler that every carrier is basically the same thing but with different decals on it. Airline alliances are surely the ultimate example of this.
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Meanwhile, first class today is not very much more than coach cost in the regulated era.
Try flying Delta. It isn’t the cheapest option, but you really do get better service.
If you want to feel special, do Aeromexico first class. The checked bags are waiting for you before you can even walk there on a domestic flight.
Spirit was cheap. And if you’re poor, you need cheap. If you aren’t, buy better service and don’t complain that it’s just Greyhound on a plane.
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I like the EU model. The regulators set a "bare minimum" set of requirements. They have much better minimums that North America, and the fares are (still) cheaper per kilometer travelled. Also, I love the penalty system when flights are late.
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Company, always: "We need government subsidy". Then hell yes to regulating what they do.
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Even with your uncharitable framing I agree with both quotes.
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Company offers a service that is considered essential to function in society, and the overwhelming majority of people _must_ pay for as if it were a tax: "this seems like something generally useful to the public! They need to be a regulated utility!"
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Changing it to a utility? Like Bart in sf? We should have Bart authority run the airline!
Company is valuable to us as a society in a fundamental way but is fucking us up in all sorts of unique ways: They might need to be a regulated utility.
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Okay, but the process of underwriting an airline now somehow involves operating a successful credit card company. Which, you know, are not typically successful based upon operating excellence but upon rapaciousness of interest rates and merchant fees.
I'm not sure it's great to have important infrastructure operated this way. Other than regulation do you see a way out?
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Bottom line: there never really is any free market. Because it doesn't work.
> Why does any of this imply they should become a regulated utility?
Because the majority of the HN crowd defaults to "a massive government bureaucracy would do this better" unless it's even tangentially related to their industry in which case it's "regulations bad" and "move fast break things."
In this case prices are _below_ cost, no?
When a necessary service is pushed towards being unprofitable / breakeven due to "free market pressures", it probably should have some kind of backstop to ensure the service doesn't completely fold - because it is necessary. I think the suggestion to treat it like a utility was trying to emphasize this.
I'd also feel similar I'd my primary water, electricity, or internet provider was on the brink of failing due to "free market pressures".
Consumer air travel is not a necessary service, though.
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If we let the free market do its work, there'd be no airlines. Jet fuel is heavily subsidized, the State injects massive amounts of money into airports and plane manufacturers, etc.
Honestly, with the looming climate crisis, we should probably just let them fail one by one and let alternatives (who can actually be profitable) take off.
In a free market, every working citizen could easily afford more expensive airline tickets, since they could keep their entire income with no taxes deducted.
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Airlines basically were a regulated utility until they were unregulated to the point where normal people can barely fit in a seat and there’s basically no amenities anymore. It used to be kind of nice to fly. That’s laughable now.
Now you have to option to pay as much as you used to (inflation adjusted) for a ticket, and get first class service with all the leg room you want.
On the other side of that coin, when airlines were heavily regulated, most people couldn't afford to fly at all.
The "regulation vs. no regulation" stance is the wrong way to look at it. Airlines are still regulated, of course. Maybe some of the regulations we do have are unnecessary, some of the regulations we got rid of we should really bring back, and perhaps there are others that we never had that we need.
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What other things changed besides regulation?
My guess is MANY more people fly and are able to afford to fly vs before. There are probably many others things that changed.
It's also very nice to fly.... in first class.
Because the amount anyone would actually pay is substantially below cost for most routes, but it's still a service that many people depend on (either directly or by the indirect economic impact of travel). It's a genuine force multiplier that is unaffordable without being subsidized; making it a utility would just shift the subsidy from credit card points programs to the government.
> Because the amount anyone would actually pay is substantially below cost for most routes
This is absolutely not true. If all the airlines were prohibited from making money with anything else (miles, credit cards) then airfares would rise across the board and there would still be plenty of demand. Not as much, but still plenty.
If airlines didn’t exist, people and goods would continue to move around the globe as they have done for thousands of years. There’s nothing magical about air travel (or any other transport mode) that makes it worthy of subsidy .
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> indirect economic impact of travel
Like what?
Nearly all 'goods' are going to travel more efficiently by rail and truck. And I say nearly all to cover the outliers like maybe an organ flying across country for transplant.
So if it's not the distribution method of choice for goods, then leisure? It's probably a global positive if people fly less. People will end up going to more local vacation destinations instead of aggregating all of those resources into a few popular locations that end up being massively overcrowded. This in turn reduces carbon impact because driving 3 hours is significantly less impactful than flying for 3 hours.
If you are just talking about all of the labor that has built up to support this inefficient and wasteful enterprise, that's probably for the best to reallocate that labor elsewhere. It will happen eventually, unless you think cheap oil is a permamenent feature, so why not happen sooner than later?
> the amount anyone would actually pay is [...]
That's.... like a pretty shocking erasure of the idea of a demand curve given the forum here.
To be glib: no, that's not how it works. Increase the price and fewer people will fly, but the demand won't drop to zero. Decrease it and you make less money per ticket but the size of the market is bigger. At some point there is a local maximum, to which the market seeks.
But conditions change occasionally and the equivalent supply curve is moving rapidly because of the oil shock (i.e. it's more expensive to put planes in the air to service tickets you already sold). And things like the mess with Spirit are what happens when the market readjusts: the rest of the industry will (probably) backfill some of the lost capacity, but not all of it, and prices will (probably) rise a bit to a new equilibrium.
This is like saying that movie theaters make money on popcorn, so they should just start selling popcorn and exit the movie business entirely. The reason those loyalty programs work is because of the flights.
For a much deeper dive on this, see https://www.complexsystemspodcast.com/episodes/gary-leff-fre...
(there's a well-formatted text transcript)
And then you have RyanAir in Europe with no credit card or loyalty program offerings. They did have a loyalty subscription program, but it cost more than it generated.
Best not to generalize.
And Ryanair is the largest airline in Europe! And one of the largest in the world.
tbf, Ryanair generates a third of its revenues from other ancillary offerings (including kickbacks from insurers and car hire firms as well as its legendary fines and fees) so it does fit the general pattern of it being unprofitable to simply sell tickets in competitive markets...
Those other companies do too So it's not distorting the competition IMO. If none of them had kickbacks then the prices would be overall higher but people would still fly because most of us don't just fly for the hell of it but because we have places to go.
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> turned into regulated utilities
Regulation won't magically save low margin businesses.
Nationalizing might, but then you make it difficult to compete for others. And of course, there's plenty of precedence of nationalized airlines failing catastrophically and having to be sold off to private or foreign entities to keep functioning.
They make a lot of money from loyalty programs and credit cards, but the legacy airlines do make money on flying alone. The margin they make on that is razor thin, but they do make money from the core product.
Spirit was designed to be ultra low cost, which attracts flyers that are much more price sensitive. Higher Jet A costs means higher ticket prices, which means lost customers, which means lost revenue. Pulling a JetBlue and adding higher tier product offerings to attract the business travelers that _actually_ makes money for airlines would've required an overhaul of their entire business, which they couldn't afford to do.
I agree that Spirit will be chopped up by whoever buys them. It happened to Braniff, PanAm, and a whole bunch of other airlines that weren't thrown a lifeline.
(JetBlue tried to acquire Spirit to prevent this outcome, but the acquisition didn't pass antitrust. Everyone knew that that acquisiton failing was a death sentence to Spirit, but it was what it was.)
> I agree that Spirit will be chopped up by whoever buys them. It happened to Braniff, PanAm, and a whole bunch of other airlines that weren't thrown a lifeline.
But that's not necessarily a bad thing. If the company is worth more to the market and society when sold as pieces, so be it.
Doesn’t have to be a profit-making venture though, just needs to cover the cost of flights — which are not money losers.
If they can build a model similar to REI, count me in.
>Airlines actually make all of their money through loyalty programs and credit card payments.
Spirit has been doing this since it's inception. The collapse of their business can't be through lack of this alone.
Or they could actually charge ticket prices that cover the cost of doing business and stop treating their passengers like a it's a time-share sales pitch the whole way.
They can't do this most of the time because for most of the year on most routes, supply outstrips demand (i.e., many/most flights on most airlines fly at least a little bit empty, often significantly empty – overall load factors are about 80-85%). They have to charge fares that customers will be willing to pay, even if that means losing money on a given flight. They can only charge profitable fares on the routes and times of year when demand surges (peak routes, holiday periods, major events). They have to keep their network capacity high enough to satisfy the peak demand, but for most of the year and most of the network, demand is lower, so they have to settle for break-even or loss-minimization. (For the record, I co-founded a flight search startup that became a fare optimization platform.)
Was that Flightfox? If so, I loved using it, helped me save so much money but also time :)
It sounds like there’s a problem with having too many flights that are barely full and hence unprofitable. AFAIK the federal gov spends significant money subsidising many “small airport” routes even if they’re barely used.
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Southwest used to do this, but then somehow got a CEO that burnt it all down instead of raising ticket prices by $20-30.
Before them Alaska Air was similar, and is now similarly bad.
Having the customers actually own the airline seems like a reasonable approach. The trick is kicking all the assholes off the board, so they can’t fire leadership for treating customers decently while turning a sustainable profit.
True, Alaska skimped on maintenance so much they killed a plane full of passengers that should never have died. https://en.wikipedia.org/wiki/Alaska_Airlines_Flight_261
I can't fathom how this airline was allowed to keep existing.
Sounds like a good way to lose all your customers to the other airlines that charge less.
Yup, and this is exacerbated by how services like Google Flights work. There's little visibility into any kind of "quality" metric, but prices are always front and center. So why would you optimize based on anything else?
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Consumers only look at bottom line. There is basically two markets with airlines, higher end market with credit cards and premium seating; lower end where consumer solely looks at ticket price.
A huge number of businesses survive on whales, it's becoming really apparent. I'm kinda surprised how common it is.
I wonder if this will be the next "market" to exploit if ad revenue ever dies down too much, or if it's one that's always been there, and I've simply never been a part of.
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They do, it’s just barely enough to cover the cost of doing business and volatility.
> Unless this initiative will turn into a credit card company (which nobody likes or wants to do) it won't go anywhere
There's another more fundamental problem with airlines like Spirit, which is they can't effectively make this change. Loyalty programs / credit card tiers require differentiated service. This is one of the drivers for why Southwest changed their entire seating model to match the other big players in the industry even though their Ops data showed faster boarding times using unassigned seating.
When you're on the lower tier of the market like Southwest and other budget airlines, creating differentiated service mostly means making things worse for most passengers, not better, in order to have loyalty programs provide a pathway to avoid the suck.
> "Flights don't make money. Airlines actually make all of their money through loyalty programs and credit card payments."
If that's the case then how RyanAir survived and is thriving?
It isn't the case. It's a simplistic gloss on a complex finance outcome.
Some flights make money.
Some flights lose money.
Some finance structures make money while looking like losses to acrue tax benefits for other activities.
Sometimes the money is being made by holding companies not operating companies. Sometimes the assets are worth more as spares than operating.
All companies are complex. I do not think "flights don't make money" is true for all airlines, all flights.
Because people take "airline X makes $50k profit, and makes $55k off of the credit card, so therefore it makes all money from credit cards" which is true from a certain accounting point of view, and also entirely false, in that it's all accounting tricks and the credit card would be worthless without an airline.
Credit cards aren't really a thing in Europe and even where people might have them they don't make money. There's no kickback schemes, cashback etc.
Bag fees and other ways to get passengers to pay above the headline price. Like this kind of thing: https://hallofshame.design/ryanair-when-every-page-is-a-dark... and https://darkpatterns.uxp2.com/pattern/ryanair-travel-insuran...
Not to mention that loyalty programs and credit card bonuses don't exist in Europe.
This isn't true. European airlines do have loyalty programs with "miles".
Air France, British Airways, Finnair, Turkish Airlines, just to name a few, all have miles programs.
They just aren't tied to credit cards because the EU caps interchange fees to 0.3%, so there simply isn't enough money to have a meaningful credit card point system.
RyanAir notoriously uses cheaper secondary airports.
Because it's nonsense. It's from some YouTube video that went viral a few years ago.
Because their social media strategy is fire
I kinda doubt that. Ryanair make money and they don't have a loyalty program and companies in Europe don't make money off credit cards.
Airlines were heavily regulated in the US and essentially operated as government contractors until 1978 [1]
[1] https://en.wikipedia.org/wiki/Civil_Aeronautics_Board
Yeah and it was an absurdly expensive activity limited to rich people
You say that, but flying economy was much better back then. Less fights, more legroom. You've got to fly business today to get close.
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And most families only had a single car prior to 1980.
What's your point?
Did airlines get cheaper due to deregulation or because technology and engineering made operating them cheaper?
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Was it cheaper or more expensive for the public to fly on them during that time or after deregulation?
As I understand it, everything about the industry was better back then too.
Case in point: Old Perry Mason shows where characters regularly drive to the airport, pay for a ticket and get on a plane. Flying was actually faster than driving back then, even when measured by time between deciding to leave and arriving at destination!
(Yes, tickets used to cost a bit more. Whatever. Figure in the price for camping in the airport for 4-5 hours, and then tell me the current system is cheaper!)
"Yes, tickets used to cost a bit more"
Tickets used to cost 4-8x what they cost now, depending on route. It wasn't a couple percent extra. A lot of what made flying seem like such a glamorous activity was that everyone but the upper classes was excluded.
An economy class round trip from the US to Japan in the 1970s with Pan-Am was $8,900 in 2026 dollars. About $15,000 if you flew first class.
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It would be prohibitively expensive for poor people to fly. I understand why you wouldn’t care about that, but some people are poor and still need to fly if you can believe it.
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Both Southwest, but also Ryanair are profitable. Totally possible to make money off flights.
But you have to follow the same model: use cheaper airports, a single modern aircraft type to simplify operations, high turnaround speed, charge a lot for extras.
It’s not enough to “make a profit”.
Southwest has 30B in assets and makes $441M in profit. Like most airlines it’s a miracle of modern economics and should practically be considered a charity or a nonprofit. You would make more in treasuries or corporate bonds.
Their last earnings report says about 17B in non-cash assets with about 848M in profit based on those assets (assuming that the quarterly profit x 4 is a reasonable assumption). So where are your numbers from?
Wow… at 1.5% annual return wouldn’t they be better off just renting those assets (aircraft) to other airlines?!
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Corporate bonds won't take you to Disneyland.
Ryanair moves the most passengers of any airline in the world and doesn't have any cobranded credit cards or loyalty program.
Ryanair is 3rd by passengers and 7th by passenger miles, according to this wiki page.
https://en.wikipedia.org/wiki/Largest_airlines_in_the_world
Obviously their model is different to the big American carriers. Perhaps there’s something about the homogeneity of the US domestic market compared to the EU market that favors loyalty based airlines versus budget airlines.
The comments here seem to suggest that the loyalty program funded with credit card margins are to blame for the difference.
It suggests we'd be better of eliminating the absurdly high hidden taxes paid to the credit card companies, that in turn act to gamify the business. In the end they raise the cost of doing business, for virtually no benefit at all. It's a monopoly extracting as much wealth they can get away with.
The question at the heart of this: How can "the shining light on a hill" be so stupid? It's digging its own demise.
> Fundamental problem: Flights don't make money. Airlines actually make all of their money through loyalty programs and credit card payments. They basically should have turned into regulated utilities long ago, but loyalty program revenue saved them.
Enough money for who? One person has a pay package north of $30 million.
> Flights don't make money
Member-owned co-ops don't need to make money. Structuring an airline as a member-owned co-op is not a fundamentally-stupid idea.
> Fundamental problem: Flights don't make money. Airlines actually make all of their money through loyalty programs and credit card payments. They basically should have turned into regulated utilities long ago, but loyalty program revenue saved them.
I don't get it. Why should they have been turned into utilities? Just because the current iteration loses money?
Please be aware that airline pricing is endogenous. That means, it's not set from the outside, but a reaction to market conditions and feeds back into market conditions. Eg airlines might be on the edge of profitability at time X, but when at time Y fuel prices drop a bit (or rise a bit) that doesn't mean that airline will suddenly all make lots of money (or all go bankrupt): the pricing of their product will adjust.
That doesn't only go for fuel prices, but also for loyalty programme revenue. If such revenue is available and competition is fierce, then prices will go down until airline can just about stay afloat after taking that extra revenue into account.
> Private equity will likely sell the company for parts.
You say that like it's a bad thing.
If airlines stopped offering flights then their loyalty programs would not be useful.
Even in this "airlines as point program companies" view of the world, flights don't make money in the same way that electricity going into data centers don't make money. It's a place where you have major costs and you want to try and gamify it, but at the end of the day it's pretty necessary for successful operations!
Consider why airline points even work as a model in the first place! Airlines have blackout dates and don't offer every seat in a plane for points because _they can make money selling a seat for more than what the points are worth to them_.
The company is not forced to sell immediately to whoever offers it money, they can sell themselves off for parts.
I heavily doubt PE firms are interested here as there is no potential for growth or a multiple. Spirit's assets are mainly their fleet, there are like 4 maybe 5 people who could buy, of these 2-3 are facing similar financial crises.
In the US I think nobody except United can afford to make a move, more likely some Asian airlines will move; many have grown and have route demand they can't service due to lack of aircraft. If you fly to Asia often you'll note that much of the time Asian airlines have to operate an aircraft from a US airline.
Spirit's assets are almost entirely their slots at ORD, EWR, LAX and LGA. They don't many of their planes.
Huh? What do you mean? They and Wizz air are public companies. Nothing would stop them from selling their planes etc.
some do - see RyanAir in Europe.
yeah in the US airlines are fintechs.
Does this imply that most people who sign up for frequent flier programs end up losing money in the long run, rather than benefitting from them?
They can probably make money on business class travelers who spend their companies money on flights which aren't necessarily the cheapest but can reap the rewards for their own personal benefit.
> They basically should have turned into regulated utilities long ago
They used to be. Read up on "Civil Aeronautics Board".
Famous Richard Branson quote:
"If you want to be a millionaire, start with a billion dollars and launch a new airline."
Bullshit. Very few airlines even have points systems.
Sounds like the industry is extremely efficient. Why would we want to turn this into regulated utilities?
sounds like it's not efficient at all? it's barely functional as a business and is only surviving on grifty addons?
This is a textbook case of competition pushing profits down to 0. That's an ideal case scenario. Why would you want to change this?
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"Perfect efficiency comes at the point of collapse"
Don't know where I read that, but it seems apropos.
It’s perfectly competitive. There is no rent seeking on the core.
It’s highly functional. It’s barely profitable. That’s good for the customers.
Good? It’s dirt cheap
Because efficiency is not the end goal of life.
So the end goal is making poor people pay more for the flights home on holidays so that the investors can have higher returns?
How about transportation?
Sadly only expensive because the unions bleed the companies dry.
Not really true. If over night all salaries in all airlines would drop by say 20% overnight. Then yes, they would make a lot of money very shorterm. But then same thing would happen. Competition where they all would lower prices towards where they again have the same margins.
Lol.
Be sure to actually go read the read the contracts and what they contain.
They could pay Trump to gid rid of some of the more costly FAA regulations. Do you know how much it costs to train a pilot these days? We have this little thing called autopilot now! Put Musk on the job, he'll straighten out those crybabies and their "safety first" ethos.