The Airline Industry: Eligible for an Upgrade

The airline industry has an image problem. Plagued by delays, lost bags, impossibly small seats and high ticket prices, flying has become almost synonymous with discomfort, stress, and expense. Indeed, the industry has long been hindered by fundamental problems: sky-high operating costs, spikes in the price of jet fuel, cut-throat competition, and a loss of consumer goodwill. But while the aviator and concorde-filled glory days of air travel are certainly a thing of the past, the industry is undergoing significant changes and an upswing which serves to benefit everyone from passenger to pilot.

Historically, airlines have long-struggled to balance their costs and profits while maintaining passenger satisfaction. In 2012, the industry made an aggregate profit of just $7.6 billion on revenues of $638 billion, a meagre 1.2% net profit margin, according to the International Air Transport Association’s Annual Report. Of the other 98.8%, over two-thirds goes to the airlines’ fixed costs. Of these, labour and jet fuel make up almost half of operating expenses, with the price of jet fuel alone more than doubling in the last decade (See Graphic I).

Graphic I: The price of jet fuel alone has more than doubled in the last decade

In addition to the industry’s inescapable dependence on the fuel, the price of jet fuel rises and falls almost in tandem with that of crude oil, making it highly susceptible to shifts in global politics. Strong industry-wide unions resistant to technological automation prevent airlines from laying off staff. Finally, cut-throat competition complemented by the advent of price comparison sites like Kayak and Expedia have created broader awareness and price sensitivity in the marketplace. Even with these heightened costs, airlines have been unable to raise prices or work to distinguish themselves to gain more market share due to mounting and inescapable financial obligations. As a result, all of these costs have often translated directly to the airlines’ bottom lines.

Sites like and Expedia have made consumers more sensitive of ticket prices

“That airlines made any money at all [in 2012] with GDP growth at 2.1% and oil averaging a record high of $111.8 a barrel was a major achievement,” says Director and CEO of the International Air Transport Association (IATA) Tony Tyler in the industry association’s annual report.

Indeed, despite seemingly insurmountable challenges, the airline industry has shown remarkable robustness in fulfilling its role. During the recession, the airlines saw the first decline in passenger numbers since the decreases caused by September 11th. Even with lowered fuel costs, reduced per capita disposable income and economic activity reduced the demand for air travel (See Graphic II). In the aftermath of the recession however, the airlines have worked hard to dramatically consolidated, trimmed, and altered the industry.

Figure II: Per capita disposable income reduced demand for air travel

Graphic II: Per capita disposable income reduced demand for air travel

In the U.S. market, the major airlines have consolidated and transformed control of the industry. According to a review of the aviation industry by the Office of the Inspector General, of the ten major American airlines controlling 90% of market share in 2009, just five in 2012 (and now four) remain in the market with a share of 85% of domestic passengers. Through such mergers, the major carriers have been able to strengthen their market position and cut costs, reducing price wars and allowing them to get away with charging new service fees. In 2013, the major U.S. carriers racked up more than $6 billion as part of these new ancillary fees. These fees aside, merger-driven consolidation of the major airlines together with the continued growth of low-cost carriers like SouthWest and JetBlue continues to stimulate essential competition between airlines.

Key to their increased profitability, airlines across the board have succeeded in improving their efficiency. According to a PWC industry trend report, the airlines significantly advanced their capacity discipline, or load factor. Since 2008 there has been an 8% reduction in the number of flights, but just a 1% reduction in number of passengers. More tellingly, though the price of jet fuel now approaches that of its 2008 peak, the airlines have maintained a non-fuel operating cost close to previous levels despite rising costs in fuel. So though the total cost per available seat-mile (CASM) has grown, for example, most of the increase is derived from rising fuel costs (See Graphic III).

Figure III: Cost Per Available Seat Mile was maintained with exception of raised fuel costs

Graphic III: Cost Per Available Seat Mile was maintained with exception of raised fuel costs

In spite of these efficiencies, airline expenses remain high. The rising cost of maintenance, higher salaries (demanded by unions as part of merger negotiations), and environmental taxes contributed to a decline in the average industry operating income per seat-mile of 0.28¢ in 2012. But overall confidence in the airline industry is up. Air freight, an important industry indicator that underwent a significant decline in the last three years, is expected to see growth of 4% in 2014 according to an industry outlook report. Airlines will also see long-terms gains as a new, more fuel-efficient generation of planes is delivered. 

Boeing’s new 787 Dreamliner promises increased fuel efficiency and more passenger comfort

How it all affects the traveller remains to be seen. Though industrywide customer satisfaction is on the rise according to the latest American Customer Satisfaction Index (ACSI) report, passengers continue to complain about the actual flying experience. Reduced delays, worldwide alliances and loyalty programs, as well as more efficiency and stability in the marketplace stands to improve, at least minimally, the traveller’s experience. In changing the way we fly, however, it might be best to look to start looking not at the airlines but the technological manufacturers at Boeing & Airbus et al.

From Roach Coach to Gourmet: The Rise of the Food Truck Industry

Growing up, my mother, who worked at a Quincenera shop in the historic fashion district, always took me and my brother with her to work. I remember the streets of Pico and Maple lined with taco trucks, or loncheras, during lunch hours. People used to call them “roach coaches.”

Now, you often see food trucks lined up in front of corporate buildings during lunch hour to serve white collar workers. Now they’re referred to as “gourmet food trucks,” serving up trendy fusion cuisine for a fraction of the price.

Latin Burger

Latin Burger

Sushi Burrito

Sushi Burrito

Korean Hotdogs

Korean Hotdogs

I don't even know what this serves.. but it looked cool.

I don’t even know what this serves.. but it looked cool.

How did this crazy make-over happen?

The recession following the 2008 financial crisis created an increased demand for quick quality food on a budget. Trailblazers like Chef Roy Choi revolutionized the industry when he introduced the iconic Korean-Mexican tacos. Kogi was founded in 2008, right at the beginning of the recession and right after Choi was fired from his cushy job at Rocksugar. The business struggled at first, but by 2009, Kogi had 36,000 Twitter followers and generated 2 million dollars mostly off of $2 tacos. People were waiting in 2 hour lines to get a taste.

Aside from the food being delicious, the key secret to the rise of Kogi was social media. The only way people could track down Kogi was through Twitter, and with Choi’s zero marketing budget, social media became a powerful weapon to spread the word. Today, there are thousands of “gourmet” food trucks that run Los Angeles. These new emerging food trucks are serving the demand of the new privileged poor consumer.

However, some people believe the food truck craze is getting out of hand, turning into a mini-bubble in its own right. Hiller says the scene has become too saturated with inexperienced band-wagoners without culinary backgrounds. In addition, the increased regulations and higher prices are creating new barriers to entry. High demand for food trucks has driven the leasing prices way up since “everyone is doing it.”

Food truck culture is spreading across the US to cities like New York and Washington D.C. It will be interesting to see whether food trucks are just a fad or the real deal. Want to learn more? Here is a cool infographic that sums it all up.

Cutting government loans as a solution to the rising tuition and college debt?

The college debt bubble has gotten everyone a little mad and crazed up. So if the government, the largest lender of college loans were to exit college loans what would happen?

This might cause less people to attend college and make paying for college harder on the ones continuing to attend. This would lead to some compounding effects such as; less people enrolling into 4-year universities;  an increase in enrollment of technical/trade schooling,; lowered tuition prices … which doesn’t sound too bad considering the 1.2 trillion dollars of college loan debt and the $30,000 average debt of college graduates.

Making the decision to go to trade school seems easier now considering that economists describe nurses and teachers as having the most economically sound and guaranteed post-secondary educational investment.

Without government loans I would not be attending a 4-year university. If everyone in my situation were to drop out of school, there would be a severe decline in number of students and future enrollment. With less people attending 4-year universities, schools would not make enough profit to finance their institutional payments (paying teachers, programs, faculty ). This could be a big problem for schools if all of a sudden they were only making half of what they made last year. Even wealthy schools like USC could be hurt considering that if they wanted to keep me and everyone in my boat, they would have to loan each of us  $40,000 a year.

Even if USC had the amount of capital to fund every student’s tuition, it wouldn’t happen without USC programs, teachers and its financial sector taking a hard hit. So maybe USC might give higher grants or just as equally effective, lower their tuition price so to retain as much students as possible. If this were to happen we could  all go back to class with a smile while USC survives the event with a cut in their tuition-based income.

But, what would it mean for students that are entering college next year? Well, there will be less students making the decision to pursue private education over a cheaper tuition. Public schools would get overcrowded and the Department of Education would have to provide greater funds. Which sort of sounds OK. Considering that in 2013 alone the Department of Education made $41 billion dollars from college loans which is enough to pay for 3 million students to attend the public schools that have an average public university tuition price of $13,000. Regardless of that rather pointless hypothetical, there is still no doubt that this would cause private schools like USC to lower their tuition. Then UCLA would have to lower their tuition in order to remain equally as financially attractive as before.

… which might get me thinking about going to school again.

If such an event were to occur, an economist might describe this as a free(er)-market of institutions that are dealing with a shorter number of demand (lower number of enrolled students) and therefore dealing with an abundance of universities that are competing to be the cheaper university. Of course, rankings and brand name universities would allow certain schools to retain some leverage.

Did I just solve the answer to college debt? Nope, probably just my debt. But damn when you are facing $75,000 in debt by graduation you’ll be looking at any solution as the right solution.

… Which brings me to my next thought.

What if the government were to bail out all of our debt just like they did for Wall St.? I should end it here but NO.

The department of education would still have their $41 billion profit from 2013 and Sallie Mae would still have its $900 million. No student would be in debt and could begin to afford buying houses. The public would spend more allowing more circulation of money. This would raise interest rates, but that would make going to college more risky. Maybe colleges might lower tuition to even out the risk. Or…