With American Airlines filing for bankruptcy, seem like a good time to dust off a slide I use in my class re: airlines revenue management practices.
My students hear often that I think airlines are pricing masters.
Which begs a question: why is their profitability so low?
Warren Buffett’s answer:
“A great management in that business will not necessarily get a great result …
In the airlines, you have a huge amount of capacity … something close to a commodity product with high fixed costs and no marginal costs
Since that extra seat doesn’t cost you anything, the temptation to sell it at a terrible price is overwhelming.”
As a result, inflation-adjusted air fares have been essentially flat for decades.
Even extra baggage fees can’t save the day …