Here's an investment banker joke I've been hearing oddly often recently: "How do you get a million dollars?" -> "Invest a billion dollars in the airline industry".
On a more serious note: there's a lot of talk on this page about the finance and logistics of starting a company like this - but I think the human factor is also worth mentioning. I fly a moderate amount, and whenever I have an hour or so to spare on a layover, I try to find interesting people to talk at the bar. While I've had varying levels of success, last layover at O'Hare, I spoke to a pilot who had been with a major airline for about a decade.
Having seen "Catch Me If You Can" and surmising that the situation must have changed, I asked him about his job. That was the most dismal response I've received from that question. We talked for about half an hour about how terribly pilots are treated, and how (maybe a bit of an exaggeration) a good number of beginner pilots for airlines are on food stamps because they're paid so poorly. I asked about benefits, and his response was, "just about every benefit you can think of is basically unusable." I asked him why he did it, and he told me that flying was like a drug.
Pilots are responsible for lives, and I'd feel a lot safer if my pilot was paid enough to survive. Yet, with dwindling margins and a thriftier consumer base, it's going to take a lot to disrupt this industry. In reality, I don't see anything major happening without some drastic innovation that cuts associated costs significantly in order to build up that margin.
Pilot salaries are all based on union contracts. Union contracts are all negotiated by union leaders. Union leaders are all senior pilots. Senior pilots have a strong incentive to negotiate contracts that pay senior pilots the most, even if it is at the expense of new pilots.
I know a guy who flies less than 20 hours a month but makes well over $100k/year. He's been a pilot for over 20 years and knows how to work the rules so he makes money even when he's not flying (being on standby and such).
Not just the unions. "Regulations" are at fault too. They're unnecessary and expensive. The number of airliners that fall out of the sky per year due to faulty design/construction/maintenance or due to under-trained/overworked/unfit pilots is something for "The Market" to decide, not the Gubbmint!
Low pilot salaries are due partly to the dismal state of the airline industry and mostly due to the fact that while flying a 747 may be an immensely impressive skill it's not one that's in very wide demand.
I have a friend who's a beginner pilot for a regional airline (American Eagle). He doesn't fly more than 80 hours a month and he only gets paid for the hours he's actually flying, but he has to be on call a lot (sometimes on call in the airport). And yeah, he makes like $20k a year, I think.
He was so upset with the airlines that he quit (also trying to save his marriage). But he loves flying so much that he went back to the same airline, and had to start over again at the bottom of the seniority ladder.
He says that flying is so much fun that he just thinks it's great that he gets paid to do it instead of having to pay to do it, ha. Still, though, he's enrolled in classes again so that he won't have to pay off his student loans because he can't afford the payments.
After he got some experience, he could come to China. They are paying major dollars for pilots right now with enough experience to fly a 737 or 320. There are serious shortages in the world that many of the pilots flying within China (and other countries in Asia) are not from Asia.
Without hijacking the subject / topic, this is one of my pet peeves... many EMTs and paramedics, even unionized, are absolutely responsible for lives, directly, as a job description. Yet you will find that the national average salary for an EMT is $19,000. That's $3,000 less than the person that makes your coffee at Starbucks...
Paramedics, who do even more, including being entrusted with cardiac drugs, narcotics, and skills up to and including cricothyrotomy, often fare barely better than said barista.
This reminds me of the 'Bullshit Jobs' article by David Graeber. While I don't know how much I agree with the article, it does touch on your pet peeve:
> Yet it is the peculiar genius of our society that its rulers have figured out a way, as in the case of the fish-fryers, to ensure that rage is directed precisely against those who actually do get to do meaningful work. For instance: in our society, there seems a general rule that, the more obviously one’s work benefits other people, the less one is likely to be paid for it.
... the co-pilot on the Colgan Air commuter plane that crashed near Buffalo on Feb. 12 earned only $16,000 a year. (The company later said she earned $23,900.)
I used to work in the aviation industry and had lots of similar conversations with pilots. After a while I began to realise it's essentially just like every other industry: those the flew for well run airlines tended to be happy and those that didn't weren't.
P.S.
Professional pilots are known to whinge quite a lot so you might want to take what he said with a little pinch of salt... try lurking on www.pprune.org for a few weeks and you'll see what I mean :)
P.P.S. Having said all of that, some shocking stuff really does occasionally go on (I've personally seen it happen) so there are genuine grievances out there.
Sure. There's a lot of whining going on. But aspiring pilots (at least in the EU) basically don't stand a chance. Most Ab-initio's (as they're supposedly called) have student loans in the range of 130-170k and - if they're lucky - en up flying for a low cost carrier.
They get paid per SBH (Scheduled block hour) which lands them - during the first few years, on average - a gross income of €4000. Since most of these pilots are contractors but technically have only one client they'll have to pay for everything themselves (social security, pension, medical insurances, liabilities, income races). Depending on the country your based in this may tax your income by up to 78%.
Not to much to live from, let alone pay for interest on a student loan. And don't even think about repaying that debt.
But like mentioned in earlier comments: flying is like a drug, it's a beautiful job.
This says a lot about Europe actually. 4000 Euro should, if taxed decently, be a nice salary (2600 Euro net at 35% taxes). However, in many countries that salary brings your income tax way up (usually between 40 and 50 %). Plus, you are obliged to pay for a pension you will never see (I challenge anybody believing that in 40 years from now European States will be able to pay decent pension).
Finally, most of the European States have funny regulations about building new house, so most of the cities are crowded and rents are way too expensive.
> Yet, with dwindling margins and a thriftier consumer base, it's going to take a lot to disrupt this industry.
Although one part of travel is about the physical experience of visiting different places, another major part has to do with connecting people. Here, the real disruption is the internet. I'm not saying flights will ever go away, because we'll always want to move around, but I am saying that we'll feel the need to travel less as connectivity improves.
There's a saying in the airline industry that goes something like this: "What's the fastest way to become a millionaire in the airline industry? Start with a billion dollars."
I don't work in the airlines, but I'm a private pilot with lots of friends and family who do work or have worked in the airlines (and in the aviation industry in general).
Expenses are high and often unpredictable, and profits are low. A lot of airlines operate on incredibly thin margins, where only one problem could push them into bankruptcy. Back in 2008, Frontier Airlines had to go into bankruptcy (and was ultimately acquired by Republic) due to a dispute with its credit card processor. http://en.wikipedia.org/wiki/Frontier_Airlines#Bankruptcy_an...
Competition is also fierce and is almost entirely price-based. While there have been a few attempts at competing on other metrics (there were several attempts to start business-class only airlines in the late 90s and early 2000s) have almost universally failed. In fact, the only one I can think of currently is OpenSkies, and it is backed by a major airline (British Airways).
It's also (as you would expect) a very complex regulatory and legal environment. Simply getting off the ground can take years of work.
I have idly thought about a small airline that would connect a handful of smaller towns across the Southeast that lack affordable or convenient air service to larger airports, where they could interconnect with the majors. But when I even begin to look at the numbers, despite what an exciting idea I think it could be, I know there is no way it would be successful.
A classic example I have is, KingFisher Airlines (http://en.wikipedia.org/wiki/Kingfisher_Airlines). As an outsider the promoter not only lost the airlines but had to part with large chunk of shares from parent UB group as well just to keep it afloat for awhile. Airlines indeed seem like a tough business to enter in.
>In fact, the only one I can think of currently is OpenSkies, and it is backed by a major airline (British Airways).
OpenSkies is three-class service now. And pretty much just boils down to the name of the BA route between NY and Paris-Orly without the need to connect via LHR. Pretty bizarre, if you ask me.
While there have been a few attempts at competing on other metrics (there were several attempts to start business-class only airlines in the late 90s and early 2000s)
There are still business-catered offerings, they just tend to be a division of a parent (legacy) carrier. US Airways and Delta's "shuttle" offerings between major business destinations on the east coast stand out as an example.
A couple of the large airlines do still have all-business-class flights, too (BA's oddball little transatlantic A318, to take an example; Singapore's "longest flight in the world", which is about to be discontinued, is another one, using specially configured A340s). It's just that there doesn't seem to be enough demand to sustain an entire airline dedicated to the idea.
> It's just that there doesn't seem to be enough demand to sustain an entire airline dedicated to the idea.
Yeah, this is kind of what I meant. The only people capable of doing this are the majors (and then only on a small handful of mostly-Transatlantic routes). Every attempt so far at building a whole airline around the idea of not competing on price has met with failure.
And, as a sidenote, I really want to take that BA JFK-LCY flight sometime, if for no other reason than it uses the old Concorde flight numbers.
Interesting thought, could a newcomer have operated the LCY-JFK service with the same level of success? Or does it need BA's brand behind it to even get off the ground.
P.S. Happy to see fellow aviation geeks here on HN
It's not just the BA brand though for business flights; it's the "enterprise deals" with the companies that are paying for the seat, the businessperson's preference for earning points they can redeem for a nice holiday, and the onward network for connections.
I'm not sure in the case of LCY<->JFK the connection network is really a factor, but I think the other two things sunk MaxJet, Eos and Silverjet. (It probably didn't help that they all launched around the same time as well!)
That flight really is all about O&D between two huge financial centers. But on the off chance someone actually wants to connect on this side of the pond, I guess they use the fact that JFK is an AA hub (which is in oneworld along with BA, as well as in the immunized TATL joint venture with them).
I did that a couple of times back in the day. The plane would take off with just enough fuel to get to Ireland, where you would do US immigration while it refuelled, then on to New York, and straight off the plane without any queuing. I think the airline was EOS or Silverjet or something.
BA still do that flight (under their cityjet brand). The real reason why they stop off in Dublin is because the runway at LCY is too short to take off with the weight of a full fuel tank.
I would assume these margins get even thinner and customer service even worse in the future as most people really do just go to a referral site, grab the cheapest flight and call it a day (I mean honestly, where I'm currently at in life, I don't need comfort on a flight, I just need to get from point a to point b as cheaply as possible and I assume this applies to 80% of people flying).
I was just on a Frontier flight a few months ago where nothing but water was free and they were being EXTREMELY strict about carry on size, which produced probably a dozen or so more $25 bag checking fees from people boarding. I have to expect these fees will only continue to grow in order to make up for lost profits on the original sale
I'm not looking forward to it. Flying has already gotten devilishly uncomfortable (my knees run into the seat in front of me) and while I would pay for a little bit more comfort, I can't figure out whether it's just impossible to find such airlines/seats, or if they just don't exist on the trips I make.
Pretty much every airline offers exit row seats for something like $25 more or an "Economy Plus" that's a step up from economy but far from first class.
The big question is if there'll be a backlash to the no-services nickel-and-dime-fees style airline business.
I suspect that the U.S. market will continue the race to the bottom, but elsewhere quality will continue to thrive.
Scandinavian Airlines' advertising is currently all about: "luggage: free. card fees: zero, online checkin, assigned seating: free, coffee, newspaper: free, breakfast on board: free, canceling fee: waived within 24 hrs" to capitalize on the passengers who have been burned by picking the cheapest option.
Also meanwhile in Asia, I don't think any of my flight searches have ever turned up Singapore Airlines as the cheapest, yet they're doing amazingly well.
I think people are beginning to realize that at the end of the day it costs a certain amount of money to get a plane from A to B and you can pay upfront on BA or have it weaseled out of you on Ryanair. Even Michael O'Leary (Ryanair CEO) is starting to tone it down. E.g. if you paid by card, Ryanair would charge you the card fee not per payment, but per ticket and per leg, so a group of 4, return flights booked together in one payment, would pay 8x the card processing fee. Oh, and there's no way not to pay by card, did I mention? Whereas on BA the card fee is 0, and you can pay cash at the desk if you really want to!
Among the western nations, at least, passengers claim to ant all sorts of amenities -- checked bags, in-flight food and entertainment, etc. -- but all of those claims go out the window when presented with the price tag, which is ultimately the driving force.
The logical result of that is unbundling of all of those bits, such that you can get a bare-bones "just fly me from A to B" fare and then anything on top of it is charged as a separate fee. And that is overwhelmingly the fare people choose, because it's the cheapest one.
There are some airlines bucking that trend, many in Asia or the middle east, and one or two in the western world. But mostly the way they do that is by distinguishing themselves to international business travelers, who are far less price-sensitive than vacationing families.
I go years between flights, so I haven't looked into this, but I've been wondering recently if it would make sense to ship (UPS, FedEx) your luggage ahead of time. Since the airlines are making big profits on luggage fees and penalties, I'm guessing shipping price wouldn't be that much more. What you'd gain is (I assume) more reliable delivery, and the opportunity to know that your luggage arrived before you get there, as opposed to wondering if it will get there, and operating without it worst case.
Generally speaking, For domestic flights, one bag, up to 50 lbs costs $25. International flights will get you 1 free checked bag.
I've thought of this as well. It's actually not very practical. Check out UPS shipping fees. Except in very edge cases, they are way more expensive than taking your bag with you.
We definitely need something like that in the Southeast. Our infrastructure is so awful. My dream would be high speed rail between all the major cities and SEC colleges, and Panama City.
It blows my mind how people start such big businesses. You must build an airport, hire stuff, buy planes, meet many legal requirements and so on, all costing tens of millions of dollars, and on top of that, it must be profitable. This gives some insight, but still it's terryfing. I feel so small.
The key observation is that the airport is built on credit (by the government, not the airline, using bonds), and the airplanes are usually either bought on credit or leased (in which case they are built by the airline on credit).
It's an illustration of why banks and bank debt are so important in our economy! This capital-intensive sort of business doesn't happen by an entrepreneur writing a $1 billion check from funds he has on hand.
It's precisely where the idea of a corporation comes in. How can a group of people risk so much? The only way is if it fails they don't go to prison or suffer for the rest of their lives because of that failure. Otherwise it would be very hard to convince people to take such enormous risks.
The main "problem" with capitalistic business is in expectations. People need to realize that every day comes with risk. And only through that risk do we see reward. But the little guy working the line, he just wants a paycheck with no risk. Unfortunately there would be very little reward if that were so.
> But the little guy working the line, he just wants a paycheck with no risk. Unfortunately there would be very little reward if that were so.
The little guys working the lines usually don't have safety nets and credentials—inherited money, money from previously founded business, mentors, a reputation, or even supportive relatives—so their fear of failure is somewhat justified.
True, but without the risk there would be no job for them to fear losing in the first place. People need to be responsible to themselves first, and a safety net is part of that. I say that knowing I just blew through $20k+ of my own safety net after going jobless for months. It's just business after all. But then again, this is why I have no qualms giving them my upsized salary demands. Because after all, it's just business. It's harsh, reality.
The days of retiring with a gold watch and pension were gone long before I ever hit the market decades ago unfortunately.
> True, but without the risk there would be no job for them to fear losing in the first place. People need to be responsible to themselves first, and a safety net is part of that.
It bugs me that it's often the poor that want free markets and cheer most for it, and shun co-op stores. The system is betraying them, they should just get away from it and focus on positive systems like co-op self-sustaining communities.
> And only through that risk do we see reward. But the little guy working the line, he just wants a paycheck with no risk.
This is a bit of pseudo-economics that's popular in the business community nowadays. Risk can be priced, in that it costs money to shift risk to someone else and you can charge a premium for taking on risk yourself. But statements like "only through that risk do we see reward" are just mumbo-jumbo.
Well if you can show one example where rewards come without risk I'll gladly cede my position. I just haven't experienced it myself in my life. I guess someone giving me a gift is risk free. But I wouldn't call that a reward.
Reward without risk is the usual definition of arbitrage. Some people make good money that way.
Of course, you can construe any activity to have some risk. After all, there's always the possibility that your currency collapses, or something. However, ignoring that sort of possibility, risk is not necessary to make money in a capitalist system.
Hrm, a valid point and I would add that the risk in arbitrage is so very low because they basically only face systemic risk. Risk of financial crisis, etc. I never really thought about that until now.
Sure. Say you're a bright young Harvard business school graduate. You might choose to either found a start-up, or go to a VC firm and help fund start-ups. The latter path is much lower risk (because you're not risking your own money, but rather that of the limited partners), but statistically you'll also probably come out ahead, financially, going that route.
Or to pose another example, starting a restaurant is probably riskier than starting a B2B software company, but also probably much less financially rewarding.
But both paths come with risk. Riskier doesn't always mean more reward, but no risk at all does mean no reward. That's all I really meant. Risk is of course relevant to each of us and we all define it differently, but everyone entertains some form of risk in their lives in order to just eat and keep a roof over our heads. It's worth it :D
Yes it does. A bank needs $1.1 billion to lend $1 billion, or they're out of compliance with Federal Reserve regulations.
The interesting part is that once they lend the $1 billion, and it's spent on aircraft (etc) and ends up in the bank accounts of Boeing and its contractors and its employees and the raw materials companies... then there's $1.1 billion in the original bank's accounts and $1 billion in all the Boeing accounts and there you go, they've turned $1.1 billion into $2.1 billion. And Boeing-etc's banks' can loan out up to about $909 million with it, and so on and so forth. Which may be what you're thinking of.
Now, the bank can borrow some or all of that $1.1 billion. And sometimes they can borrow that from the Fed. But the Fed isn't too big on that, and in non-2008esque-crisis situations tries to discourage it.
This is a huge commonly held misunderstanding of fractional reserve banking.
'The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord. Basel II requires that the total capital ratio must be no lower than 8%.'
With $1 billion in deposits a bank may lend upto $12 billion under Basel II assuming a risk weight of 1.0
With $1 billion in assets and $12 billion in liabilities the capital ratio is 8%.
Where does the bank get this extra $11 billion? They borrow it from the Federal Reserve, unless they are lending it to another of their accounts in which case they just credit the account.
There is a disturbing amount of mis-information in this thread. As a sibling commenter writes, deposits have nothing to do with capital.
The Basel regulations are, as the term "risk-weighted assets" which you quoted implies, about the riskiness of assets of the bank.
NB: Loans made by a bank are assets of the bank, and they are risky, that is why Basel regulations are relevant. The corresponding liabilities of the bank are the money that is created in the debtor's accounts when the loan is made. But those liabilities are not part of the Basel computations, because Basel is about risky things. Risks do not come from liabilities, because liabilities are known, certain quantities. Risk only comes from assets.
When a risky asset has to be written off (e.g. loan goes bad), then the asset side of the bank's balance decreases. This is offset by an equal decrease on the liability side of the bank's balance. To be precise, the bank's capital is reduced (yes, capital is a liability).
This makes sense because capital represents the "liability" that the bank has towards its owners. When the bank makes bad decisions, the owners are supposed to pay for it in properly implemented capitalism.
When capital goes below zero, the bank goes bankrupt. Therefore, the ostensible goal of the Basel regulations is to ensure that capital never goes below zero (or, at least, that a lot has to go wrong before that happens).
This is why a risk-weighted sum of the bank's asset (the things that can go bad) is compared to capital (the only liability that can be legitimately decreased).
There's one of two possibilities, either I'm wrong and capital requirements don't work like that, or every bank in the world is insolvent. Given Quantitative easing 1,2,3,etc which do you think is true?
You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember, all I'm offering is the truth – nothing more.
So from a bank's perspective, a loan is an asset and a deposit is a liability.
Say someone deposits $100 cash (federal reserve notes) into Bank A. Let's say the reserve ratio is 20%. It takes $80 and loans it to someone, who deposits in the same bank. It then takes $64 of that and loans it to someone who deposits in the same bank. It then takes $51 of that and loans it to someone who takes out cash and holds it.
The bank has the following assets: $20 + $16 + $13 in reserve, plus loans of $80 + $64 + $51 = $244.
It has the following liabilities: $100 + $80 + $64 = $244.
Now, if those loans don't get repaid, the bank might not remain solvent, but that has nothing to do with fractional reserve banking. Any entity that is solvent on the books can be rendered insolvent by loans going bad.
The accounting rules for banks are different. They book cashflow differently and I believe balance sheets are presented in a way that essentially neutralises the deposits and loans in order to focus on what the bank itself owns or owes.
Not true. There is only one Fed regulation about how much central bank money a bank must have, and that is the minimum reserve requirement, which is currently 10% for sufficiently large banks.
This is a required ratio between accounts of clients of the bank and money that the bank itself has in its account at the Fed (or as cash in its vaults). As such, it does not even have anything to do with loans in the first place.
The only way it has anything to do with loans is that as a loan of e.g. $1000 million is created, the bank creates a new account or marks up an existing account to the extent of $1000 million.
The minimum reserve requirement then increases by 10% of the newly created money, i.e. by $100 million. If the bank does not already have a sufficient amount of central bank money in its accounts, it must obtain this money within the next two weeks or so.
This is what happens in practice: Banks create loans based on creditworthiness of potential borrowers. An institutionally separate department of the bank then ensures sufficient central bank money to satisfy regulations.
tl;dr: Your number of $1.1 billion is completely wrong. The number $100 million would be somewhat less wrong, but is still not correct. In reality, banks do not need any money to make loans. They do need to satisfy minimum reserve requirements, but if necessary, they can obtain the required money after the loan is made.
> I think that's backwards. A bank is required to hold $100mm cash if it has $1b of demand deposits.
Yes. So it can loan out the other $900 million. Or, if it holds $1,111,111,111.11 it can loan out $1 billion.
> But it can hold all sorts of no-reserve-requirement deposits (like CDs) ... From that it can lend out whatever it wants
Yes, but in either case, it needs to have that $1 billion available to it in order to cut a $1 billion check. In neither case does a bank with only $100 million available get to loan out $1 billion, which is what it sounded like someone was suggesting.
Well... The bank could start with half a billion, and lend $450,000 of it. Then whichever bank that gets put into could lend 90% of that again, and so on. After a few times, there's a billion dollars lent from half a billion.
I fail to understand your reasoning: 0.5e9 * 0.9^n < 0.5e9 < 1e9. In other words: No one is ever receiving $1B even if banks' balance sheets sum to more than $1B lent collectively. On par, each bank is holding a small part of the 0.5e9, and then the final individual is holding the rest.
So? If you chain the loans, the bank might have the final balances: ($50M, -$450M) and ($45M, -$405M) and ($405M). The bank's net loan after settling internally is still $500M. Even if spread across banks, the sum of "real" money loaned out is still only $500M. If the loan at the end of the chain defaults, the loss is only $500M net.
U.S. banks have $9.3 trillion in deposits. Since FDIC insurance only goes up to $250,000, and rich people generally have most of their wealth in stocks, bonds, etc, that represents a very broad-based pool of wealth.
But they do use it as a reserve that is the basis for said loans. After all, they wouldn't have any money if it didn't come from the Fed, or another central bank, originally.
> It's an illustration of why banks and bank debt are so important in our economy! This capital-intensive sort of business doesn't happen by an entrepreneur writing a $1 billion check from funds he has on hand.
Aren't you just pushing the "problem" back one step? The entrepreneur writing a $1 billion check from funds he has on hand is now the banker, not the airline guy. Of course, I guess these days you can keep pushing that back until you hit the federal reserve (or other central bank).
Not exactly, because bankers aren't required to have monetary reserves equal to their loan amount. So a bank can "loan" an entrepreneur $1B of which the bank only physically possesses, say, $100 million. This is what is meant by banks "creating" money -- the bank just created $900 million.
The key to understanding the fractional reserve system is that banks take title to your money when you deposit it, and you get in return an asset (the account) which is essentially a promise to pay you that money on demand.
A bank can't just "create" $900 million by making a $1 billion loan when it only has $100 million on hand. Rather, depending on the reserve ratios, $1 billion in notional assets can exist backed by only $100 million in central bank money. That's because those notional assets are not in fact money, but IOU's that people are willing to treat as functionally equivalent to money.
This is simply incorrect. Banks can and do create money when they give out loans. Unfortunately, our everyday vocabulary doesn't contain the terminology to describe this properly, and this is how people end up confused.
The crux is that there are really (at least) two types of money: Central bank money, and money used by "the public". They live in two different "monetary circuits", and while those circuits are not entirely unrelated, they are completely isolated from each other; money cannot go from one circuit to the other.
Ignoring cash for simplicity (and it is little volume anyway), central bank money is only the electronic currency on accounts at the central bank, and it only moves between banks and other financial institutions.
Money used by the public is cash in circulation as well as money on checking accounts and so on.
Banks cannot create central bank money, but they can and do create money in the other "monetary circuit". It is true that the amount of money in the public monetary circuit must be less than the amount of central bank money times a factor (the inverse of the reserve ratio).
However, in practice, this limit works the other way around: When the amount of money in public use grows "too large", central bank money is automatically created by the central bank (this has nothing to do with quantitative easing; it is part of the normal market operations that the central bank always performs to achieve its interest rate target). Because of this, the reserve ratio does not limit the creation of money by banks.
To be more precise, when a bank gives a loan of $1000 million, then it creates $1000 million.
This is a straightforward conclusion of how monetary aggregates such as M1 are defined: Among other things, M1 includes money in checking and similar accounts. The creation of the loan involves, among other things, adding $1000 million to some checking account, without reducing the amount of money anywhere else.
Hence, $1000 million is created net.
This contradicts the story that most people are familiar with, but it is a more accurate description of reality than that other story.
You're a little off. The bank can in fact loan $1 billion and only keep $100 million around on hand afterward. And the $1 billion of the loan is, in fact, new money in the economy that didn't exist before.
But the bank still needs to have the $1.1 billion on hand first, so that it can have that $100 million after the billion-dollar check goes out.
You can also be a contract airline that fills up routes for other airlines. Lots of the "operated by xyz airline" on weird routes are run by airlines that nobody has ever heard of outside of that notice on their ticket.
I mostly fly with, and credit my miles to, US Airways, but I end up on more United flights than I'd care to in order to fill some gaps (riding a turboprop direct MCI-DEN is better than flying on A319s and connecting in Phoenix). For some time now the joke about United has been that the only mainline flights left are the international routes and the hub-to-hub connections.
And then the other day I saw someone point out that there are now hub-to-hubs on United Express regional jets.
Good point. Which is evidenced by the fact that many airports aren't really 'in' the cities they are named for. Example: Cincinnati's CVG airport is actually in rural Kentucky. Cheaper land.
> it's hard to say that getting terminal real estate is any easier than building an airport would be :-)
A budget of "tens of millions" would be eaten by a small airport alone (estimates for extending and overhauling Plymouth's airport to link to international traffic and handle up to 115-seaters are 30m GBP)
I always thought I was very ambitious, granted "my ambitions far exceeded my talents."
When I stood there under the Eiffel Tower, I felt like I never had a grand thought in my life. To think that massive undertaking started in someone's head is just humbling.
You don't need to buy planes - leasing is a pretty common option - there are even lease options ("wet leases") that cover the plane, crew, maintenance and insurance:
What he/she really means is that it's not profitable. Wet leases are used to fill in gaps for airlines, you don't build an entire airline out of wet leases. If you did you're not doing much other than being a middle man doing bookings for other airlines, and you probably won't be able to compete on price.
Major commercial air travel is a commodity business. Where opportunity lies is perhaps in offering air travel solutions that bypass the hassle of airports. Shuttles between SF, LA or Houston and Dallas for example. These are heavily trafficked routes with mostly business travelers who would love to avoid long security lines and drive right up to a plane at a small airport.
Air travel in the US is a massively subsidized business (the government gives huge amounts of money to Boeing to make next-gen warcraft, then Boeing translates those R&D concepts into airplanes.
The airlines were, for a long time, subsidized by air post. Fuel prices are still much lower than they could be.
These things are barely directly profitable, but they contribute immensely to the global economy. That's the interesting tradeoff in post-capitalism.
Defense contracts are not subsidies. They are won by competition with the likes of Lockheed. Most of the money won is spent providing the product or service. The profit margins on defense contracts are not nearly large enough to "subsidize" an airline business. Yes, some R&D crosses over but it's no easy trick. Lockheed does not play in the commercial space at all.
I've read enough books about Boeing to say that this is established practice (IE, the people who ran boeing during the 747 period specifically said this internally).
Some R&D examples I've seen is the movement of advanced electronics and structural materials from military craft to commercial craft. Boeing and AirBus both benefitted tremendously by their military contracts.
I think the point is that at a certain level there are only 3 or so defense contractors that have the infrastructure to bid on and win those contracts. Given that they are not "subsidies", but when there are only 2 corporations that are expected to receive the money, then you must call a spade a spade.
If you look at things like the Boeing/Northrop Grumman Tanker contract, then it is hard to fathom that any of the $35B for 180 planes (that's 190M for each plane) wouldn't lead to significant development that could be shared with Boeing's commercial sector.
That's not a subsidy in the true sense of the word, though. It's a company using a massively profitable but specialized industry (blowing stuff up as efficiently/quickly/quietly/spectacularly as possible) to fund a much smaller-margin but comparatively very broad industry (commercial aeronautics).
Boeing Defense doesn't make a whole lot of surplus cash either.[1] They've eaten some large expenses in the last 2 years (KC-46 tanker cost overrun, Advanced Super Hornet development program) and probably others. I don't believe there is significant cash flow over to Boeing Commercial Aircraft. There is exceptions like the KC-46 and P-8, but most programs are Boeing Defense only with almost no crossover.
The Boeing 737NG line is probably their most profitable product overall. That is from Boeing Commercial Aircraft.
"Boeing Defense doesn't make a whole lot of surplus cash either"
It does give you economies of scale in the sense that any larger company gains purchasing power and for that matter visibility (and political power) by employing more people.
The US ExIm bank also provides billions in either direct loans or loan guarantees to foreign companies; this keeps the export market artificially high and effectively subsidises non-US operators and lessors too.
Heh, but do you enslave entire worlds in StarCraft 2? I've found that enterprise is like real time strategy games a little bit, there are a lot of things all at the same time that have to be working well for you to be successful, but if you can put your head in the frame of mind that its just a game (or game like) then you can set aside a big chunk of the tension of doing it for real. The Flying Wallendas (high wire act) would have people walk along a tight rope that was 6" above the ground, and then point out that if you could do that you could walk between buildings, it was just not thinking about the 'bad' things that you weren't planning on having happen anyway.
So at some level when you're spending millions of dollars instead of tens of dollars you're still not planning on losing it, but recognize that if you do it will be a problem. And you are working through a checklist and getting stuff done and correcting for unexpected events. Some folks find that really invigorating, others find it completely paralyzing.
Anecdotally, I acquire such a frame of mind after a session of Civilization IV (just tried recently, never played strategy video games before). Everything looks like time or resource investment with a goal, and I feel a bit detached emotionally when making choices. I guess I should be worried that this feels unusual :)
High barriers to entry are actually considered a positive for a business. If it's hard to enter, you won't have new competitors casually trying to encroach just because margins look attractive.
Of course the airlines have issues with barriers to exit too, which come with their own problems.
The interesting thing to me is how a vendor is trying to create demand by encouraging the creation of customers. And it's not a new world tech company that's doing this.
That $3 million doesn't get you much of an airline without some guarantee of profits on the route you're looking to operate though - leasing a 15 year old 737-800 for a year would use up most of that money before you'd even considered getting it off the ground.
Lately, they leased an Airbus A330 for $30k/day (that is $11m). They are also leasing multiple other planes. I guess it's manageable since they are making money from tickets.
I forgot to mention that they enjoy no competition in my town (basically they revived the town small airport) but not much on the rest of the country (being sabotaged by the national airline)
I'm going to infer (mostly from the country code in your profile contact) the airline in question is Syphax.
If the headline figures I've seen are correct, their IPO sold nearly half the company for approx ~$15 million (or about three month's revenue according to their Q2 figures) in working capital.
They have 6 aircraft on order with Airbus which will cost them something in the region of $300 million over the next few years (which they'll probably fund with a sale/leaseback arrangement with an aircraft leasing company because another IPO wouldn't even scratch the surface...)
Those figures give you an indication of why it's easy to get the economics of a startup airline wrong. Imagine Silicon Valley working on those numbers!
I've read a report by an insider who claims that the unions negotiate a payout of 97-99% of the projected total profit (or revenue sans some given costs) the airlines make, when it's contract renewal time.
This kind of makes it difficult for the airlines to make anything, especially on the down years that don't match projections, when they end up paying out over 100% (and end up having to borrow money, or get bail outs).
If it makes you feel better, you can say the same thing about No. 2 pencils. Imagine all of the de-forresting infrastructure, shipping, carbon processing, glue, rubber for the eraser, etc. All of those different experts and workers you have to hire. The money you need for the bulldozers, ships, etc.
Those are the exceptions to the rule. How many planes and routes do you need to even merit consideration at a major airport?
To organically grow, you'd need to find desirable and under served routes between smallish airports, build a loyal following, then maybe you take a risk, borrow money and attempt to move mainstream. Not impossible but it seems like you'd need just tons of money.
Is there much room for value add and innovation? The most obvious area I can think of off the top of my head would be an airline that did all their own security and skipped tsa but I don't know if that's allowed and I think the work would be akin to building your own airports.
It's very strange given how necessary air travel is. It still surprises me how need and margins are inversely related (luxury goods have high margins, commodities low), but it makes sense. It's the price. The price of travel is so high for most consumers that they're going to optimize on price at the sacrifice of everything else.
The cost of flying and operating an airline is so expensive that airlines also optimize on costs and prices.
Virgin stands out as trying to change, that, but otherwise for everything economy class it's a race to the bottom.
Looking at prices you'd think we value things we need lower than things we want.
Food is also necessary, but the margins on staple foods are razor thin. It's Econ 101: profits in competitive industries tend towards zero. The only way to make consistent economic profits is to focus on industries where there is (relatively) little competition. One way to do that is ride the wave of a new industry before the competitors have time to pile in. Another is to enter industries where product differentiation plays a major role. E.g. wheat is wheat, but an iPhone and an Android phone aren't totally fungible.
What's at the bottom? Airlines, electrical utilities, paper, metals, construction materials, and trucking. These are all products that are highly standardized and fungible. You're never going to sell trucking services for 10x cost by making it a "lifestyle brand" the way Ralph Lauren sells jeans for huge margins.
> wheat is wheat, but an iPhone and an Android phone aren't totally fungible.
You can also use branding-slash-marketing to make your fungible product seem less fungible. Witness, for instance, how cattle ranchers used marketing campaigns to turn "Angus beef" into a premium, name-brand product (http://bbq.about.com/od/beef/a/Angus-Beef.htm) that customers don't believe is directly substitutable with unbranded beef.
Except when it is not. Soft red, soft white, hard red, etc. Grading, protein content, etc. All can change who is willing to buy the product, and more importantly, how much they are willing to pay.
Actually it's commoditization. There is very little differentiation in airline flying - particularly domestic in the US. So they get stuck competing on price. Imagine you're flying from NY or BOS to SFO. You have two choices. Pay around $500 per ticket with some price shopping. Have a horrible experience of cattle herding, no food choices, small seats. Or spend $2500 or something insane for slightly larger seats. Weird how there isn't an option for $500, $800, $1500 just like there's a Corolla, Camry, Avalon or Lexus. Now, the airlines will tell you that's because people just care about price and only price and that's why soon you'll need to drop quarters in to use the bathroom. But that's just opportunity to me. There are about 800 places you can improve the flying experience from the minute you hit the curb to bundled in Uber to and from to wide seats (vs just extra legroom) to food to entertainment to dedicated standing areas to "kids focused flights" (parents embrace business travelers avoid) to baggage rules........
Weird how there isn't an option for $500, $800, $1500
There is, sort of. It's easy to look at the interior of, say, a 737 and conclude there are only two or three "classes" (economy and first, and possibly some sort of premium-rate economy with extra legroom), but fare-wise there's enormous variation.
On -- to take an example legacy carrier -- United, the "economy" cabin is actually made up of fourteen different fare classes. Deciding how many seats to offer in each fare class on a given instance of a given flight on a given day is a stupendously complex task which largely gets hidden from the customer (for completeness' sake, "first class" and "business class", on planes which have them, have three additional fare classes each).
A big part of it is that there's more to it than just the seat, which is obvious since all those different "economy" fare classes end up in the same or very similar physical things-to-sit-on. The number of factors, though, is frighteningly large.
For example, your origin and ultimate destination factor into the fare, as do whether it's one-way or round-trip, and how far in advance you booked, and whether you wanted a refundable ticket, and whether it was booked by a corporate travel department on your behalf, and whether it was a seat offered to third-party travel-booking and search sites, and what day of week and time of day the flight is operating, and whether it's a seasonal offer to a popular vacation destination, and... that's the tip of the iceberg.
This is the Virgin America model in some ways, with affordably comfortable seats and a relatively livestock-free experience. But while customers like it[1], they're only just now turning profits after 6 years of building a fleet and routes[2]. Doing something different in the airline industry takes a lot of upfront time and money - and that's just for parts of the flying experience airlines actually have control over. The closest they get to changing the airport experience is better lounges and staff.
Do they not do economy plus (or equivalent)? I mostly fly internationally (not a lot of domestic flying in England) and there's usually the option of spending an extra ~£100 on a LHR-EWR return for extra legroom seats. I couldn't justify the jump to Business/First, but £100 over 15hrs of flying is a no-brainer.
Yes, but for many flights, especially international ones, the charge for those seats is not worth it.
I was looking into flights to Japan, and the Premium Economy tickets are literally double the regular economy tickets.
Many domestic flights have Premium Economy for less than double the price, but it's still expensive enough and the benefits not great enough (generally only a couple of inches of legroom--no change in seat width, no better service, etc) to generally not be worth it unless you are flying cross country.
The legacy carriers in the United States (American, Delta, United, US Airways) all have some sort of improved-economy seat with more legroom and/or more recline, and charge a varying premium to book those seats.
Problem with this is that airplane configurations are not easily changed; and accomodating 3 different sizes of seats with the risk of having to sell bigger seats for lower prices.... is not worth taking for most airlines (especially low-cost carriers)
A lot of people think that, there are a ton of FAA regs related to seats. Everything has to be tested in crashes. That also why it takes airlines so long to change seats to the new entertainment ones with power and everything. Your seat is your number one safety in the event of a crash. You are actually supposed to use the seat in front of you to brace yourself. It has a certain give to it so you don't run in to a brick wall when you land hard. If seats were easily configurable, every possible combination would need to be tested. Also whenever you do any work on a plane, you must have all of the supporting documentation, just think how long that would take to turn around. Document each bolt that was removed, when it was replaced, where it was..etc.. a lot of hassle.
If you are able to design one that passes all FAA/EASA/CAA/<aeronautical regulatory body here> certifications, I think ALL airplane builders will hail you as their saviour. Not to mention the airlines ;-)
The seats sit on rails on the floor, so they can be swapped out or repositioned quite easily. Usually the Supplementary Type Certificate for each aircraft plans for this.
While being true, not all Seat configurations are automatically approved for operation. The swapping itself can - as mentioned - be performed overnight.
It's actually pretty easy for (e.g.) United to add or remove rows of their Economy Plus seating. They can make that change overnight.
When United and Continental merged and began adding E+ to the Continental fleet, most aircraft were completed pretty quickly since that change can be made during overnight maintenance at the hubs.
FWIW, I would pay a lot of money for an airline that would knock me out with some drugs and wake me up when I'm at destination (Toronto - Hong-Kong is a long and boring trip and I can't seem to do anything that truly distracts me in an airplane). Subjectively, this wouldn't be too far off from teleportation.
I think it's hard for airlines to innovate much as many factors that determine the quality of service are outside their control. For example they don't own the airports (like Apple owns their own stores) and that affects a lot of the overall experience.
Further to that, their profits are always being affected by fuel prices. If you read an airline's annual financial report it will talk about buying fuel futures to minimise the risk but they are still vulerable: http://www.transtats.bts.gov/fuel.asp?pn=0&display=chart1
Not strange at all if you know a little economics--actually it's encouraging. In an efficient market with perfect competition, economic profit (i.e. profit after opportunity cost) will be 0.
The reality is though that virtually no airline routes are "perfectly competitive" (monopolies and duopolies are far more common; many routes are "natural monopolies") and airlines set (and constantly vary and test) their prices at levels they think will maximise yield, not at parity with some "market level" that everyone else charges for comparable routes. The difficulties in achieving profitability are all to do with high fixed costs and limited flexibility, and profits average close to zero largely because bailouts keep the airlines that are losing money in the sky as long as those which are highly profitable.
As an example consider the trouble for businesses if they could not mail legal documents or critical parts overnight. Consider Disney World vacations if everyone had to drive across the country to get there. Consider all the cities in the country that would wilt because no one wants to drive all the way there. Consider people not wanting to drive 18 hours to attend the Super Bowl.
A lot of money moves around the country on those planes one way or another.
On point 2), humans are still very much "social animals", and time and time again I see that business works a lot better face to face, and trust is much more easily gained.
That has been repeatedly established, and there are very strong reasons why people with very limited time still travel a lot of hours to conduct their business.
Not everyone is the same, but it is the norm rather than the exception.
From the paper:
"From a psychological perspective there are a number of positive features about faceto-face meetings that cannot always be achieved as well via other forms of
communication.
Face-to-face meetings allow members to engage in and observe verbal and nonverbal behavioral styles not captured in most computer mediated communication
devises. There are nuances associated with hand gestures, voice quality and
volume, facial expressions, and so forth that are simply not captured in email
discussion, chat rooms, and the like. Even videoconferencing does not capture all of
the dynamics of group members (e.g. the expression of others while one member is
talking, etc.).
A further advantage of face-to-face meetings is that they occur in “real time” as
opposed to non-synchronized time. Computer mediated communications often are
delayed because of a variety of reasons, not always received, and sometimes
disrupted because of technical problems.
Another feature is simply the fact that face-to-face business meetings provide human
contact among members. Human contact is a primitive need among human beings.
We are social creatures and isolation is harmful. A recent article in the New Yorker
magazine8
discussed the impact of social isolation and concluded that “simply to
exist as a normal human being requires interaction with other people” (p. 36). There
is much psychological research affirming this proposition—that individuals need
personal contact with others to satisfy deep primitive psychological needs. Face-toface business meetings help meet these needs. Emailing and even teleconferences
are not as likely to meet these needs, notwithstanding the enormous popularity of
Facebook which basically provides electronic connections between social “friends”.
However, the popularity of this website suggests that people might be even hungrier
for social friends than can be satisfied in their present day-to-day work and personal
lives.
Similarly, business meetings allow participants opportunities to develop important
exchange relationships among themselves. These exchanges can be in the form of
business negotiations, personal favors, promises, understandings, etc. that cannot
often be achieved via other forms of communication because of their personal and
informal nature. One psychological theory that emphasizes this notion is “social
exchange theory” where human relations are viewed as an exchange of rewards
among individuals or achieving equity between “what you put in” compared to “what
you get out” of relationships."
There are technologies today , for example teleconference rooms, which probably capture most verbal and non-verbal feedbackin meetings, to the points participants claim it's like being there.
It would be interesting to do an experiment:isolate someone for a period of time, but let him have full contact with family and friends via the best electronic means we have , and measure the impact of his mood and well-being.
Even the full-presence suites don't quite work once you start going over any distance. The lag is just enough that the bit of your brain that processes NVCs gets a little out of sync with your thoughts.
According to cisco design guidelines[1] , 150 msec is acceptable network latency(not including video encoding/decoding). Also [2] talks about 300 msec total latency about the limits for remote surgeries.
Even if we take 150 as our guiding figure, if we assume direct fiber optic connection between sites, the maximum distance would be 45000 kilometers, which can basically connect any 2 points on earth.
So theoretically at least, it's possible. Achieving good latencies in real life is much harder though :)
It's funny, because, while I'm not extremely isolated, I have lived through periods of my life when all my family was abroad (I stayed in Uruguay, most emigrated, others studied abroad), and I have few local friends.
No amount of telephone calls, chats, Facebook or Skyping can compare to in-person interaction. I have a photo of a recent Christmas, with 3 screens with Skype calls to family in Canada and Europe on each screen, and while it helps to "be" there more than just a phone call, it's still nowhere near the same.
It is of course anecdotal, but that was my experience.
I didn't have a full-wall videoscreen with HD, maybe for a limited environment like a meeting it can be a very reasonable simulation... but at least in Latin countries like mine, "real" negotiations and bonding/trust building occur over a shared meal or other shared experiences, which cannot be currently simulated.
Going back to the original topic: business air travel isn't dying soon.
Maybe some inmersive 3-d environment will finally kill it (and we'll see Second Life as an innovation before its time, much like the Apple Newton?)
But skype does miss eye-contact and picture of half body (to get all hand movements which are important) , and the illusion of being in the same room created by telepresence , and probably had worse latency , and probably other factors i'm not aware of.
And we know from the "uncanny valley" that humans are very very sensitive to little things in human/human communication.
So it might just be that telepresence offers a altogether different quality of experience.
And regarding the topic - currently , maybe business air travel isn't dying(thought in 2009 there was a lot of talk about disruption from telepresence). But assuming we'll find the formula for remote face to face communications, and assuming there's enough bandwidth, the pace of change could be rapid(unless people will keep sticking with tradition, which might be the thing now that slows the process).
Anyway, i would be really interested to see major deployment of telepresence quality systems deployed in homes, and how that would affect culture.
Aiming towards the higher end makes you vulnerable when recessions hit. You also have to compete with carriers that are run by government related entities, who operate for the prestige rather than the profits.
lots people love the air transportation industry. They wouldn't think about working anywherer else... And on the economic sectors that this happen, salaries and ROI tend to be lower than the ones where it does not happen.
Now Exxon just needs to buy Boeing and then start and airline bringing the full powers of vertical integration to bear. That's probably the only way to make a dime consistently.
True. The real winner is Emirates. They refuel when at the hub in the UAE where they get fuel for next to nothing. That is awesome given fuel is the driving cost of most airlines. When Boeing invents a flying fuel barge, expect them to dominate US routes.
It's a government subsidy just like any other. It's a huge one, and many carriers are complaining about it. They argue Emirates should be charged extra fees for their US service because of unfair competition. I think that argument has merit given US carriers have to pay market price plus taxes on their jet fuel.
Emirates gets huge subsidies because its a goal of Dubai to become a world air hub. It certainly makes sense for them given their geographical position but I don't see how US carriers are supposed to compete with that.
The US Government pays huge subsidies to US airlines that aren't extended to foreign airlines. It also has rules in place that do not allow foreign airlines to fly domestic routes in the US.
Perhaps the UAE(/European/applicable foreign) governments should start charging US carriers an extra fee to combat the subsidies when they land abroad.
I'm sure no-one would complain about that or attempt to use the US government's muscle to fight it...
Cabotage (the right for a foreign flagged carrier to transport passengers/cargo between two points inside a single nation) is quite rare outside of the EU. http://en.wikipedia.org/wiki/Freedoms_of_the_air#Ninth_freed... Those US rules are in no way unusual.
As a current example, the EU decided that airlines operating in Europe would have to pay a carbon tax, to be spent on fighting climate change. The US government made it illegal for american airlines to pay that tax. It's currently suspended by the EU.
Clearly the McKinsey infographic guys never took geometry. I'm surprised at the elementary mistakes like scaling bubble charts by radius rather than by area. Makes the Asia airmarket growth look like 37000% rather than the actual 600%.
Nope. The 757 is really inefficient (RB211 engines are serious overkill). It's unfortunate, because as an aviation enthusiast, I love nothing more than rocketing off the runway on a 757.
This is very cool. I'm sure I'm not the only one who has fantasized about starting an airline and doing it 'right' after an annoying flight. Probably not going to happen but at least I can read about it now.
Although going big is interesting, I am surprised no one has brought up http://www.surfair.com when thinking about starting an airlines. They seem to be doing well and although i do not have a membership (live on the east cost) I think it would be interesting to do the same thing from DC to NYC to Boston as I would be down for that!
Surprised that I had to read so far down the comments to find someone who saw how this best applied to HN. Then surprised again that a few of the respondents still missed it when it was explained.
It's someone with a product for sale to a category of businesses, helping people start more of those businesses. Similar approach could be taken by more entrepreneurs, especially those looking for good blog content.
Yes, of course, the theory is clear. I still can't help suspecting that this whole "Startup" organization is a boondoggle so somebody's brother-in-law can be a VP in charge of something harmless. At Boeing's scale, purchases (or leases) of new (or at least new enough to affect demand for new) planes by investors who can't hire their own experienced airline executives will necessarily be a drop in the bucket.
Experienced airline executives often use outside consultants for specific areas of expertise, and national governments have a fondness for starting airlines and purchasing multiple new aircraft. It's probably the only marketing division of Boeing that turns a profit :)
There's been a big boom in small, regional jet airlines over the last few decades (Low Cost Carriers, or LCCs, sometimes known as Low Cost Regional Carriers). A lot of companies saw what Southwest and JetBlue were doing and figured they could do the same on a smaller scale: control costs by flying limited routes and serving smaller markets, where they could outcompete the bigger carriers on price [1]. Then, if things went well, maybe expand from there.
It's an incredibly crowded field now, and even many of the LCCs themselves collapsed.
[1] It seems a little counterintuitive, but in the airline business, there is almost a reverse economies-of-scale effect. This is because routes can't be flown on demand, but must be scheduled, and so you're maintaining a fixed supply while dealing with variable demand. You don't have a lot of fantastic levers to pull to deal with fluctuations in real time, because you can't redirect inventory (planes, crews, etc.) on demand, and canceling flights causes chain reactions across hubs and spokes.
This is why a lot of the big carriers have been cutting flights and routes like crazy in recent years. Faced with undersupplying or oversupplying the market -- and faced with all their other enormous costs -- they'd rather bet on undersupply. Passengers these days aren't incredibly loyal to any given airline, and they're very price conscious. They won't give you credit for having a bigger network; all they care about is getting from A to B right now, and finding the best price in so doing. So having a bigger network can often be a liability.
There was a fascinating article on HN a few months ago (don't have the link handy at the moment) about how most major airlines make less than 25 cents profit on each ticket sold. It's pretty mind blowing when you consider the entire industry operates on such margins.
Another good one is An American saga: Juan Trippe and his Pan Am empire. A decent chunk of the book is essentially the other side of the story that is portrayed in the Aviator (i.e. Trippe trying to get monopoly status for Pan Am's international routes).
My co-founder and I have a combined 20+ years of experience in the airline software industry. When we set out to start our own business, it was clear that we were not going to sell to airlines. Too many legacy systems, too much historically grown cruft, needless complexity, too many individual requirements but no money to pay for it. Plus they're distributed all over the world so selling to them is very costly. It's a shame because we would have had a big head start in terms of domain knowledge.
The key issue is that you don't just need to be certified to fly a 737, you need to be certified to fly a 737 for a specific airline. This makes strikes extremely powerful because you can't easily hire replacements.
One of my favorite childhood games was Aerobiz [1]. Probably not an accurate simulation of starting an airline, but that is what this submission made me think of.
On a more serious note: there's a lot of talk on this page about the finance and logistics of starting a company like this - but I think the human factor is also worth mentioning. I fly a moderate amount, and whenever I have an hour or so to spare on a layover, I try to find interesting people to talk at the bar. While I've had varying levels of success, last layover at O'Hare, I spoke to a pilot who had been with a major airline for about a decade.
Having seen "Catch Me If You Can" and surmising that the situation must have changed, I asked him about his job. That was the most dismal response I've received from that question. We talked for about half an hour about how terribly pilots are treated, and how (maybe a bit of an exaggeration) a good number of beginner pilots for airlines are on food stamps because they're paid so poorly. I asked about benefits, and his response was, "just about every benefit you can think of is basically unusable." I asked him why he did it, and he told me that flying was like a drug.
Pilots are responsible for lives, and I'd feel a lot safer if my pilot was paid enough to survive. Yet, with dwindling margins and a thriftier consumer base, it's going to take a lot to disrupt this industry. In reality, I don't see anything major happening without some drastic innovation that cuts associated costs significantly in order to build up that margin.