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Starting an Airline

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Re: Starting an Airline

#211

Post by FireBeyond »

joonix wrote: post #124
twistedpair wrote: post #113

Earlier quoted context omitted.

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 sen…

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...

Re: Starting an Airline

#212

Post by olalonde »

jusben1369 wrote: post #18
leokun wrote: post #12

Earlier quoted context omitted.

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…

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. Wei…

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.

Re: Starting an Airline

#213

Post by khuey »

FireBeyond wrote: post #211
joonix wrote: post #124

Earlier quoted context omitted.

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 sen…

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…

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.

Re: Starting an Airline

#214

Post by nhaehnle »

delluminatus wrote: post #138
baddox wrote: post #130

Earlier quoted context omitted.

> 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 pu…

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.

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.

Re: Starting an Airline

#215

Post by nhaehnle »

rayiner wrote: post #159
delluminatus wrote: post #138

Earlier quoted context omitted.

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.

That's not how fractional reserve banking works. See: http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exam... . 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…

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.

A better intro than the link you posted is this one: http://neweconomicperspectives.org/2011/09/mmp-blog-15-clear...

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.

Re: Starting an Airline

#216

Post by nhaehnle »

fennecfoxen wrote: post #176
wodow wrote: post #75

Earlier quoted context omitted.

A bank doesn't necessarily need a billion dollars to lend a billion dollars...

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 Boein…

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.

Re: Starting an Airline

#217

Post by nhaehnle »

fleitz wrote: post #189
fennecfoxen wrote: post #176

Earlier quoted context omitted.

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 Boein…

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%.' http://en.wikipedia.org/wiki/Capital_requirement With $1 billion in deposits a…

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).

Re: Starting an Airline

#218

Post by ubernostrum »

kalleboo wrote: post #107
sharkweek wrote: post #78

Earlier quoted context omitted.

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 fligh…

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 f…

I wouldn't hold my breath for a backlash.

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.

Re: Starting an Airline

#219

Post by intenex »

FireBeyond wrote: post #205
Shenglong wrote: post #142

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 lay…

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, an…

Where did you get those numbers? http://www1.salary.com/Emergency-Medical-Technician-Salary.h...

Re: Starting an Airline

#220

Post by yuhong »

rayiner wrote: post #43
leokun wrote: post #12

Earlier quoted context omitted.

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…

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 differentiati…

I wonder what would happen if "profit margin fixing" was allowed.
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