Profits are too high. America needs a giant dose of competition

[GennGreymane]

http://www.economist.com/news/briefi...chofagoodthing

(WARNING, LARGE ARTICLE)

AMERICA’S airlines used to be famous for two things: terrible service and worse finances. Today flyers still endure hidden fees, late flights, bruised knees, clapped-out fittings and sub-par food. The profit bit of the picture, though, has changed a lot. Last year America’s airlines made $24 billion—more than Alphabet, the parent company of Google. Even as the price of fuel, one of airlines’ main expenses, collapsed alongside the oil price, little of that benefit was passed on to consumers through lower prices, with revenues remaining fairly flat. After a bout of consolidation in the past decade the industry is dominated by four firms with tight financial discipline and many shareholders in common. And the return on capital is similar to that seen in Silicon Valley.

What is true of the airline industry is increasingly true of America’s economy as a whole. Profits have risen in most rich countries over the past ten years but the increase has been biggest for American firms. Coupled with an increasing concentration of ownership, this means the fruits of economic growth are being hoarded. This is probably part of the reason that two-thirds of Americans, including a majority of Republicans, have come to believe that the economy “unfairly favours powerful interests”, according to polling by Pew, a research outfit. It means that when Hillary Clinton and Bernie Sanders, the Democratic contenders for president, say that the economy is “rigged”, they have a point.

The last year has seen a slight dip in aggregate profits because of the high dollar and the effect of the oil price on energy firms. But profits are at near-record highs relative to GDP (see chart 1) and free cash flow—the money firms generate after capital investment has been subtracted—has grown yet more strikingly. Return on capital is at near-record levels, too (adjusted for goodwill). The past two decades have seen most firms make more money than they used to. And more firms have become very profitable.

Opportunities
An intense burst of consolidation will boost their profits more. Since 2008 American firms have engaged in one of the largest rounds of mergers in their country’s history, worth $10 trillion. Unlike earlier acquisitions aimed at building global empires, these mergers were largely aimed at consolidating in America, allowing the merged companies to increase their market shares and cut their costs. The companies in question usually make no pretence of planning to pass the savings they make this way on to their customers; take their estimates of the synergies involved at face value and profits in America will rise by a further 10% or so.

Profits are an essential part of capitalism. They give investors a return, encourage innovation and signal where resources should be invested. Their accumulation allows investment in bold new ventures. Countries where profits are too low—Japan, for instance—can slip into morbid torpor. Firms that ignore profits, such as China’s state-run enterprises, lurch around like aimless zombies, as likely to destroy value as to create it.

But high profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand. This has been a pressing problem in America. It is not that firms are underinvesting by historical standards. Relative to assets, sales and GDP, the level of investment is pretty normal. But domestic cash flows are so high that they still have pots of cash left over after investment: about $800 billion a year.

High profits can deepen inequality in various ways. The pool of income to be split among employees could be squeezed. Consumers might pay too much for goods. In a market the size of America’s prices should be lower than in other industrialised economies. By and large, they are not. Though American companies now make a fifth of their profits abroad, their naughty secret is that their return-on-equity is 40% higher at home.

(much more in article)

[Malachi256]

So first off - I thought airlines were struggling so badly they had to start charging for basic baggage. At least that was the rationale I remember hearing some years ago. I guess I heard wrong? Was that all just profit-generating-PR-smoke?

Second - why haven't basic market forces fixed this airline situation? As the thread title states, we need competition, but it seems like there are plenty of different airlines. Perhaps I'm mistaken? If there really was collusion or monopolies forming, I'd think I would've heard about it a bit. A quick google search does yield some year old results - maybe when these cases finish, the airline situation will be fixed a bit?

[petej0]

So first off - I thought airlines were struggling so badly they had to start charging for basic baggage. At least that was the rationale I remember hearing some years ago. I guess I heard wrong? Was that all just profit-generating-PR-smoke?

Second - why haven't basic market forces fixed this airline situation? As the thread title states, we need competition, but it seems like there are plenty of different airlines. Perhaps I'm mistaken? If there really was collusion or monopolies forming, I'd think I would've heard about it a bit. A quick google search does yield some year old results - maybe when these cases finish, the airline situation will be fixed a bit?

When it comes to airlines, the market forces are slow to react, partly because not all airlines have the same flight routes. There is one airline that claim that "Bags fly free" and have been that way for awhile now, but the other airlines have not felt the need to follow suit. The market has not spoken, so they have no reason to get rid of them.

[melodramocracy]

So first off - I thought airlines were struggling so badly they had to start charging for basic baggage. At least that was the rationale I remember hearing some years ago. I guess I heard wrong? Was that all just profit-generating-PR-smoke?

Second - why haven't basic market forces fixed this airline situation? As the thread title states, we need competition, but it seems like there are plenty of different airlines. Perhaps I'm mistaken? If there really was collusion or monopolies forming, I'd think I would've heard about it a bit. A quick google search does yield some year old results - maybe when these cases finish, the airline situation will be fixed a bit?

To be fair, the airline industry is just used as an example. I'd say that it's even more telling that the entire airline industry only made the equivalent of Google last year.

I'd say the most important paragraph of that article is here:

Most explanations of America’s high profits draw on national-accounts data which show that the fall in the share of output going to workers over the past decade is equivalent to about 60% of the rise in domestic pre-tax profits. Scholars typically have three explanations for this: technology, which has allowed firms to replace workers with machines and software; globalisation, which has made it easier to shift production to lower cost countries; and a decline in trade-union membership.

This often gets overlooked when we're generally pushed towards the idea that people being paid more for their work will be the end of all great things on this planet.

[Sunseeker]

After my last flight experience I have officially quit using planes. It was horribly expensive, uncomfortable and our flight was delayed which the airlines then used to fore us off our connecting flight, and then our new flight was delayed for 4 hours and then abruptly cancelled and I had to get my mother-in-law to drive to the airport (2 hours down and back) to pick us up and then drive my wife and I home (3 hours both ways). The airport refunded us our last tickets, but offered absolutely nothing else in means of compensation. If we had stayed in a local hotel and rented a car, we would have had to pay for it first, then submit it to the airline for compensation at their mercy. I had neither the time nor the money to deal with that and aside from having to spend 24 hours with my in-laws (it's own special place in hell), that only cost me 80 bucks (two tanks of gas).

So fuck airlines. There's nowhere in this country I can't drive and I get to enjoy the scenery too without having to play sardines.

[Belize]

This is why I fly Luftansa when I can.

U.S. airlines are shit

[hydrium]

This is why I haven't flown in 12 years. If I can't get to it by car or boat I don't need to go there.

[wheresmywoft]

The endless nickel and diming. The basic service included with just the ticket is laughable.

[Damajin]

The part about the airlines is just an example of the problem at large which as the article notes, no competition. You have this consolidation and collusion at the upper echelons of business to either buy out competitors or enter into 'industry standards' with them which is just another way of saying price fixing. This started long ago once these guys started to figure out and implement planned obsolence to guarantee their stuff would need to be replaced and that they'd have a steady stream of customers. Anyone who was trying to break away from this mold was bought out or destroyed, this happened in light bulbs, cigarettes, early appliances, cars, oil and gasoline and other goods and commodities.

What's being done now is skirting the monopoly laws through creative means but as noted in the article the investors in these businesses are mostly the same people. I'd almost say this falls under some sort of racketeering heading but I also hesitate to say that due to how convoluted and open the corporation laws are. What we do know is that the centralization of the wealth is beyond obvious at this point and with the already established precedent of "sell or be destroyed" anyone looking to jump into business and not play by the same rules as these clowns isn't faced with good prospects either way.

[Annoying]

I'm reminded of a few images I've seen:

http://i.huffpost.com/gen/585370/original.jpg
https://09daviese.files.wordpress.co...-ownership.jpg
http://i2.cdn.turner.com/money/infog...rlines-v3b.png
http://l.yimg.com/os/publish-images/...ankMergers.jpg

So many gigantic conglomerates that do their best to compete with each other as little as possible.

[Fang7986]

To be fair no one NEEDS to fly anywhere. If you don't like what a service industry provides don't use the service

[GennGreymane]

To be fair no one NEEDS to fly anywhere. If you don't like what a service industry provides don't use the service

While no one NEEDS to fly, it does make transferring cargo easier and improves commerce. Plenty of economies would collapse without tourism.

[Fang7986]

So first off - I thought airlines were struggling so badly they had to start charging for basic baggage. At least that was the rationale I remember hearing some years ago. I guess I heard wrong? Was that all just profit-generating-PR-smoke?

Second - why haven't basic market forces fixed this airline situation? As the thread title states, we need competition, but it seems like there are plenty of different airlines. Perhaps I'm mistaken? If there really was collusion or monopolies forming, I'd think I would've heard about it a bit. A quick google search does yield some year old results - maybe when these cases finish, the airline situation will be fixed a bit?

No they were struggling after 9/11 because no one was flying. If people stopped flying again they would be forced to change but instead people keep buying tickets and complain later

- - - Updated - - -

While no one NEEDS to fly, it does make transferring cargo easier and improves commerce. Plenty of economies would collapse without tourism.

Considering the article seemed to be focusing more on passenger flights not cargo ones I wasn't really talking about cargo movement.

[Detritivores]

As Genn's Secretary of Defense, I approve of this article. But seriously, reading for a while brb.

Edit: The sig works!

[GennGreymane]

No they were struggling after 9/11 because no one was flying. If people stopped flying again they would be forced to change but instead people keep buying tickets and complain later

- - - Updated - - -




Considering the article seemed to be focusing more on passenger flights not cargo ones I wasn't really talking about cargo movement.

Which is fine, but that is another factor I see. Many families due to flight have become more spread out as well, which has been good for many state economies. Thats why some people struggle through and complain later.

[Damajin]

I'm reminded of a few images I've seen:

http://i.huffpost.com/gen/585370/original.jpg
https://09daviese.files.wordpress.co...-ownership.jpg
http://i2.cdn.turner.com/money/infog...rlines-v3b.png
http://l.yimg.com/os/publish-images/...ankMergers.jpg

So many gigantic conglomerates that do their best to compete with each other as little as possible.

The problem is that I think we'd just end up with another "Teddy Roosevelt Monopoly Buster" situation where he supposedly shattered Standard Oil but Rockefeller still controlled all the individual fragments. That's not a solution by any sense of the word. These investors are the supreme epitome of hivemind when it comes to running these businesses, so all this overlap needs to be undone so that price fixing and other forms of collusion can be undone as well and/or prosecuted easier.

These guys take that lesson of cooperation you learn as a kid way too far.

[Captain N]

So many gigantic conglomerates that do their best to compete with each other as little as possible.

I think it may have been Endus in the past made a comment to situations like these. Here you have the CEOs of all the major airlines sitting on boards of all their competitors so they find the system that maximizes the profits across the board. So basically you have a a monopoly but it skates the legal term by being more than one company having complete dominance over the respected market.