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<p>[quote user="ecoli"]</p> <p> </p> <blockquote> <div><img src="/TRCCS/Themes/trc/images/icon-quote.gif" /> <strong>Sam1:</strong></div> <div> <p> </p> <p> </p> <blockquote> <div><img src="/TRCCS/Themes/trc/images/icon-quote.gif" /> <strong>ecoli:</strong></div> <div> <p> </p> <p> </p> <blockquote> <div><img src="/TRCCS/Themes/trc/images/icon-quote.gif" /> <strong>Sam1:</strong></div> <div> <p> </p> <p> </p> <blockquote> <div>In 2010 the Fortune 500 airlines, e.g. Delta, American, United, etc. had median returns of 1.1% on sales, .6% on assets, and 7.4% on equity.  Through September 2011 the nations major carriers had a median return on sales of 2.02%.  If the fares were increased by 20%, as claimed in another post, the return on sales would jump to a blistering 2.42%.  For comparative purposes, in 2010, the Fortune 500 companies had a median return on sales of slightly more than 5%.</div> </blockquote> <div style="clear:both;"></div> <p> </p> </div> </blockquote> <p> </p> <p>Maybe I'm confused by your terminology, or maybe I'm missing some context, but you seem to be saying that if an airline sells a $100 ticket it earns $2.02 cents on average, and that if it were able to sell the same ticket for $120 it would earn only $2.42. Surely that's not what you meant. </p> <p>(Seems to me the true figure depends on the elasticity of demand for tickets, which is impossible to know for certain unless you actually experiment with raising the price 20%.)</p> </div> </blockquote> <p> </p> <p>1.1% of sales revenue is one.one penny on each sales dollar.  This was the return for the Fortune 500 airlines for the year stated.  If all the commercial airlines with revenues of more than $20 million are taken into consideration, they earned an average of 2.02 cents or 2.02% on every sales dollar.  Multiplying 2.02 times 1.20 (an increase of 20 per cent) equals 2.42 cents for each sales dollar.  And multiplying 2.42 cents times 100 equals $2.42 for each $100 of sales revenue.  If a commercial airline in the United States sells a $100 ticket, it earns or carries to the bottom line (net income) $2.02 or two dollars and two cents on average.  </p> <p>As of the end of September the United States had 13 airlines with revenues of $20 million or more.  Five of the carriers had sufficiently high sales to place them in the Fortune 500, which is compiled by revenues, and is not the same as the S&P 500, which is compiled by capitalization.</p> <p>Whether the carriers could raise their fare by 20% is another issue.  Whether a carrier could raise its fares at all, let alone 20%, which was just for illustrative purposes, would depend on its pricing power in the market place.  Although fares have increased substantially over the past two years, they have been raised in small increments.  The airline business is very competitive.  On more than one occasion one of the carriers has attempted to raise its fares, only to have to rescind the increase because the other carriers did not follow suit. For those carriers that have to compete directly with Southwest Airlines, it (Southwest) sets the fares for the route in question. </p> <div style="clear:both;"></div> <p> </p> </div> </blockquote> <p> </p> <p>While I agree that 2.02 * 1.2 = 2.42, I don't think that's the correct answer to the question, "What would happen to the 2.02% return on sales if airlines raised their fares by a hypothetical 20%?" Suppose an airline sells a single $100 ticket with $97.98 going to expenses and $2.02 going to the bottom line. Raising the price to $120 does not in itself cause the expenses to change, so now $120-97.98=$22.02 goes to the bottom line, which is a return of 22.02/120=18.35%.[/quote]</p> <p>If a business could raise its price by 20 per cent without any change in the expenses, then the return on sales would increase by the increase in the sales price. </p> <p>Anyone familiar with the airline business knows that the airlines don't have the pricing power to raise their prices by 20 per cent in one fell swoop.  Moreover, if the company could hold its expenses constant, it would not have a need to raise its fares by 20 per cent.  Over time airline fares have krept up, primarily to rising fuel costs, but the increases have been incremental.  At the end of the day, the returns for the airlines have been paltry.</p> <p>As pointed out in the original post, in addition to the return on sales, the airlines also generate a return on assets and a return on equity.  The management and the shareholders are most concerned about the return on equity.  Accordingly, a one or two per cent increase in fares, which might be sustainable, would have a multiplier effect on the other returns, especially the return on equity.  </p> <p>The airline business, unlike passenger rail, is amongst the most competitive businesses in the world.  The margins are razor thin, which means they barely cover their expenses.  However, if they are managed well, as is the case with Southwest Airlines, they can provide their owners with a decent albeit modest return on their investment. </p> <p>Your are reading my post out of context, which was to correct a misstatement of fact in another post.  At the end of the day, the profitability of the airlines has nothing to do with passenger rail, other than to say that many rail enthusiasts misstate airline facts and subsidies as an argument for more subsidies for passenger rail or to claim an unfair advantage for the airlines.</p>
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