The Inflation of Airline Frequent Flyer Miles

In response to the Fed policies, Airline companies in the US have been giving away less services by inflating frequent flyer miles. Or simply put; indirect price increases.

Simon Black of the Sovereign Man explains

Today, millions of passengers in the Land of the Free will take off their shoes and assume the “I surrender” pose inside a radiation machine that provides negligible benefit and maximal cost to taxpayers.

Our modern security theater is a stark contrast to the past. But there’s been something else happening over the last several decades that is even more insidious… and far less obvious.

In 1979, Texas International Airlines (the precursor to Continental) introduced the first modern frequent flier program. American Airlines soon followed, launching their AAdvantage frequent flier program in 1981.

When the program launched, you could upgrade to a first class seat on the Concorde for 20,000 miles (something that you couldn’t even do today). Today, an upgrade to first class between the US and Europe would set you back 50,000 miles, plus $900 in fees.

In fact, just about every mileage award category has been getting more ‘expensive’, particularly among the major US carriers. The majority of the increases have taken place in the last several years.

United Airlines, for example, is raising the number of miles required for most of its awards starting February 1st. The steepest is an 87% increase for first class award seats on United’s partner airlines flights to the Middle East.

A United economy class ticket to Hawaii will increase by ‘only’ 12%. And business class to Europe and Japan will increase 20%.

Just like central bankers with paper currencies, airlines are devaluing their miles.

They have created trillions of miles in the system, many of these through special gimmick promotional giveaways. We’ve probably all seen the ‘sign up for the new credit card and receive 25,000 bonus miles’.

But just like the real economy, rapidly increasing the money supply (airline miles) devalues the currency and creates inflation.

That’s exactly what’s happening here. Airline miles are worth less and less.

Read the rest here

Graphic: The Globalization of Boeing’s Dreamliner

Assembled in the US, much of what makes up the Boeing’s Dreamliner has been sourced overseas

Source Reuters; hat tip Businessinsider

Note: Since the following graphic has been dated in January 2011. There may be changes on them

Markets in Everything: Solar Impulse, the Fuel Less Plane

Speaking of the gush of technological advancements from the deepening of the information age, here is another: the advent of fuel less solar driven airplane: the Solar Impulse

Here is an excerpt from Wall Street Journal (hat tip EPJ)

FOR BERTRAND PICCARD, the idea to build a solar-powered plane capable of circumnavigating the globe was hatched while running on empty. In March 1999, Piccard was on the final leg of an around-the-world journey by hot air balloon—the first-ever nonstop flight of its kind—when his Breitling Orbiter 3 swept low over the Egyptian desert and skidded to a halt on the corrugated plains. As Piccard stepped out onto the hot sand, he checked the fuel tanks mounted on his gondola and got a shock that became a defining moment. "We had left Switzerland with four tons of propane," he remembers. "We only had 40 kilos left! We almost didn't make it. I promised myself that next time I would fly around the world without using any fuel at all."

The 55-year-old Piccard, a trained psychiatrist with a confident, intense manner to match, is adept at making sure there is always a "next time"—no surprise, since he's descended from explorer royalty. His grandfather, Auguste, broke high altitude records in the '30s by designing a balloon with a pressurized cockpit, and later became the inspiration for Professor Calculus in the Tintin comics. In 1960, Piccard's father, Jacques, descended seven miles beneath the Pacific Ocean in another pressurized module to set a deep-dive record that has been matched only twice.

In 2003, Piccard approached European companies to sponsor what has become a $148 million project and began assembling a team of 80 engineers and technicians plucked largely from Swiss universities. After seven years of tinkering, they arrived at a machine with a deceptively simple design: Solar Impulse—with its sleek, clean lines, white-gloss finish and rakishly angled 208-foot wings (bent to increase the plane's stability)—resembles what you might get had Steve Jobs reimagined a child's balsa-wood glider in giant form.

Read more here

The wonders of human ingenuity.

Philippine Economy: Airline Liberalization Yields Greatest Number of Cheap Travel

Well this development is certainly a refreshing plus for the Philippine economy. 

The domestic airline industry’s liberalization has led to a boom in domestic tourism and has earned the Philippines plaudit as having the greatest number of cheapest air fare in the world.

From the Economist, (bold mine)

LOW-COST airlines like Ryanair and Southwest Airlines have swollen to formidable size in recent years by offering a very different approach to that of more traditional full-service airlines. With their single-class seating, range of ancillary charges and pared-down approach to all things aviation-related, these budget carriers have become a familiar, often bemoaned, feature of holidays and business trips around the globe. In British airports, for example, more than 50% of all passengers last year squeezed into seats on low-cost carriers. But Britain only comes seventh on a list ranking countries on that criterion. Figures released by Amadeus, a global travel distribution system, show that the Philippine aviation market has the greatest proportion of low-cost flyers. In that country of over 7,000 islands, 65% of all passengers used budget carriers last year. Cebu Pacific, the nation’s biggest low-cost operator, boasted over 46% of the domestic market. Among the smallest low-cost markets are Russia, Japan and China, where budget carriers accounted for just 5%, 4% and 1% of departures respectively. In China, the government keeps strict control of the airline industry and shields the three main state-controlled carriers (Air China, China Southern and China Eastern) from low-priced competition. Shanghai-based Spring Airlines, which launched in 2005, is the country's only low-cost carrier of any size.

Since the Philippine government has liberalized the airline industry in 1995, the entry of new players has prompted competition to drastically lower airfares which translated to a natural boom in the domestic tourism industry. Lowering the cost of airfare has allowed a greater number of people, across income and wealth strata, to enjoy the benefits of traveling.

Here is the current list of domestic commercial airlines from Wikipedia.org

Domestic tourism plays a big role in the tourism industry where spending share of local tourists accounts for 59.1% of the industry in 2011 as I earlier pointed out here.

Rather than blowing bubbles, real structural reforms on the local economy should be modeled after the Philippine airline industry.

As post-war free market reformist, former Chancellor of Germany Ludwig Erhard, popularly known to have ushered in "Wirtschaftswunder" or German for "economic miracle", wrote in his classic book Prosperity through Competition, page 1

Competition is the most promising means to achieve and to secure prosperity. It alone enables people in their role of consumer to gain from economic progress. It ensures that all advantages which result from higher productivity would eventually be enjoyed.

Indeed.

Air India’s Failure: Epitome of Bureaucratic Enterprises

Massive infusion of taxpayer money has failed to revive the viability of government owned airline carrier, Air India

From a Bloomberg report,

Indian taxpayers gave Air India Ltd. $1.7 billion as bailout funds in the past four years. The airline now says it lacks cash to purchase spare parts.

That’s grounded 16 aircraft for the nation’s oldest carrier. Without the funds, the airline is also unable to refurbish some of the idled planes before returning to lessors.

“Some are just empty shells standing,” Air India Chairman Rohit Nandan said about the grounded aircraft. “We are in the process of returning some leased planes.”

The grounded planes add to the struggles of the former monopoly carrier saddled with about $8 billion of debt and six straight years of losses. Air India has also lost market share as discount carriers that started flights less than a decade ago lure passengers with the latest fleet and cut-rate fares.

Inability to fully utilize the fleet means Air India, the nation’s largest by number of aircraft, will operate fewer local flights than smaller rivals. The flag carrier won approval to operate 1,788 departures a week in the six months through September compared with IndiGo’s 2,821 and SpiceJet Ltd.’s (SJET) 2,467, according to the Ministry of Civil Aviation.

“It’s a criminal waste of public money,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “With all this funds pumped in, what’s stopping Air India from spending on aircraft? They have to deploy fleet, expand network, increase frequency and go for market share.”

Since the Indian government liberalized the airline industry via the repeal of the Air Corporation Act of 1953 in 1994, privately owned firms dominated the market share. Air India’s share, from a monopoly, had been reduced to an estimated 18% of the domestic market.

The merger between Air India and Indian airlines, hobbled by labor unions, have reportedly been a factor in Air India’s continued losses.

Another important variable has been high prices of jet fuel which emanates from high taxes, around 32% of aviation fuel comes from a combination of sales tax, excise tax and freight related costs, as well as, from the inefficiencies of state owned oil marketing companies. High fuel prices has made domestic airlines less competitive relative to international counterparts. As of 2011, 5 of the top 6 major airlines were in the red.

Air India’s case is a classic example of the difference between bureaucratic firms and private companies which boils down to economic calculation.

As the great Ludwig von Mises explained:

A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors…

Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.

In short, political enterprises are operated mainly from political goals, whereas the free market runs under the discipline of profit and losses. 

One should also make a distinction between private companies operating under the influences of politics or rent seeking “crony” firms.