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2011 December 24 Saturday
Cost And Weight Of Business Class Seats

One of the problems with flying, especially on long distance flights, is limited leg room in economy class. Yet the step up to business class requires spending some multiple of coach fares. I've always wondered why there aren't more steps between economy and business classes. Came across a Businessweek article that sheds some light on the economics of airplane seat costs. A business class seat alone now weights 200 lbs more than coach.

A single business class berth crammed full of entertainment systems and the electronics needed to morph into a bed can weigh 300 pounds, three times its coach class counterpart, and typically costs $80,000 to $100,000.

Just who are the price insensitive buyers who will pay, say, $5400 to go business class from San Francisco to Sydney in 1 hop versus $1800 for Economy? Are they employees? At what corporate rank or in what industries? That's nultiple is a factor of 3. Check out Kayak and try some long haul flights. The multiple between Economy and Premium Economy (like Business?) from NYC to Johannesburg, South Africa is on the order of 4 or 5.

So is there really little demand for adequate leg room by itself? Seems like it. Yet I don't need a 200 lbs greater seat to sit in with lots of electronic gadgetry built in. An extra laptop battery and an extra smart phone battery can keep me in movies, music, and ebooks for all my waking hours even on a 20 hour flight. Does the price gap between economy and business classes indicate a different source of buying power (ability of corp execs to get their employer to pay more) that is much less price sensitive?

Short of business class there are ways to get more leg room, at least on some flights: pay more for exit row seating. As that link to British Airways shows, it can be problematic though. You can try to pay for an exit row seat in in Economy or Premium Economy at 14 days before departure. So do you have to buy your ticket before knowing whether you can pay for the exit row upgrade? Do you have to start your out-bound part of a trip before knowing whether you can buy an exit row seat on the in-bound part?

Is paying for exit row seating a viable strategy for getting more leg room on long haul flights? The answer is unclear to me. A site called Seat Guru has layouts of various aircraft for each airline with seat quality ratings by color. Note a small number of Green (good) seats on this Continental Boeing 737-500. Given that frequent fliers can nab those seats my guess is they are very hard to get. But it can be worse. Take the Continental Boeing 767-400ER (Extended Range - where leg room would be most beneficial) for example, It has no Green good seats. The exits have lavatories galleys next to them. So no seats have extra leg room. By contrast, the Continental 777-200ER has a number of green seats.

United Airlines has Economy Plus which is more what I'm interested in. On a United 777-200 Economy Plus provides "up to" 5 inches of extra leg room. Not sure what is meant by "up to". But on a United 747-400 Economy Plus provides only up to 3 extra inches.

Note that you can hover over seats in Seat Guru to get extra information. A lot of the exit row seats do not have under-seat storage space. This seems problematic if you want to bring along a backpack with laptop and ebook reader. Will you be able to store it nearby and retrieve and store again on a longer flight?

What I'd like: a web search engine on flight availability where one can include leg room minimums in one's search.

By Randall Parker    2011 December 24 01:57 PM Entry Permalink | Comments (10)
2009 May 16 Saturday
Jeff Macke Sees Dim Future For US Auto Industry

Jeff Macke doesn't see a bright future for the US auto industry.

Not that I’m saying the government and UAW won’t be able to restore the glory of the US auto industry. Wait. I’m saying exactly that. The Administration and unions stiffing the real owners (those “unpatriotic debt holders” who, in 60 days, will be asked to re-buy the Chrysler they just got hosed out of) and going halfsies on the auto industry is the worst merger since the axis powers were formed. I don’t think the answer to the American auto industry's problems is to make a bunch of golf carts that go 50 mph for an hour - before you have to plug them in for 8 hours. Keep in mind, these have to be subsidized, even if you sell them for $50,000. And the North American auto run-rate is now 8-9 million annually, versus 17 million 2 years ago - which is nothing short of terrifying.

My take: The UAW needs to take a much bigger hair cut. US auto companies need labor costs that are below the labor costs of their competitors. That's especially the case for Chrysler. Why? Because the Japanese companies especially have far better reputations for quality and value. The US companies need to be able to undersell the Japanese on price while closing the gap on quality.

Once the US companies close the quality gap (assuming they can survive long enough to do that) their reputations will take years to repair. Therefore the Japanese get to charge price premiums over US makers and therefore the US makers need to have lower costs for years while waiting for customer quality perceptions to catch up with reality. So there's the time period for closing the quality gaps and then there's the subsequent time period for closing the perception gaps. Chrysler has the longest time to go on the first step. Ford is farthest along on improving quality.

Of course the Obama Administration has decided to shaft the senior debt holders to the benefit of the UAW. The UAW concessions fall short of what is needed and far short of what the UAW gave up to Delphi during Delphi's bankruptcy. Those concessions came probably too late to save Delphi which has recently warned it may liquidate. Wow.

By Randall Parker    2009 May 16 05:06 PM Entry Permalink | Comments (6)
2009 January 13 Tuesday
Analyst Sees GM Bankruptcy Unavoidable

General Motors can't avoid bankruptcy.

A leading Wall Street analyst said Jan. 13 that he doesn't think General Motors (GM) will be able to restructure its debt to the satisfaction of the U.S. Treasury, which is lending the company billions of dollars, without the help of a federal bankruptcy judge.

"The chances are greater than not that there will be bankruptcy, at least for GM," said Rod Lache, auto analyst for Deutsche Bank (DB), speaking in Detroit at a conference sponsored by the Society of Automotive Analysts during the North American International Auto Show. "But it won't be the disruptive, scary bankruptcy that suppliers fear."

Lache thinks some of GM's debt holders won't agree to a large enough cut in their holdings to make a restructuring work outside of bankruptcy court. But since the Obama Administration gets to decide whether GM has really proven its financial viability it could be that GM could do a smaller restructuring and still get more US government money. But that'll just delay the inevitable bankruptcy. Also, if the Obama Administration doesn't force the United Auto Workers union to make very big concessions this also means a bankruptcy later.

GM could also do more dealer network shrinking in bankruptcy.

By Randall Parker    2009 January 13 11:07 PM Entry Permalink | Comments (3)
2009 January 11 Sunday
GM And Chrysler Seen As Insolvent

US government loans just keep GM and Chrysler on life support.

General Motors Corp. and Chrysler LLC technically are bankrupt and Chrysler is a step away from death, said Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor.

"GM and Chrysler are insolvent. Without federal funding they are bankrupt," McAlinden said at a conference today at the joint office of The Detroit News and Detroit Free Press. If the government took half of all of the bailout money away, they would go back to being bankrupt, he said.

"GM will not meet the initial conditions of the loan. But the conditions will change so GM can keep them," McAlinden said.

This is why big cuts in UAW wages and benefits are necessary. Both GM and Chrysler need big reductions in their costs in order to survive. The only alternative is outright continuing subsidy by the taxpayers. Chrysler's loan isn't even big enough to pay for all it owes to its suppliers.

McAlinden said Chrysler needs $6 billion to pay its suppliers for last quarter's parts and he suspects the full $4 billion loan went towards these payments. Chrysler initially sought $7 billion from the government.

McAlinden said Chrysler may threaten to keep its factories closed longer as a bargaining tool in negotiations with the new Obama Administration.

But if Chrysler is allowed to go bankrupt that will pull parts suppliers that GM and Ford rely upon into bankruptcy as well. There's a big domino effect with the bankruptcies. Will a left-leaning Democrat Barack Obama force the UAW to offer concessions big enough to allow the US domestic auto industry to survive?

Chrysler needs to be freed from UAW work rules and UAW pension and wage and benefits costs. The Big Three are the UAW's bitches. Not only does UAW labor cost a lot but UAW work rules slow improvements in productivity and the bureaucracy around those work rules are an obstacle to continuous improvement. It isn't like unions shift money generally from management and capital to lower level workers. Read about The Aribtrariness of Wagner Act Redistribution (scroll down to find it).

Update: The unfunded pension benefits of the Big Three are far larger than the government loan amounts.

The outgoing director of the U.S. Pension Benefit Guaranty Corp. warned Friday that Detroit's Big Three automakers face a $41 billion pension shortfall.

...

In total, the Big Three pensions cover nearly 1.3 million people. If all three automakers were to collapse and turn their plans over to the pension corporation, the agency estimates it would pay out $13 billion of the $41 billion, because of limits set by Congress on how much the pension corporation can cover. The agency generally has a yearly cap of $54,000 in benefits for people who are 65.

So a bankruptcy would substantially cut the size of pensions received by retirees. The UAW could agree to cuts in salaries of current workers in order to free up more money to pay retirees. Or the UAW could agree to benefits cuts such as with health care for retirees and current workers. The UAW workers get medical benefits worthy of envy. How'd you like to have 95% of your medical costs paid for?

By Randall Parker    2009 January 11 10:16 AM Entry Permalink | Comments (7)
2008 December 20 Saturday
Ford Brazil Plant Shows What UAW Blocks

Watch this video. Such a highly efficient plant would be impossible to set up in the US - at least by Chrysler, Ford, or GM. Of course, Toyota, Honda, and other companies in the anti-union Old South could do it. Have they already?

Megan McArdle paints a great picture of why customer satisfaction dropped down in the list of things that Big Three managers worried about.

During those years of oligopoly, the Big Three's first loyalty (after their loyalty to management) was loyalty to the union.  The worst thing that could happen to a Big Three manager was a strike.  Making a car that is reliable is only partly a matter of engineering; it's mostly a matter of extremely tight control over the assembly process.  That tight control is necessarily less pleasing to the workers than looser rules.  The unions could severely hurt a company with a strike.  Whereas the customers?  The customers could only go to another company where the same union was negotiating the same loose work rules.

(Yes, yes, I know that Toyota does it differently, with group responsibility.  But Toyota's system was developed in the absence of a strong union; the adversarial model that the UAW had developed along, however historically necessary, made the Toyota example completely unworkable in a Detroit plant.)

After the unions, for the Big Three, the government was the next most worrisome constituent, followed by the dealers, then the suppliers.  The customers were somewhere down there with the mayor of Youngstown, Ohio, in emotional importance to Detroit managers.  It's not that the managers in Detroit had anything against their customers, and I've no doubt that they had lots of meetings in which moving testimonials to the gosh-darned swellness of Chevy or Buick or Mercury buyers.  But the buyers had little power to punish them, and their other constituencies could make their lives miserable.

My fear is that anything less than bankruptcy won't break through the pull that other interests have on how the car companies function.

By Randall Parker    2008 December 20 04:09 PM Entry Permalink | Comments (5)
2008 December 19 Friday
US Car Financing Deal Requires UAW Cuts

The Bush Administration has reached a deal with GM and Chrysler to lend them enough money to keep them in business for 102 days to give them time to negotiate a large restructuring with their creditors, suppliers, and union workers. The deal requires GM and Chrysler to negotiate lower labor costs with the UAW.

The conditions of the Bush plan require that GM and Chrysler satisfy a number of restructuring goals spelled out in the legislation that failed to pass in the Senate earlier in December. The companies will have to reach a new wage and benefit agreement with the United Auto Workers and retirees that puts the automakers on parity with foreign companies manufacturing vehicles in the U.S., such as Toyota (TM) and Honda (HMC). Investors holding GM and Chrysler debt will also have to take a huge "cram-down" or discount on their bonds, reducing debt by two-thirds.

The Big Three can't compete long term unless all their costs are competitive with their competitors. So this need is obvious.

These loans from the US government are needed to give GM and Chrysler time to negotiate the sorts of deals which normally happen during bankruptcy. What they are going thru is bankruptcy in all but in name.

But some are skeptical that the deal will force sufficient cost cutting on labor.

Industry critics say this plan won't force the automakers to do what is really necessary to become competitive with the nonunion auto plants operating in the United States by overseas automakers. They wanted tougher rules that would have forced the companies into bankruptcy unless the union agreed to painful wage and benefit cuts.

"Over and over again we've seen these guys use creative math to give the illusion of competitiveness," said Peter Morici, a business professor at the University of Maryland.

Reaching agreements with a large number of debtors and with the UAW in 102 days will be very difficult. During bankruptcies these sorts of measures normally take a year or two. This deal basically requires GM and Chrysler to do something similar to bankruptcy without officially filing for bankruptcy.

More daunting may be targets set by the White House, which require the companies to work toward reducing debt by two-thirds, cut in half the cash owed to an employee health care plan and make UAW wages competitive with those paid by Honda, Nissan and Toyota at their U.S. operations by the end of 2009.

The president's designee, by March 31, can waive those targets but must explain why.

The Obama Administration does not have to honor the terms of this agreement. It can let the UAW off the hook and force the Big Three to keep paying uncompetitive prices for manual labor. Some politicians do not want to see labor cost cuts that are needed to make the Big Three cost competitive. Barney Frank inhabits a fantasy world where the Big Three can achieve competitive costs while paying more for unskilled labor.

Still, House Financial Services Committee Chairman Barney Frank is calling the stipulation "an unfair assault on working men and women" that could force them to accept "a disproportionately large reduction in what is currently legally owed to them."

The provision, Frank said, "could give foreign auto companies in effect the ability to dictate wages for all America auto workers."

He already is pushing for president-elect Barack Obama to change that portion of the emergency loan package, something Treasury said the incoming administration will have the power to do.

If the Obama Administration decides to let the UAW off the hook then the Big Three will get even more deeply in debt and the crisis will hit again but with the GM and Chrysler in just as much debt but the next time around with the US government.

The Big Three also need a restoration of credit and demand for cars.

"The automakers will hemorrhage red ink until auto lending and leasing revives. Without credit, vehicle sales will at best remain at their current 10 million unit annual sales pace," said Mark Zandi, the chief economist at forecaster Moody's Economy.com.

"The Big Three share of these sales is less than 5 million units. Their break-even sales rate is closer to 7 million units."

By Randall Parker    2008 December 19 09:27 PM Entry Permalink | Comments (1)
2008 December 13 Saturday
Associated Press Can't Recognize Absurd UAW Claim

Associated Press reporters Tom Krisher and Kimberly S. Johnson get used as tools of the United Auto Workers to uncritically relay a UAW claim that is obviously incorrect.

DETROIT (AP) -- Festering animosity between the United Auto Workers and Southern senators who torpedoed the auto industry bailout bill erupted into full-fledged name calling Friday as union officials accused the lawmakers of trying to break the union on behalf of foreign automakers.

What did Bob Corker and other Republican Senators propose that would help foreign automakers? Nothing. In fact, Corker and colleagues wanted to lower UAW salaries in order to make US automakers more competitive against foreign makers. The key Republican demand to make UAW wages competitive would hurt foreign makers by lowering the costs of US makers. US automakers are stuck in a death hug with the UAW. Corker wants to give them some relief from this death hug.

The irony here is that the Senators from states that have non-union foreign transplant factories are promoting a policy that would help the Michigan competitors of these southern factories. But the AP writers can't seem to notice that what the Republican Senators are saying is true.

The vitriol had been near the surface for weeks as senators from states that house the transplant automakers' factories criticized the Detroit Three for management miscues and bloated UAW labor costs that lawmakers said make them uncompetitive.

The AP writers do not think to question the reasonableness of the UAW President's absurd claim.

"They thought perhaps they could have a twofer here maybe: Pierce the heart of organized labor while representing the foreign brands," UAW President Ron Gettelfinger said at a Friday morning news conference in Detroit.

Corker wants a deal that results in low enough costs for the American makers that they can survive and thrive. That is a wise and prudent position to take. The companies need to get all their costs (and that includes union labor) down to a level that allows them to compete with foreign car makers.

"Our members wanted to know that the UAW was willing to be competitive," Corker said.

"I basically pleaded with them to give me some language by some date certain that they were competitive with these other companies," Corker said. "That's where it broke down."

You can listen to Corker's press conference after the deal fell thru where he explains what happened from his vantage point. What amazes me about the whole thing: The US automakers are effectively at death's door and yet the UAW refuses to make big concessions. The UAW wants the US taxpayer to start funding union wages and very high benefits for an indefinite period of time. The UAW wants its manual laborers to continue to get benefits that no other manual laborers in the United States get. They want to do this at taxpayer expense and they expect everyone else to solve their problems.

By Randall Parker    2008 December 13 07:59 PM Entry Permalink | Comments (15)
2008 December 08 Monday
GM Needs To Escape From United Auto Workers

76 year old GM vice chairman Bob Lutz says what GM needs to do to survive is obvious but not possible.

But with Mr. Wagoner under attack and with the bailout legislation uncertain, the automaker decided to give Mr. Lutz a chance to forcefully defend the company.

“You get these people who say, ‘I know what I’d do if I were C.E.O. of G.M., like close up all the union plants and set up plants down South with non-union labor,’ ” he said. “Well, any idiot can figure that one out. But how conceivably can you get that done?”

Escape from the UAW. The need is obvious. But there's no way the Democrats in the US Congress are going to bail out GM so it can escape from the organization that made the bail-out necessary in the first place.

Roger B. Smith wanted to escape from the UAW with robots. But he was too soon in attempting to go down that path. A lot of the robots didn't work well. Robots advanced enough to replace all human labor on assembly lines still lie somewhere in the future. 10 years? 20 years? The day is coming. But GM has to survive till that day. Not clear that it can.

By Randall Parker    2008 December 08 11:15 PM Entry Permalink | Comments (8)
2008 November 20 Thursday
Car Companies Need Bankruptcy To Escape UAW?

What I find most troubling about the proposals to loan tens of billions of dollars to GM, Ford, and Chrysler is that these proposals ignore the biggest reason why the Big (and continually shrinking) Three have been in decline for decades running: Companies with much higher labor costs can not compete with companies that have much lower labor costs. The US Congress has kept the Big Three in a bleeding bear hug with the United Auto Workers. At the recent US Senate hearings where the 3 US domestic auto company CEOs pressed their case for big government while an economist at University of Maryland, Peter Morici, presented an opposing argument.

The gradual erosion of the market shares, of the Detroit Three, over the last several decades, stems from higher labor costs, having origins in wages, benefits, work rules, poor management decisions and less than fully supportive government policies.

Although the government has been sympathetic, to the needs of this industry, the industry has fallen victim to currency manipulation and other forms of protectionism, predominantly in Asia, in Japan, Korea, China, India and elsewhere. The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization.

It's my position that it would be better to let them go through that process and reemerge with new labor agreements, reduced debt, strengthened management. That would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.

There is an alternative: impose tariffs on imported cars and also force domestic plants run by foreign competitors to accept a union. But to do that would require the admission that, yes, labor costs are the biggest problem.

Morici argues that loans would just delay the inevitable because as long as the UAW (with a big body of US government labor laws to give the UAW legal power to extort from the Big Three) forces the Big Three into uncompetitive labor costs the continued decline of the Big Three is assured.

Today, the Detroit Three have achieved remarkable progress in improving productivity and lowering labor costs, thanks to a new agreement with the UAW. But they still don't have costs quite as low as their Japanese transplants.

This is an industry with very thin margins. I've heard over and over again, for example, when Ford decided to locate its small-car factory in Mexico, that the UAW tried to persuade Ford that it could be competitive enough in the United States.

There is no such thing as competitive enough in the automobile industry. Either you hit the mark that Honda hits, in Indiana, or you are not competitive. The margins are too thin. There's too much excess capacity. Either the costs are the same or they're not. There's no such thing as almost as competitive.

By assisting the Detroit Three, Congress can delay one or all of them from going through Chapter 11 reorganization. But sooner or later, one of them will march down that path.

Here's another alternative: Congress could repeal the labor laws that enable the UAW to drive the Big Three into bankruptcy. Let the Big Three throw the UAW out of their plants and I bet suddenly the credit ratings for the Big Three would soar.

Morici says that the Detroit Three must have the same labor costs as their competitors or die.

Without a new labor agreement that brings wages and benefits absolutely in line with those at the most competitive transplant factories, without reduced debt and other liabilities, the Detroit Three will continue to lag in innovation and field too few attractive vehicles because their higher cost, debt and other liabilities require them to spend less on new product development than they should. General Motors makes about the same number of cars globally as Toyota. It simply has a smaller product development budget because of the cost it bears. They have very fine engineers. They are capable of producing very good cars. The same applies at Ford.

If you have less money to develop product, you put fewer products on the street. They have a longer life. For example, the Impala was a great car, but it was left sitting out there for seven years. Camry recycles every four.

People who complain about the rate at which the Detroit makers rev their designs miss why this happens: Toyota pays less in manufacturing labor costs and therefore has more money to pay for engineering labor and other engineering costs. Toyota can outspend GM in engineering. The fact that GM has managed to last as long as it has with this huge disadvantage probably comes as a result of a combination of American customer loyalty for the home team and a high level of productivity per engineer and manager among the Detroit Three.

Free trade and a union with a labor monopoly in only some companies is not a sustainable combination. The union either has to cut its costs or companies have to shut down plants and stop using the labor union's high priced labor. The Big Three really need to move abroad and stop using UAW labor.

The Democrats want to bail out the US car companies because they want to retain high union wages in US companies. Barney Frank wants the US car companies to find a magical way to survive in spite of uncompetitive labor costs.

BARNEY FRANK: Bankruptcy would be very disruptive. Bankruptcy is a favorite spectator sport for politicians and experts who don't have to engage in it. You have a whole network of suppliers--small businesses and others--who would get "stiffed," to use the legal term, in a bankruptcy.

There is also an assumption that if you do bankruptcy, you could undo labor contracts. Now the unions to their credit have negotiated some concessions. But you know, we already have too much union-busting and too much income inequality for the average worker in this country for us to now say by the way, if you're a company and you haven't been able to totally get rid of the unions, then go bankrupt and rewrite, write down the contracts.

You have to admire this irresponsible audacity. What nerve the guy has. GM is weeks away from running out of money. But Frank thinks the unions shouldn't have to give up squat.

House leader Nancy Pelosi insists the auto makers show how they can become profitable.

"Unless they can show us a plan, we can't show them the money," said House Speaker Nancy Pelosi.

Nancy's House has the power to change the labor laws in a way that will allow the auto makers to compete. Congress holds the most powerful cards. But they do not want to admit they are the cause of the problem.

I do not know whether the auto makers can escape from the UAW in bankruptcy or whether they can avoid liquidation in bankruptcy. We would be better off if the auto makers could escape the UAW without going into bankruptcy. If Congress loaned them enough money to relocate their plants to Mexico and Canada that would probably enable them to compete. But can automation and other cost cutting measures eventually allow the Big Three to compete without totally escaping the UAW? The politically possible two choices of either government loans or bankruptcy both have big risks.

By Randall Parker    2008 November 20 10:12 PM Entry Permalink | Comments (31)
2008 November 08 Saturday
GMAC Puts High Bar For Car Credit Applicants

The General Motors Acceptance Corporation (GMAC) has raised its lending standards for auto loans. As a result at least 40% of the population of the state of California have credit scores too low to qualify for an auto loan from GMAC.

GMAC said it will now only lend money to buyers with credit scores better than 700, near the top. It's also financing a smaller portion of the car's value, requiring buyers to make bigger down-payments.

"Scores under 700, that's at least 40% of the population of this state," California New Car Dealers' president Welch told CNNMoney.

What I would like to know: the credit rating distribution of the population of each American state and the trends for credit rating distribution per state. What will credit ratings look like 10, 20, 30 years from now? I'm expecting a decline in average credit ratings for demographic reasons. Whites who have higher average credit scores are a declining percentage of the population. Whereas blacks and Hispanics who have lower average credit scores are rising fractions of the US population. What does this portend for future car sales?

By Randall Parker    2008 November 08 01:45 PM Entry Permalink | Comments (9)
2008 September 03 Wednesday
Minneapolis Bridge Repair Happening Fast

The Minneapolis Minnesota bridge which collapsed on August 1, 2007 will get repaired rapidly because of high motivation to get it fixed.

Florida Rep. John Mica, the highest-ranking Republican on the U.S. House of Representatives Transportation and Infrastructure Committee, toured the bridge reconstruction on Wednesday and hailed it as a model for federal projects.

"It normally takes at least seven to eight years to undertake an infrastructure project of this magnitude, but the new I-35 bridge was contracted to be designed and completed in 437 days," he said.

Mica said following that pattern in other projects could dramatically lower costs. "This will be our goal in the next highway bill, which is scheduled for renewal in 2009," he said.

I wonder what percentage of the money spent on bridge repair and replacement goes to staffers who do studies and conduct hearings on what ought to get fixed and how it ought to get fixed. Some people say America can't keep up its infrastructure any more. I'm not worried about our ability to afford it as much as I'm worried that the populace will just lower its standards and let things become more decayed than they ought to be. Bureaucracies can spend years planning with big staffs because people do not expect fast repairs.

By Randall Parker    2008 September 03 10:32 PM Entry Permalink | Comments (1)
2008 June 28 Saturday
US Airline Industry Set To Shrink

Former American Airlines CEO Bob Crandall tells Businessweek some changes that would help the struggling airline industry.

--Revising U.S. bankruptcy laws to...

“...deprive failed carriers of the right to use lower costs to undercut the fares offered by their more prudent rivals, forcing both management and labor to face the twin specters of liquidation and unemployment.”

In other words, take away the option of Chapter 11 and force troubled carriers into Chapter 7 – the mere threat of which could force labor groups to offer concessions more readily, rather than being content to milk the cow until it keels over and only then consent to a lower wage scale. You know this will be popular with workers…

--Creating regulations that limit the number of scheduled flights to what the airport can handle. This is already a problem at airports like JFK in New York, which routinely slot far more flights than was ever intended – explaining why your 5 pm flight never leaves before 7 pm. Crandall argues that current schedules should be “reduced proportionally,” which would force each carrier to use the largest feasible aircraft in each slot. So bye-bye regional jets—and bye-bye competition.

The problem with takeoff and landing slots could be solved by selling them to the highest bidder. But the airlines have opposed this introduction of market forces for years. Business jet operators have opposed it even more because they want to land at places like JFK at peak times but would get outbid by jumbo jets.

As for bye-bye competition: if the slots were sold in a bidding process that would increase competition since airlines would compete to use each slot for the most profitable purpose. That would increase efficiency, reduce delays, and also reduce fuel usage as airplanes wouldn't circle waiting to land or idle waiting to take off. The ability to periodically bid for slots would allow new entrants to displace existing entrants.

Regardless of what the airlines do we are going to see less air travel in the United States and other Western countries as limited oil supplies and the bidding up of prices on those oil supplies by Asian countries drives ticket prices so high that passenger volume and number of flights will drop.

American and American Eagle are ending service to 8 airports.

American (NYSE: AMR), based in Fort Worth, Texas, and American Eagle serve 250 airports combined. The airports American will leave are: Oakland, Calif.; London Stansted; and Barranquilla, Colombia; and Albany, N.Y.; Providence, R.I.; Harrisburg, Pa.; Samana, Dominican Republic; and San Luis Obispo, Calif., for American Eagle, which also will close its maintenance base in San Luis Obispo.

The US airline industry is going to shrink back to where it was 10 years ago. Then it will shrink even further.

This week, the country’s two biggest airlines, American and United, announced plans to lop cities like Fort Lauderdale, Fla., and San Luis Obispo, Calif., out of their networks. Cuts also are taking place on international routes to cities like London and Buenos Aires, and even to popular vacation destinations in the United States like Las Vegas, Honolulu and Orlando.

With more reductions coming next year, all the domestic industry’s growth over the last decade will most likely be lost. “The U.S. industry is undertaking a historic restructuring,” Gary Chase, an industry analyst with Lehman Brothers, wrote in a research report Friday.

Some of the major airlines are headed for bankruptcy and liquidation.

In the hopes of bringing attention to the magnitude of the oil crises, Business Travel Coalition (BTC) commissioned AirlineForecasts, LLC to provide an analysis of what oil at several different price points means in terms of lost airline jobs, reduced seat capacity and increased fare levels.

AirlineForecasts concludes that if oil prices stay anywhere near $130/barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009. The implication is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate.

Each of the airlines is trying to survive until their competitors liquidate. With the resulting reduction in total capacity the survivors can raise fares to levels high enough to pay for higher fuel costs. So which ones will go into liquidation? Some of the liquidations have to involve big airlines because the amount of needed capacity reduction is quite large.

At current oil prices about 1000 airplanes will need to get parked by US airlines.

Every $10 increase in the price of oil results in $4 billion in additional costs for the 40 passenger-only airlines. Oil prices have spiked to $135/barrel from last year's $72/barrel average. With oil prices in the $135 range, the airline industry could be forced to park upwards of 1,000 aircraft and shed over 80,000 employees, and still not return to health.

1000 idled airplanes equal about one year of the combined output of Boeing and Airbus.

Airbus has a backlog of 3,655 planes, or more than six years of work. It delivered a record 453 aircraft last year and is planning to hand over about 470 this year. EADS Chief Executive Officer Louis Gallois said on June 18 there were no plans to slow the production increase.

Boeing, which had a backlog of 3,645 orders as of May, is in ``constant contact'' with customers and regards deferrals and cancellations as ``a normal part of its business,'' spokeswoman Sherry Nebel said last night by telephone. It plans to deliver 480 planes this year, up from 441 in 2007.

The older and less fuel efficient airplanes will get parked first. You might expect Boeing to benefit from this because of their new and highly fuel efficient 787 Dreamliner. But Boeing needs to delay 787 shipments yet again for some redesign work.

By Randall Parker    2008 June 28 08:30 PM Entry Permalink | Comments (5)
2008 January 27 Sunday
Huge Costs Seen From Flight Delays

Air flight delays are not just irritating and fatiguing. Time is money and so flight delays cost travelers a lot of money.

During the first 11 months of last year, 1.6 million passenger flights were at least 15 minutes late. The total delay time added up to 170 years -- up steadily from 98 years lost on 1 million flights during all of 2003. The average delay of a late flight has grown from 49 to 56 minutes during that period, the data show.

With the U.S. economy stumbling, regulators and lawmakers are turning their focus to the economic toll of such delays. In a speech to the Aero Club of Washington on Tuesday, Transportation Secretary Mary E. Peters estimated that flight delays cost the U.S. economy $15 billion a year. In an interview, she said she thought that figure was probably low.

"It is incredible," Peters said. "It means a loss to our economy, a loss to our productivity; it also means a loss in quality of life."

When you have to wait in long queues (e.g. waiting in an airplane to get clearance to pull back from the gate or circling overhead waiting for permission to land) it is usually sign that market forces have been blocked somehow. Certainly that is the case with airport take-off and landing slots. Huge delays in take-offs and landings are a result of lack of a bidding mechanism for those slots. Resources aren't allocated by price and therefore they are allocated by making people wait in long lines.

Robert Poole of the Reason Foundation points to an obvious solution: congestion pricing.

Today, airports charge a fee based solely on the weight of the plane. That means a 767 carrying 300 people pays about 10 times as much as a 35-passenger regional jet. Both planes use the same air traffic control resources and runways, but the smaller plane is lighter and thus pays a fraction of the fee.

A much smarter way is to charge all planes the same amount to use the runway (since they use the same resources) and to make that price much higher during rush hours and lower at off-peak times.

Such congestion pricing would cause airlines to move some flights out of the busiest periods, reducing delays. Small jets that jam runways during rush hours without consequence would be forced to choose cheaper, off-peak times or make sure passengers are willing to pay the significantly higher ticket prices that come with rush hours.

For Kennedy, a recent Reason Foundation study estimates that during the morning peak, the departure price should be $1,800 to $1,900 per plane. In the afternoon peak, prices would be up to $2,000 per flight.

Congestion pricing would also stimulate "up-gauging" - meaning airlines would reduce flights but use bigger planes to ensure they could carry the same number of passengers as they do today. For example, there are 30 flights a day between Kennedy and Baltimore-Washington International. Ten of those flights are on small regional jets during peak hours. The same number of passengers could be handled by about 20 flights using larger jets, cutting air traffic by one-third.

For a 200 passenger airplane the $2000 cost would be $10 per passenger to leave at peak times. There'd be a cost of leaving at other times but it would be lower. Well, let pricing push airplane size up and less time sensitive passengers toward cheaper times.

Some business travelers want to get paid for delays.

It's no wonder 81 percent of business travelers surveyed by Directravel, a corporate travel management company based in Mahwah, think airlines should give them at least a partial refund when their flights are late. The longer the delay, the higher the refund should be.

The problem with such a scheme is that by itself it doesn't create all the incentives needed to eliminate delays. I think revenues raised from a congestion pricing scheme could be used to fund an upgrade of the air traffic control system and that would address two causes at once.

The reason the congestion pricing proposal wasn't implemented years ago is that the airlines don't want to pay more to leave at peak times.

In slamming the department's proposal, Air Transport Association President James C. May made the good point that the plan "does nothing to fix the primary cause of delays: our nation's increasingly antiquated air traffic control system."

I'm not sympathetic to the airlines. Sure, we need a better air traffic control system. But that won't eliminate delays because we will still have limits on how many airplanes can take off or arrive at the busiest times of the day. Scarce resources should be handed out based on price unless there's a compelling reason to use some other mechanism. I do not see any reason to make people wait longer periods of time in terminals and airplanes.

By Randall Parker    2008 January 27 08:17 PM Entry Permalink | Comments (0)
2008 January 23 Wednesday
Privatized Toll Roads Create Large External Costs

Yet another "privatize profits and socialize costs" story.

Privatizing toll roads in the U.S. may result in significant diversions of truck traffic from privatized toll roads to "free" roads, and may result in more crashes and increased costs associated with use of other roads, according to a new study.

Peter Swan of Penn State – Harrisburg and Michael Belzer of Wayne State University will present the findings of their study, "Empirical Evidence of Toll Road Traffic Diversion and Implications for Highway Infrastructure Privatization" on Jan. 14 at the 87th annual meeting of the Transportation Research Board in Washington, D.C.

The study used data from the State of Ohio, the Federal Highway Administration, and the Ohio Turnpike to predict annual Turnpike truck vehicle miles traveled, and therefore diverted vehicle miles, based on National truck traffic and Turnpike rates. The researchers then compare estimated truck traffic diverted from the Turnpike to truck traffic on Ohio road segments on possible substitute routes.

Both economic models support the hypothesis that rate increases divert traffic from toll roads to "free" roads.

"While recently privatized roads do not have enough history to determine how high actual rates will rise, adequate data do exist to determine what happens when toll rates increase dramatically on state-run toll roads," says co-author Peter Swan, Assistant Professor of Logistics and Operations Management at Penn State's Harrisburg campus.

The study concludes that if governments allow private toll road operators to maximize profits, higher tolls will divert trucks to local roads, depending on the suitability of substitute roads. The authors estimate that for 2005, a for-profit, private operator of the Ohio Turnpike could have raised tolls to roughly three times what they were under the public turnpike authority, resulting in about a 40% diversion of trucks from the Ohio Turnpike to other roads.

"The Ohio Turnpike substantially increased tolls during the 1990s to help finance construction of a third lane in each direction over substantial portions of the Turnpike," the researchers say. "Because the Ohio Turnpike raised its rates for trucks in the 1990s and later lowered them again, sufficient data exist to calculate a demand curve for the Turnpike based on demand and the toll rate. We then use the resulting demand curve to estimate diversion of trucks caused by the changes in the toll rates and to forecast how toll rates might affect Turnpike truck revenue."

The number of diverted trucks is important to both the State of Ohio and the Nation for economic and social reasons.

First, many of the substitute roads are two-lane highways with crash rates many times that of the Turnpike. Second, the increased traffic has reduced the quality of life for communities located along diversion routes and dramatically increased the maintenance costs of many of these roads, say the researchers.

Finally, higher truck tolls have two negative effects on the economy. Motor carriers eventually pass all tolls to consumers in the form of higher prices for goods. While higher toll rates may not decrease the efficiency of non-diverted trucks, they have raised costs.

Furthermore, diversion reduces the efficiency of these trucks because they clearly are taking a second-best route. The resulting loss of efficiency can stifle economic activity, according to the study.

Many of these economic and social costs may not be considered in future leases or sales, especially when such costs are paid by people in states other than the one making the lease agreement.

The study researchers question whether it makes good policy sense to substitute the existing fuel tax-based system of funding road infrastructure with a system that uses widespread tolls and to grant long-term leases to private enterprises that will operate them for profit.

External costs are inconvenient for advocates of extreme laissez faire economics because such costs argue against a purely private market. In this case a publically owned toll road might minimize total costs. But that keeps the state involved in operating highways and therefore reduces the extent of privatization. Hence the desire to ignore inconvenient external costs.

By Randall Parker    2008 January 23 08:32 PM Entry Permalink | Comments (5)
2008 January 12 Saturday
Car Loan Finances Show People Living Beyond Their Means

I always wonder how some people I see driving nice expensive cars can afford to drive those cars. Answer? They are living beyond their means. People are routinely buying cars that depreciate in value faster than they pay off the loans.

Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.

At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

But Marty Jerome at the Wired blog says the numbers might overstate the size of the problem.

Not mentioned in the "Times" article is that the "average" amount owed on a car is hugely skewed by luxury makes (and utility trucks). A relatively small percentage of individuals and companies are assuming extravagant amounts of debt on auto loans for various reasons, including tax write-offs.

He doesn't provide any evidence for these assertions. Also, he still thinks the trend in auto loans is "unsettling".

My biggest problem with the debt nation is that people who live beyond their means their entire working lives will demand more from government (i.e. from people still working and paying more in taxes) in their retirement. Worse, the US government (and not a few other ones) has over promised on what it can hope to deliver to retirees. The currently retired are getting a great deal where they get far more in benefits than they paid in as taxes. Younger folks are going to get shafted on this and the economy will bog down with taxes to try to pay welfare benefits to baby boomer retirees.

By Randall Parker    2008 January 12 04:59 PM Entry Permalink | Comments (3)
2007 November 12 Monday
1 Year Of Toyota Profits More Than GM Market Cap

General Motors used to be the mightiest American corporation. Those days are long gone. Toyota could buy all of General Motors with just 1 year of Toyota profits.

At yesterday’s results announcement in Tokyo, finance chief Takeshi Suzuki said that Toyota now expects to make operating profits of $20.2 billion this financial year, $440 million higher than earlier stated and a figure still considered conservative by analysts. By the end of Wednesday trading, which saw GM’s stock price plunge 6% to $33.95, the market valued the world’s biggest automaker at just $19.21 billion.

That market capitalization is less than half a single quarter's sales.

Globally, G.M.’s automotive operations earned $122 million. Total revenue was a record $43.1 billion.

By Randall Parker    2007 November 12 11:15 PM Entry Permalink | Comments (4)
2007 October 28 Sunday
Aging Passenger Aircraft Fleet In US

If it seems like the airplanes you ride in are old that's probably because they are old.

The fleet of big jets operated by nine major domestic airlines has aged steadily since 2002, according to Airline Monitor, an aviation research firm. The average age was 10.6 years at the end of 2002, and it has risen each year, hitting 12.2 years at the end of 2006. Domestic airlines largely stopped ordering new planes after Sept. 11, 2001, shrinking their fleets to adjust to a drop in demand. Travel has rebounded strongly, but airlines are, for the most part, years away from taking delivery on large numbers of new planes. A big reason is that Boeing and Airbus have committed most of their airliner production capacity in coming years to carriers outside the United States.

Indeed, only 43 of the 710 Boeing 787s on order have been identified as going to domestic airlines; 25 to Continental Airlines and 18 to Northwest. And none of the 165 giant Airbus A380s on order are destined for United States carriers. In essence a new generation of jetliners — bigger, more comfortable, more fuel efficient — is largely bypassing domestic airlines and their customers.

On one hand the newer airplanes are a lot more fuel efficient. Plus, the cost of oil keeps going up. On the other hand, the old airplanes have lower capital costs. I'm surprised that the airlines calculate the older airplanes are cheaper given the increased fuel efficiency of the Boeing 787 Dreamliner. If the price of oil keeps going up their decision might become a pretty big mistake. On the other hand, another doubling of oil prices will idle a lot of airplanes.

These older planes are dirtier, noisier, and get delayed more often by mechanical problems. Are you like me and find that flying has become an ordeal? One reason (though not the only one) is old airplanes.

By Randall Parker    2007 October 28 02:07 PM Entry Permalink | Comments (3)
2007 October 26 Friday
Airlines Oppose Congestion Pricing

US Transportation Secretary Mary Peters wants to use congestion pricing to reduce delays at busy airports. But the airlines oppose market-based solutions for rationing limited resources.

"Congestion pricing has worked exceptionally well in other areas of our economy such as highways, electricity, and telecommunications, and we believe the time has arrived to pursue similar approaches in the aviation sector," Peters told a Senate committee last Thursday.

The airlines are adamantly opposed to the idea of paying more to fly during peak periods, contending that it will only cause them to raise prices and reduce service. Other analysts question whether congestion pricing will work in the New York region.

"Peak pricing doesn't work in a place like LaGuardia because LaGuardia is busy all of the time," says John Hansman, an aviation expert at the Massachusetts Institute of Technology in Cambridge.

Given the shabby ways that airlines are willing to treat passengers their reaction is really par for the course. I think the South Park episode The Entity does the best job of capturing just how bad the airlines have gotten. Even Mr. Garrison's gyro monowheel beats traveling with the airlines.

As for places that are busy all the time: Raise prices high enough and they will become less busy.

By Randall Parker    2007 October 26 11:30 PM Entry Permalink | Comments (0)
2007 September 13 Thursday
States With $1000 Speeding Tickets

Governments look for ways to raise revenue without increasing taxes across the board. Speeding tickets have become a major tax revenue source in some states.

Depending on where you live, speeding fines can range from the puny to the punitive.

In July, Virginia began charging most speeders an additional $1,050 fine on top of its usual $300, with drunken drivers there now facing an additional fine of up to $2,250. Other heavy hitting states include Georgia, Illinois and North Carolina, where maximum fines can hit $1,000, as well as New York, Texas and New Jersey.

I am shocked by the size of these fines. Utah's max is $750.

At least they are fining the drunk speeders a lot more.

Virginia's new law imposes a mandatory $1,050 fee on anyone convicted of speeding at more than 20 mph over the limit, or anyone traveling 15 mph over the limit in a 65 mph zone. When added to a drunken driving offense, a ticket's total can reach $3,550.

Cruise control typically improves gas mileage. But cruise control can also help you avoid a very hefty speeding tax.

The Virginia legislators who wrote the law for the high speeding fines are expecting big revenues as a result.

Albo and Del. Thomas D. Rust (R-Fairfax), who co-sponsored the fee legislation, project that $65 million to $120 million will be raised annually to cover costs of snow removal, pothole repair and grass-mowing. Money for Northern Virginia's congested roads had to come from somewhere, they reasoned, and new taxes were not going to fly in the GOP-controlled House of Delegates.

So get this: Governments basically want you to speed because they want the tax revenue.

By Randall Parker    2007 September 13 07:38 PM Entry Permalink | Comments (1)
2007 September 04 Tuesday
GM And Ford May Shift Production Out Of United States

The US domestic automakers are headed down the road to bankruptcy unless they find a way to make their labor costs globally competitive. They've been steadily losing market share to Japanese rivals for years. South Korea is starting to eat into their marketshares as well and even if they find a way to survive the Japanese onslaught the behemoth called China could finish them off. The Big (but shrinking) Three want big cuts in health care costs and creation of health trusts managed by the UAW. It is no wonder then that in the current contract negotiations with the United Auto Workers GM and Ford are threatening to pull all car production out of the US and move factories to cheaper labor countries.

Their biggest burden is the current labour cost per vehicle - an estimated $71 (around £35) per man hour. Workers earn about $27 an hour with the remainder made up of overheads such as pensions and healthcare costs for the thousands of retirees on their books.

Ford and GM have made it clear that they expect to reduce the hourly cost from $71 to about $50 - a cut of about 30 per cent. The companies are keen not to cut workers' hourly pay, but they insist that other overheads must be reduced.

If a deal cannot be reached, Ford and GM negotiators have said the companies will have no choice but to move their North American operations to countries in Latin America and Asia where manufacturing costs are cheaper.

GM says this isn't a bluff. Look at all the other industries that have already bailed. Highly credible argument.

Sources close to senior GM executives confirmed that the prospect of shifting operations away from North America was very real. 'We have seen it in every other industry,' one said. 'There are no sacred cows today. Globalisation means just that, it's a worldwide playing field.'

They are right that they can not survive with their current union labor costs. No way. No how. Either the UAW grants them a big concession or they go bankrupt or they move abroad. Those are the three possibilities.

What I wonder: Can they afford to move abroad? The UAW will try to go on strike to stop them. So can GM or Ford manage to move their factories fast enough that they can get set up in other countries before they run out of cash? How fast could they move?

I'm thinking they could shift some production to Canada in a hurry. For example, Ford could make Crown Victorias and Grand Marquis in the Canadian plant that makes Lincoln Town Cars. Also, they already have factories in Mexico and Brazil. How fast could production get expanded at those factories?

Update: The UAW threat to strike is hollow since bankruptcy would allow auto makers to walk away from their retirement benefit obligations and union contract workers.

But industry experts say there is almost no possibility of a strike, as the car companies are in such fragile financial shape that a shutdown could force at least one of them into bankruptcy.

“It would be really remarkable if there was a strike. You’d need a complete collapse of negotiations,” said David L. Gregory, a professor of labor law at St. John’s University in Queens. “A strike this time around could be absolutely lethal for the company being struck.”

The UAW's biggest problem is that its members are deluded. They probably can't bring themselves to face the size of the benefits cuts they need to agree to in order to maintain a domestic unionized auto industry. UAW workers oppose efforts to cut auto maker medical costs. Well, US automakers can't survive under current obligations. If the UAW doesn't provide relief the bankruptcy courts will.

By Randall Parker    2007 September 04 07:24 PM Entry Permalink | Comments (4)
2007 August 01 Wednesday
US Car Makers Below 50% Marketshare

The Big Three automakers of Detroit continue to go down, down, down.

DETROIT, Aug. 1 — Detroit auto companies’ grip on the American automobile market ended in July, when dismal auto sales gave foreign nameplates the lead for the first time ever, sales reports showed Wednesday.

The traditional American brands owned by General Motors, the Ford Motor Company and the Chrysler Group held 48.1 percent of the market in July, according to the Autodata Corporation, an industry statistics company in Woodcliff Lake, N.J.

That meant foreign auto companies held 51.9 percent of the market. Their previous high was in June, when they held 49.8 percent of automobile sales.

Note that the Big Three have wracked up huge losses the last couple of years even during a period of strong economic growth. Unless the United Auto Workers (UAW) relents and gives the US car companies big relief on labor costs one or more of them will end up filing for bankruptcy.

In the current contract negotiations the UAW might go after a weakened Ford first.

This time, David Cole, chairman of the Center for Automotive Research, sees Ford as the target.

"They will very likely go to Ford first so the pattern doesn't kill the weaker company," Cole said. "The union is very aware of the financial issues, and it will be a different kind of negotiations. They can't do anything to hurt the weakest company when it's so close to the edge of the cliff. They have to do something that helps keep Ford in the game."

Ford's fragile condition, he said, "reinforces the urgency" that the UAW needs to make more concessions on issues such as health-care costs and retiree benefits. The domestic carmakers contend that those benefits are the main reasons their manufacturing costs of about $75 an hour are $30 more than those at Japanese plants in the United States.

My guess is that large chunk of the UAW's membership rationalize that they are not to blame for the decline in the US auto industry. Therefore even if the union's leaders recognize they are driving the US automakers out of business than the membership wouldn't ratify any contract that cut salaries and retirement benefits enough to allow the Big Three to reverse their fortunes before they reach bankruptcy court.

Once the automakers file for bankruptcy they'll be able to dump tens of billions of dollars of retirement benefits liabilities and maybe even stop using union labor when they emerge from bankruptcy.

The reason this tragedy has dragged on for so long is that the shareholders don't want to accept total loss. The non-union employees of the car companies and the domestic suppliers would benefit from a bankruptcy because with lower manufacturing labor costs they could probably compete and even gain marketshare. But the shareholders, forced by the US government into disastrous contracts with the UAW, keep pushing management to find some tactics and strategy that will bring success in spite of the UAW contracts.

Some say that missteps by the car companies put them in this situation. Lax attitudes about quality certainly cost them in the 1970s and 1980s and even beyond. But the US makers have improved greatly and by some measures Ford now surpasses even Toyota in quality (and more here). Costs are the bigger problem.

What is surprising about this saga is just how long the US car companies have managed to last given their competitive environment. Look at domestic manufacturers in many other industries. The US auto industry has done much better than many other domestic manufacturing industries and has lasted longer. Not only do US car makers compete with foreign makers who have lower costs but US car company labor costs are much higher than blue collar manufacturing labor costs in other American industries. So management and the engineers in Ford, GM, and Chrysler must have come up with many design and manufacturing innovations to allow them to stay in the running for this long.

By Randall Parker    2007 August 01 09:42 PM Entry Permalink | Comments (6)
2007 July 04 Wednesday
Recession Could Push Chrysler Into Bankruptcy?

Chrysler is starting out financially weak but this might help it against the United Auto Workers union.

The new Chrysler is getting its first taste of life without parent Daimler. The sale of Chrysler (DCX) to private equity giant Cerberus Capital Management hasn't gone through yet, but Standard & Poor's and Moody's Investors Service (MCO) have already rated the soon-to-be independent carmaker's debt as "junk," or below investment grade.

That's not all. Standard & Poor's ratings essentially say that Chrysler could be a recession away from bankruptcy. S&P analyst Gregg Lemos-Stein said that if the U.S. car market were to weaken further—with sales dropping from this year's pace of 16.3 million vehicles to 15.5 million vehicles next year—Chrysler could be in default by 2010.

I think the financial position into which a bunch of capitalist financiers have placed Chrysler is great news for the US auto industry. The UAW has been able to very slowly run the auto makers down for years secure in the knowledge that the car companies are not going to go bankrupt immediately. The car companies have been caught in the UAW's grip for decades slowing getting sapped of financial strength. But all the Chrysler UAW workers are now at substantial risk of either a total company shutdown or a bankruptcy that would allow the company to break its UAW contract and kick the union out of Chrysler plants entirely.

In the next round of contract negotiations the UAW is going to need to make major concessions. If it fails to do so then one or more of the big (but shrinking) 3 will eventually end up in bankruptcy court. Chrysler might go first followed by Ford. GM could probably survive the longest.

The UAW's leadership must know just how precarious the union's existence has become. The UAW just took a huge cut in pay for Delphi workers as part of the Delphi reorganization.

The agreement, which runs until September 2011, calls for Delphi to offer wages of $14.50 to $16.23 an hour for all current workers. New hires would make $14 an hour. The agreement also calls for four UAW-represented plants to remain open. The rest will be sold, closed or taken over by GM.

Workers who began their employment with GM or who were hired before the lower- tier wage for new hires went into effect earned about $27 an hour.

About 4,000 of the 17,000 remaining Delphi UAW workers were making the higher wage. Delphi offered buyouts, early retirements and "flow backs" to jobs at GM last year.

The car companies and UAW aren't just threatened by Japanese makers and the next recession. If we are near a world oil production peak (a.k.a. Peak Oil - see Stuart Staniford's Hubbert Theory says Peak is Slow Squeeze and Extrapolating World Production) then the US auto industry will get hit especially hard by rising oil prices. The US makers will need to shift very rapidly over to making diesels, hybrids, pluggable hybrids (PHEVs), pure electrics, and other high fuel efficiency vehicles and that will cause a lot of their existing designs and tooling to become obsolete.

By Randall Parker    2007 July 04 04:40 PM Entry Permalink | Comments (10)
2007 April 04 Wednesday
Prius Carpool Lane Stickers Worth $4k

Those Priuses which have stickers that allow them to ride in the high occupancy vehicle lanes (HOV lanes)

LOS ANGELES — Californians appear willing to pay $4,000 more for used gasoline-electric hybrid vehicles that have state-issued carpool stickers than for hybrids that don't, according to a sampling of prices by Kelley Blue Book for USA TODAY.

The stickers allow low-polluting hybrids to use less-crowded, faster-moving carpool lanes, even if the driver is alone in the car.

This provides a measurement of how much people value their own time and how much they'll spend to go down a faster lane on a highway. Planned High Occupancy Toll (HOT) lanes access in Virginia will sell for $42 per vehicle round-trip per day. That'd put the $4000 premium on HOV lane access as only paying for less than 100 days of access. Though the HOV lanes and HOT lanes might provide different levels of advantage in California and Virginia. Also, one has to make a sacrifice by choosing particular hybrid car models in California whereas the Virginians will be able to take any car of their choosing down a HOT lane. So the HOT lanes probably command a convenience premium over the HOV lanes.

If highways were more like markets then we'd see a lot more fast premium access lanes. Such lanes would also allow buses to offer a time advantage over most cars since the buses could use the HOV/HOT lanes. This would compensate for the time disadvantages of buses due to the need to go only when the buses go and the time waiting and the time getting from the bus stop to where you really want to go.

By Randall Parker    2007 April 04 11:00 PM Entry Permalink | Comments (1)
2007 March 28 Wednesday
Lexus Lanes Coming To Freeways

High Occupancy Toll (HOT) lanes or Lexus Lanes are all the range among free marketeers.

Economics geeks love HOT lanes because they're a beautiful example of supply and demand in its essence. Read the professors on this, and HOT lanes start to sound like econ porn.

Even some environmentalists like HOT lanes on the theory that high tolls will discourage driving and that revenue from tolls can be steered toward transit projects.

So if all these smart people love Lexus lanes, what's the problem?

Drivers tend to hate the idea for three reasons: 1) Lexus lanes seem unfair to low- and middle-income commuters who can't afford to shell out the big bucks. In Virginia, where prices could vary according to traffic volume, planners say it could cost up to $42 per day roundtrip between Prince William County and the Pentagon on the HOT lanes scheduled to be built along Interstate 95.

Wow, $42 per day. Why should drivers hate that the people going in the fast lane are paying more per trip in tolls than the slower drivers pay for transportation total? Seems to me this is a "sock it to the rich" tax where the rich volunteer to pay through the nose.

The cost per trip is so high that the HOT lanes must generate more revenue than they cost to build. Also, the traffic on them reduces the burden on the rest of the lanes.

By Randall Parker    2007 March 28 09:36 PM Entry Permalink | Comments (0)
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