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Posts from the Economics Category

The Wall Street Journal reports that Alaska Airlines has reached a deal to purchase Virgin America. The big news is the price paid.

Alaska Air Group Inc. said Monday morning that it had reached a deal to buy Virgin America Inc., winning a frenzied bidding war with rival JetBlue Airways Corp. The parent company of Alaska Airlines said it would pay $57 a share for Virgin, a 47% premium to Friday’s closing price, representing a total equity value of $2.6 billion. The Wall Street Journal had reported Sunday that Alaska won the bidding contest for Virgin, whose shares have risen lately on takeover speculation.

And investors are responding with a little bit of disapproval as well, with Alaska Airlines stock down around 5.5% at 10am Pacific.
Alaska Stock Price After Purchase Announcement of Virgin America

I am a little concerned that Alaska is paying a significant premium simply to gain gate space and landing slots at a few different airports, namely San Francisco. They are making the purchase at a time when Delta is still trying to grow their new Seattle operation and encroach further into Alaska’s dominant hub, yet they seem unfazed. The Alaska premium product is definitely not cut out to go head to head with some of the other premium transcontinental products and Virgin’s product is showing its age. How does Alaska plan to compete with better products on some of the more lucrative transcon markets (SFO/LAX-NYC, SFO-BOS)?

And all of this without taking into account two very different customer loyalty groups. Virgin is considered sleek and hip, while Alaska Airlines has a loyal following in the Pacific Northwest and Alaska. Merging those two cultures together while not losing customers will be key for Alaska to succeed. I wonder if the Alaska Airlines management team has a plan in place for doing just that or if they are going to call in the consultants to try and sort it out.

Lastly is the two very different airplane fleets. Virgin America operates an all Airbus A320 and A319 fleet while Alaska Airlines is Boeing 737s for their mainline operations. During the analyst call this morning it was mentioned that the Virgin America Airbus leases start expiring in 2020, so for the next few years, there will be a mixed fleet. The one possibility is that Alaska will use the Airbus fleet up and down the west coast since their capacity is a little less than what the 737s can hold and Alaska could run more frequencies to make up for that.

My general sentiment is that I had thought JetBlue would win the bidding war and build a larger west coast presence. This seems like a generally risky move for Alaska who up until this point has not needed financing to operate and they have grown very organically through the years. I worry that biting off more than they can chew could come back to haunt them in the next few years. I hope I am wrong, but the true test will be whether or not they are able to stay entrenched at Seattle-Tacoma International.

I am probably not the customer Starbucks wants using their rewards program. When I am in a city where there are not a lot of local coffee options, Starbucks is my backup. The blonde roast is drinkable and if it is not being brewed they are happy to make a pour-over of it. All of this to say, a lot of my recent work travel has not been close to local coffee shops, but Starbucks were readily available.

The recently announced changes to Starbuck’s rewards program are not going over well.

Under the new plan, the “stars” that are stockpiled to earn free drinks and other rewards are awarded at a rate of two stars for every $1 spent. Currently, customers earn one star per visit. But it will take 300 stars to get to the company’s Gold status, up from 30 stars, and it will take 125 stars for a reward, instead of 12.

Stars will now be earned based on spend instead of number of transactions, meaning people who buy the expensive Frappuccinos will earn more stars than someone like me who orders a grande coffee. I am sure this is specifically targeted at a customer like me who earns 12 stars by ordering coffees and then redeems (or has someone else redeem) an expensive drink. Or worse, the person who orders a coffee and a pastry but in separate transactions to earn two stars and then redeems for something expensive.

Are the Starbucks changes aggressive? Yes, but just like in the airline mileage earning and redemption world you have to remember: Pigs get fat and hogs get slaughtered. Starbucks could have probably made some rules changes that simply limited the number of transactions per day to something reasonable (2 per day maybe?) but they decided to go fully revenue based. The revenue based rewards are quickly becoming commonplace across tons of different industries as a way to “reward” someone for their spend rather than their loyalty. The thing to remember is that spending more to earn a reward usually is not beneficial to you mathematically. Well, unless you’re buying the office coffee on a corporate card; Then you’re making out like a bandit.

In the end, this probably will not change my habits when it comes to Starbucks. If there is no local option when I travel, I will visit Starbucks. And that’s probably exactly what Starbucks wants. Spending habits stay the same but the number of rewards will decrease.

The Bureau of Labor Statistics released the May consumer price index summary yesterday and within it was a piece of data that has gone somewhat unnoticed.

The index for lodging away from home rose 2.0 percent and has increased 4.0 percent over the last three months. The index for airline fares rose sharply in May; its 5.8 percent increase was the largest since July 1999.


The index for all items less food and energy has risen 2.0 percent over the last 12 months; this is the highest figure since February 2013. The 12-month increase in the shelter index reached 2.9 percent in May, its highest level since March 2008. The index for airline fares has increased 4.7 percent over the span, and the medical care index has risen 2.8 percent. Indexes that have risen more modestly over the past 12 months include apparel (0.8 percent), new vehicles (0.5 percent), and used cars and trucks (0.2 percent).

Airline prices are on the rise and with oil prices likely to rise in the coming weeks there will be little relief. But hey, consolidation is a good thing. Right?

I am a sucker for this kind of, in Jeopardy terms, potpourri. Priceonomics has a short piece on why UPS trucks do not make left turns. The most telling part:

UPS engineers found that left-hand turns were a major drag on efficiency. Turning against traffic resulted in long waits in left-hand turn lanes that wasted time and fuel, and it also led to a disproportionate number of accidents.

UPS even has a page describing the practice of no left turns and they expand on the above idea.

What we found: A significant cause of idling time resulted from drivers making left turns, essentially going against the flow of traffic. From there we explored routes where these turns were cut out entirely, and then compared data.

The use of data to make a decision that goes against logic is what I love. UPS leadership was experimental enough to say “we are going to implement this and see if it works” and then study the results from that test. There are a number of very large companies that I have worked with that would immediately balk at this idea. They almost go through stages of grief (sans depression) with ideas like this.

  1. Denial – the companies claim the data is wrong or that it is flawed
  2. Anger – the workers who are responsible for causing the data become upset that someone found out about their poor work habits
  3. Bargaining – to get out of making a change, people start tossing out different ideas, none of them good
  4. Acceptance – “I guess we’ll just have to do it”

Then there are the companies who do the complete opposite. They implement a terrible idea based on bad data, or their understanding and interpretation of good data, and it blows up in their face. Once that happens, they become very adverse to ever trying a new idea again. We need new ideas backed by data and I think it’s awesome that UPS took their data and made some interesting choices that have paid off.

Tory Gattis with the Houston Chronicle debunking United’s stance regarding international flights from Hobby Airport →

What they are pretending will happen is that the fares and number of passengers on any given route are static, and that by splitting them with SWA, they will have to cancel IAH flights (because there aren’t as many passengers to fill their planes – SWA is “siphoning them off”). What happens in reality is the famous “Southwest effect”: SWA reduces fares, UA matches, and demand increases because the price dropped (simple supply-demand curve economics). SWA does not have to actually have lower costs than UA to reduce fares (although they do), they simply have to be willing to give up some of the fat monopoly profit margins UA currently enjoys on those routes. Even if their costs are exactly the same as UA, fares will come down and demand will be stimulated. This terrifies UA, of course, because not only do they lose the fat monopoly profit margins, but they have to offer more flights to meet the demand surge, pulling planes from elsewhere (either that or just cede market share to SWA). Of course, Houston wins all the way around: lower fares and more service.

What Mr. Gattis fails to mention is that Southwest has, in recent years, been less likely to lower their fares significantly over a long term when entering new markets. This was brought up by the city council when reviewing the Houston Airport System study, which, oddly enough, heavily favored Southwest. City council questioned the mentioned fare numbers due to their extremely low prices, something like $150 for Houston to Cancun. When the Houston Airport System and Southwest folks were put on the spot, they could only offer a rebuttal along the lines of “that is what we forecast in five years”. Unless Southwest expects fuel prices to plunge in the next five years, those numbers are unattainable. I cannot seem to find a mention of this anywhere on Mr. Gattis’ blog.

I do think that United’s arguments are a bit of posturing, but what do you expect? I do not think that demand will necessarily increase out of Houston if Southwest gets its way, simply because prices probably will not go down that much. Southwest will start flights at some rock bottom rate and two weeks later they’ll be close to matching what United has. Where Southwest will win out is one-way fares and last minute and walk up tickets.

The difference with “siphoning off” passengers in Houston versus say, New Orleans, is that Southwest is not sure they could fill the planes out of New Orleans, but they feel they could out of Houston. What Southwest is effectively doing is moving closer and closer to the legacy airlines by creating more and more of a hub-and-spoke system. If they wanted, Southwest could easily start international flights from any airport in the U.S. and in fact other airlines have done that; United offers seasonal service from Austin to Cancun, Raleigh-Durham to Cancun, etc. Instead, Southwest does not want to incur the costs of paying for immigration and customs officers at all of these airports, instead they want the city to split those costs with them.

I’ll end this by saying I do think international flights from Houston’s Hobby Airport are inevitable. The push for them is just too persistent for it not to happen. What I don’t understand is this anti-United sentiment. I read and hear comments about “losing the hometown airline” and if that is what is fueling this rage against United then it is in poor form. United still has one heck of a presence in Houston and it will continue to stay that way for a long time. Just as Mr. Gattis said, it’s about free markets, and that’s why United moved to Chicago, they have a better office/building agreement up there.

Delta Bid for Trainer Refinery Gaining Momentum (

When I first saw the news that Delta Airlines was looking at the former ConocoPhillips refinery in Philadelphia I had to do a double-take. An airline running a refinery is just that strange. At first I thought it was a move by Delta to stir up the market a bit but this most recent news makes me think the Atlanta based airline is very serious about buying the facility.

The Trainer refinery is configured to produce a higher yield of jet fuel – about 13 percent of its output, or 23,000 barrels a day (966,000 gallons). Delta could ship the fuel by pipeline or barge to New York, where it has a large presence at LaGuardia and JFK airports.

Delta would ostensibly receive all of the jet fuel from the facility, but would probably swap much of the gasoline and diesel for jet fuel in other locations near Delta hubs.

I am still trying to understand where Delta thinks they will save the money. They will still be buying oil at the market price, the difference now is that they will be a refiner of said fuel. Refining crude oil is not a “value-add” process, it is a necessity. You can’t fly a plane on crude oil.

“The objective would be to achieve a 10 percent price reduction on a large portion of its fuel needs – which, if were achieved, would represent significant savings,” reported Linenberg, the Deutsche Bank analyst.

How? How are they planning to achieve that much of a reduction? Are they simply offsetting their fuel costs by selling the jet fuel on the wholesale market? If so, then how are they financing the operation of the refinery? Refineries are not cheap to operate and certainly not cheap to maintain. As stated earlier, oil companies do not view them as moneymaking facilities but rather, as necessities to compete in the market. The margins in refining are so small that it is hard to make money from fuel alone. Now, maybe if Delta is going to sell chemicals from the facility they can make the revenue that the article hints at.

I would love to have a sneak peek at Delta’s game plan. They must have some kind of strategy up their sleeve to make this work, but they’re going to wait to make it obvious to the rest of us.

John Gruber points to Mike Arrington’s article that responds to Warren Buffett calling for higher taxes for the rich. Specifically, he points out the following:

What I really didn’t understand until recently though is why so many rich Americans seem to loathe their richness as much as everyone else does. Many in Silicon Valley want to tax the rich into the middle class and let government spend and spend and spend. The super rich tech elite flock to Obama, joining in the call to screw the rich as loudly as all the rest.

Gruber then goes into detail about how the economy was so much better under Clinton and then links that success directly to marginal tax rates. He pays no attention to spending and the increase we’ve seen lately. Sure, entitlement spending is up and in the long term we’re going to have to deal with it, but during Clinton’s presidency spending was lower. It’s easy to create a surplus when your budget doesn’t skyrocket due to increases in spending for food stamps, housing, etc. and yes, your taxes are a bit higher.

My problem with all of this is that everyone wants to focus on their brand of a “solution” rather than examining the problem for what it is, spending more than you’re taking in, and trying to solve that. If Democrats were a family and had $100k in debt, they’d get another credit card to cover themselves. If Republicans were in the same situation they’d, well, I’m not sure what they would do. Maybe stop paying into their retirement or going out to movies.

The answer really is somewhere in the middle. Maybe some short term credit (temporary tax increase) along with some significant cutting in short and long term programs. The problem is, this isn’t an answer to the economy’s problems, it’s an answer to the budget and debt’s problems.

Good ol’ Krugman,  once again leaving out important facts in order to wiggle his way into finding some Republican fiscal responsibility for any and all messes.

In his usual way, Mr. Krugman gets straight to the point with this:

And in low-tax, low-spending Texas, the kids are not all right. The high school graduation rate, at just 61.3 percent, puts Texas 43rd out of 50 in state rankings. Nationally, the state ranks fifth in child poverty; it leads in the percentage of children without health insurance. And only 78 percent of Texas children are in excellent or very good health, significantly below the national average.

What he fails to point out is that the majority of the Texas budget is spent both on healthcare and education. How do I know this? Texas conveniently publishes a fact book that you can find here (2010). Page 33 is what you are wanting to read, of $77.6 billion in state revenue, 56.3% was spent on education and 22.8% on health and human services. That amounts to around $43.6 billion spent on education (higher education and public education) and $17.7 billion spent on health and human services. The next closest item on the budget is criminal justice and public safety, which received 9.4% of the state’s budget or $7.3 billion.

Krugman is insinuating that we do not spend enough and that budget cuts will have a deep impact across the state. There’s no doubt that there will be a hit on health and human services but I think the problem is how the funds are being spent within their different agencies, not in the amount the agencies have received before. A lot of mid-sized school districts are estimating $14 million to $20 million a year being cut from their budgets if the plan goes through. If 85% of a district’s money is being spent on personnel, I’d like to see who’s earning what. My money is on the admin side making a decent chunk of change. Maybe some cuts can be made in the admin buildings without making a dent in teacher numbers.

The Texas budget crisis is this, they could cut all other department funding completely and would still have to cut some out of education and health and human services. Tax revenue for the state has dropped to around 2006 levels, which begs the question, why can’t we return to 2006 spending levels? Technically we could, but it would still require personnel cuts in education. The real question is, would it have dire consequences on your children if their classroom size jumped to 30? The research says that the jury is still out on class size having anything to do with graduation rate. Krugman is simply echoing what school districts are screaming across the state which is, “Call your representative! Education is going to die in Texas!”. It’s a little extreme isn’t it? Especially since the estimated budgets for the schools would simply return to 2005 numbers. Have our graduation rates really gone up that much since then? No.

On the chopping block for education are a litany of programs, including parts of the TELPAS program, an assessment for English language learners. While I’m sure the motives behind the program were good, the program has grown to be a beast both in terms of money and in time. And it’s what we are doing with the information we glean from the assessment that is so worrisome. Rather than spending extra time specifically with students who are not English proficient, a lot of districts simply slow the entire class down, in order to avoid the student from feeling awkward. Education’s role is not keeping a student’s social life intact, it’s to educate them.

Another item that people keep insisting would help us is dipping into the state’s rainy day fund, which sits around $9.7 billion. Yeah, that makes a lot of sense, knock down our deficit to $18 billion with our entire savings account, sounds like a stellar plan. Instead, let’s keep that money for a time when we really, really need it.

One of the things I am actually in agreement with Krugman on is the issue of taxes. Most of the state’s budget comes from sales tax and I would be alright with a 1% increase in the tax, taking the rate up to 9.25% (includes local and county collection). Before you tell me how I’m not conservative, let me just explain why this is an acceptable compromise. By raising the sales tax rate, you are not increasing franchise fees or “punishing” the poor, you are simply making it a little more expensive for people to consume. Since a lot of items are not taxable, people have the ability to avoid the taxes or significantly minimize them. The other plus is that sales tax is easy to roll back, while things like franchise taxes and property taxes have a nasty way of sticking around after being implemented.

In the end, something has to give. Either a slight tax increase, budget cuts, or a little bit of both is necessary to get this thing under control. Go to your school board meetings, look at their budget. If they are spending a lot more on administrators than on teachers, call it in to question. Maybe they can make cuts around your district without actually affecting the class room.

A recent study points toward predatory lending practices aimed at minorities as the main reason for the U.S. housing meltdown.

Predatory lending aimed at racially segregated minority neighborhoods led to mass foreclosures that fueled the U.S. housing crisis, according to a new study published in the American Sociological Review.

The financial institutions likely to be found in minority areas tended to be predatory — pawn shops, payday lenders and check cashing services that “charge high fees and usurious rates of interest,” they said in the study.
“By definition, segregation creates minority dominant neighborhoods, which, given the legacy of redlining and institutional discrimination, continue to be underserved by mainstream financial institutions,” the study says.

So it’s those fat cats in their suits that have caused this ruckus.

Sure, I wouldn’t doubt that there is some predatory lending going on out there and it should be severely punished, but I’d bet dollars to donuts that Fannie Mae and Freddie Mac had some part in this as well. Either by being passive and not informing buyers about predatory loans or by not insuring that lenders did not carry on with such practices.