Are Popular Airlines Conspiring to Keep Fares High?

 

Every time you book a flight, you wince a little at the price. Could it all be unreasonable? Airlines always claim that their flights are overbooked, that weather is playing a part, or that seats on your flight are in high demand. But what if they’re causing that high demand themselves in an effort to keep your plane ticket airfare high?

Civil Antitrust Investigation Eyes Major Airlines’ Possible Collusion

On July 1st, the U.S. government launched a probe into several of the country’s most popular airlines on suspicion of collusion. The claims are that these major airlines are purposefully keeping customer’s airfare high by limiting the number of seats available on their flights, creating an increase in demand.

As if that weren’t skeezy enough, the Justice Department’s civil antitrust investigation claims that the major airlines were illegally signalling to each other about how quickly they were adding new flights and seats. This is a much worse crime than simply forcing demand to remain high. They violated the competition policies that the government set forth in order to keep competitive pricing healthy in our state of capitalism.

The major airlines in question received letters demanding that they turn over all records of communication between each other, Wall Street analysts, and shareholders. The government has also requested their information about passenger-carrying capacity from 2010 to the present.

They suspect that these airliners have avoided upgrading their planes or adding new flights when they could’ve in an effort to limit available seats, keep demand unreasonably high, and increase fare for passengers. The investigation claims that these airlines could have added more seats many times, but conspired with other major airlines to intentionally limit their passenger-carrying capacities together.

Although the Justice Department spokesperson, Emily Pierce declined to confirm which airlines were under investigation, she did confirm that they were looking into “unlawful coordination” between some of the U.S.’ most popular airlines.

Major airlines such as Southwest, Delta, American, and United Airlines have all said that they received the government-issued letters and are complying by providing the requested information.

Massive Profit Growth for Post-Merger Airlines Sparked Suspicion

Suspicions grew when from January 2010 to January 2014 the economy 2.2% per year, but the passenger-carrying capacity remained static. Compare that to the airline’s growth of a whopping 5.5% in just one year; from January 2014 to January 2015. It simply doesn’t follow unless there was a little extra help between the competing airlines.

Through a series of very well executed business moves, United, Delta, Southwest, and American Airlines now control over 80% of seats on commercial flights. Since 2008, there have been a series of careful mergers, eliminations of less-profitable flights, and controlled airfares. Their strategy worked: the average domestic airfare has risen 13% from 2009 to 2014.

That percentage is adjusted for inflation, and doesn’t even cover the fees collected from passengers. In the last year alone, these airlines raked in $13 billion in reservation changing fees, and $3.6 billion in baggage fees. The profits were record-breaking at a combined $19.7 billion earned for the U.S. airlines in just the past two years.

Decrease in Jet Fuel Prices Could Spoil the Airline Industry for Investors

Investigation aside, will we see a decrease in prices this year? Unlikely. In fact, the airlines will probably see more profit since the 34% drop in jet fuel prices (their highest expense).

In the defense of airliners, expanding too rapidly has been the kiss of death for many flights in the past. When fuel is cheap, airlines often reduce their prices too much in an effort to outprice the competition, but instead offer too-low fare and add too many new flights… all too fast, effectively emptying their pockets.

It’s a capitalistic highwire act, to be sure. But as this current investigation shows; stacking the odds too heavily in your own favor can just as easily hurt you. Analysts are nervous that the control over the market will soon be lost, and the health of the airline industry will decline as new, cheaper airlines like Jet Blue and Spirit continue to grow more popular. Investors want to know that airlines will cap their growth and keep their passenger-carrying capacity limited for the health of the industry, or else they’ll retreat.

Effects of the Conspiracy Investigation Felt in the Stock Market

When the news of the investigation went out, stocks plummeted 3-5% within minutes on a day where the overall stock market was previously up. Investors would be most affected if the investigation were to reveal that the airlines in question were indeed colluding. Many are already pulling out in an effort to protect their finances.

Spokespeople from many of the airlines under investigation have reiterated that they’ve done nothing but benefit their passengers, and that the airline industry is competitive and healthier than ever.

Even if the collusion allegations are proven to be false, this investigation could change the financial course for the airline industry over the next few months; for investors, the stock market, airlines, and even passengers.

07 Jul 2015

Treasury Prices Boosted by Stock Market Sell Off

stock-market-sell-off

Stock Market Sell Off Boosts Treasury Prices

June 10th marked the best day in the S&P’s 500 in over a month, largely due to a major sell off in German Bunds. The same strategized sell off resulted in the U.S. Treasury yields to spike to their highest recorded yields in more than seven months; a relief after being carefully tracked for the better part of a year. U.S. shares are now on the rebound.

Other U.S. Financial Increases That Could Be Attributed to the Sell Off

The U.S. Treasury wasn’t the only beneficiary of the recent rises. Oil prices also improved, and with it, raising hopes that the U.S. equities will be strong enough to handle the Greek government debt crisis.

Other industrial averages that experienced a comeback: the Dow Jones increased 1.33 percent, the Nasdaq Composite went up 1.25 percent, and the S&P 500 rose 1.2 percent. S&P experienced gains in their financial stocks and energy sector index, as well, at 1.4 percent and 1.2 percent, respectively.

The German Bunds sell off boosting the Treasury prices came at just the right moment, given the Greek and European debt crises, and the sharp drop in the value of the Japanese Yen. While finances take a global dip, the sell off secured a brief financial respite for the U.S. after a long solid auction of 10-year notes.

Unstable Economic Climes and Currency Failings May Be Ahead

The German 10-year yields also finally rose above 1 percent for the first time since September, putting to rest concerns that the euro zone might go into deflation. The 10-year yields rose for their fourth consecutive day as of June 11th. This shift caused investors to drop holdings on Japanese government bonds and U.S. Treasuries.

According to Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg, Florida, “We are completely tracking bund yields.”

The sharp increase in yields might scare off investors, as they did two years ago. According to Boris Rjavinski, a strategist at UBS in Stamford, Connecticut, “We are approaching yield levels where we may begin to see outflows from some bond funds. People might not have tolerance for more losses.”

In an effort to combat the potential loss of investor interests, the U.S. Treasury sold $13 billion worth of 30-year bonds on June 11th. Analysts are hoping that the boost in U.S. Treasury yields will incentivize investors to own new issues of U.S. Treasuries and corporate bonds. However, it’s speculated that the investors who’re concerned about a further rise in Treasury yields might hold off on purchasing them until yields stabilize.

The Greek Debt’s Impact on Current Economic Trends and Prices

Whether or not Greece and its creditors are able to quickly strike a deal will continue to cause market swings until a deal is finalized. The fear amongst traders is that Athens will default on a 1.6 billion euro repayment that is due at the end of June to the International Monetary Fund and exit the euro zone. This will be their fourth IMF deadline that has come up this month. If they do default, it could cause more sharp swings in the market, and global financial upset.

Despite the Yen’s troubles, the U.S. dollar is still currently rallying; again in part due to the stock market sell off. The U.S. consumer-price index was also given a boost, even in the face of decreased investor confidence in bond prices. That increase could signal an upcoming decrease in Treasury prices, as the two are often linked. Whether or not this increase holds throughout the month remains to be seen, given the current economic volatility.

Global economic decisions made in the course of the next few weeks could affect the current upward trend of U.S. Treasury prices, despite the effects of the recent German Bunds sell off.

12 Jun 2015

US Government Sources of Revenue

United States Government’s Sources of Revenue

The U.S. government doesn’t show up to work and get a paycheck. A government is funded in part by its citizens, corporations, and resources. Most of the United States government’s sources of revenue come from various kinds of taxation, and the revenue earned from those taxes is put back into the country and states. There are five major tax-based sources of revenue in the U.S.- here’s how they break down:

Excise Taxes

The smallest source of the U.S’s revenue comes from excise taxes. These little everyday taxes accounted for just 3% of the total government revenue for 2010.

They can be indirect taxes or penalty taxes paid to the government. You’ll most often see these taxes at the end of your receipt. Purchases made on specific goods such as gasoline, highway useage for trucks, etc.

There are two kinds of excise tax classifications:

  1. Specific: a fixed dollar amount is charged according to the quantity purchased
  2. Ad Valorem: a fixed percentage is taxed on any particular good

You’ll see the ad valorem excise taxes in situations like pulling from your retirement fund before you’re of the designated age. That penalty charge takes the appropriate percentage from you in excise taxes, and those go to the government.

“Other”

Any form of tax revenue that doesn’t fit into any of the other specified categories gets lumped into the “other” category. This can include estate and gift taxes, customs duties, miscellaneous receipts, etc. These taxes mostly come from businesses, financial transactions that aren’t covered by the other categories, and so on.

6% of the U.S. government’s sources of revenue is labeled as “other” forms of tax revenue.

Corporate Income Taxes

In the scheme of total government sources of revenue, corporate income taxes make up 9% of the total revenue from taxes. Despite major corporations reaching near-monopoly status, their taxes remain shockingly low compared to other countries.

Corporate income taxes are used to try to level the playing field while still generating revenue for the U.S. government. Different rates are used for different levels of profits. The government taxes a corporation’s profits for the taxable period, typically to the operating earnings after things like depreciation, SG&A, and so on have already been deducted from the revenues.

In the U.S. corporate income taxes are only 9% of the government’s sources of revenue, but in most countries, they use higher corporate income taxes to finance government spending and national programs for their citizens.

Payroll Taxes

At 40% of the U.S. government’s sources of revenue totals, payroll taxes are the numbers that you see taking bites out of your paycheck. An employer withholds these payroll taxes based on the salary or wage that the employee earned. It’s common in most countries for both the federal and state governments to collect payroll taxes from employees.

These taxes are the source of revenue that funds programs such as health care, Social Security, unemployment, worker’s compensation benefits, etc. On a smaller scale, state or local governments will sometimes use payroll tax revenue to finance improvements and maintenance to local transportation and community upkeep for roads, parks, sidewalks, etc.

Payroll taxes are the government’s source of revenue that typically comes to most people’s minds when they think about their taxes and where that money is going and being used for. However, this revenue is still only 40% of the total revenue earned and used by the U.S. government; and nowhere near the full extent of tax revenue useage for the country or state.

Individual Income Taxes

At 42% of the U.S. government’s revenue sources for 2010, the largest portion of tax-gained revenue for the government comes from individual income taxes. You’ll know it best as the mountain of paperwork you have to fill out and file each April, and you cross your fingers that you get a tax return in the mail.

Individual income taxes are taxations by the government on gross financial income generated by everyone within their jurisdiction. Both businesses and individuals are required by law to file an income tax return each year. Those tax returns are examined and processed, and then it’s determined whether you owe more money to the government, or if the government owes you money, instead (which will come in the form of a tax refund). Individual income taxes may seem like a pain, but at 42%, they are the foremost provider of state and government-funded programs and activities that serve the public on a daily basis.

The rate of individual income taxes can vary, in an effort to keep the balance. So when the tax rate rises, taxable income rises with it.

Taxes are a Major Source of Government Revenue Across the Globe

Every country imposes taxes as a necessary source of revenue for the nation. The United States is no exception, but it actually falls far below other developed countries as far as how much they take in taxes to account for revenue. Given the massive debt that the U.S. is in, it might be time to rethink that strategy and follow the lead of prospering countries that impose high levels of taxes, such as Denmark or Sweden.

Federal and state taxes are felt every day by citizens, but they’re still a necessary source of revenue generated to finance other improvements in our everyday lives.

08 Jun 2015