# The economics of budget airlines don't make sense



## Matthew H Fish (Wednesday at 7:18 PM)

As many people have pointed out, Amtrak is often being beaten not just on speed, but on cost, by budget and ultrabudget airlines. 
The question is...how? When I try to do some envelope math, the numbers don't seem to add up to anything close to profitability. I am not an expert on this, and I am looking for some information that would allow me to get some sense of what the income and cost of an airline is. Some of these things have been discussed in passing in other threads, but mostly in passing. 
The basic question is: a commercial jet costs on the order of 100 million dollars. A coach bus might cost a few hundred thousand. So just looking at that first capital expense, how are airlines able to have cheaper tickets?
I tried to do a breakdown of how many flights it would take to pay off a 100 million dollar airplane. At 100 dollars a ticket, that would be...a million passengers. Since there are around 100 seats on an airplane (mostly so I can make the unit conversion cancel better), that is 10,000 flights. At about 3 flights a day, that is 1000 flights a year. Meaning that it would take about 10 years to pay off the cost of that plane from ticket sales. (Notice that I used some round numbers to get a convenient number---it might actually be 8 years, or 7 years, but still, several years). But jet planes also take fuel---a lot of fuel. I was reading estimates of how much jet fuel costs, and one source said that on a flight like Denver-San Francisco, it averages out to $5,000-$7,000 on the low end. So if we have 100 passengers at $100 each, 50-70 of those passengers are just paying for the fuel! And of course, pilots and mechanics don't work cheap. The labor costs for an airline have to be pretty high. (Although apparently not as high as I thought, even at $100 for a three hour flight, only a few of our passengers are paying for the working cost of the pilot---but there is also a co-pilot, as well as many people on the ground. 
Anyway, adding all of these things up, the budget model doesn't seem to make sense as a sustainable business practice. Even if we add in things like the fact that many passengers are paying extra for luggage, it still seems like it would be a stretch.
My guess is that it is a byproduct of the very low interest rates we have had for the past 10 years. The business model of the budget carriers is to buy or lease airplanes using credit, and to have cheap fares to try to build up a market, with the eventual idea of having a more sustainable fare structure. They also are assuming that interest rates will be low enough that they will be able to sell their own assets later. As far as I can tell, low airfares are being powered by having a lot of investment money coming in, but it can't continue indefinitely.
A lot of the answers to this question might just end up kicking the can down the road---for example, the airlines might not own the airplanes, they might just be leasing, but then the question just becomes "how do they pay enough to the leasing company?"
(The overall question is very relevant to ground transit, both train and bus: how can a mode of travel that can literally have 100 times the capital cost, as well as higher operating costs, be at all competitive? And specific types of financial methods, such as being able to write-off capital costs or depreciation, exist _ceteris paribus_ across modes, and don't account for the long term sustainability of a business model.


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## skylar (Wednesday at 7:27 PM)

I'm not a business person, but I think one incorrect assumption is that the airplanes are $100 million. That's the list price, but nobody pays that; my understanding is that discounts of well over 50% are de rigueur. $100 fare is very rare these days too for coach class, and given that first/business class tickets are easily 5x and sometimes 10x that, my guess is that the premium cabin is strongly subsidizing the rest of the plane, similar to how sleeper passengers are subsidizing long-distance Amtrak routes. There's also huge public subsidies for running the airport itself, and generally their capital projects are financed with tax-exempt municipal bonds that can command lower interest rates than normal commercial debt.

That's not to say that airlines are sustainable or use wise business practices, though.


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## Matthew H Fish (Wednesday at 7:43 PM)

skylar said:


> I'm not a business person, but I think one incorrect assumption is that the airplanes are $100 million. That's the list price, but nobody pays that; my understanding is that discounts of well over 50% are de rigueur. $100 fare is very rare these days too for coach class, and given that first/business class tickets are easily 5x and sometimes 10x that, my guess is that the premium cabin is strongly subsidizing the rest of the plane, similar to how sleeper passengers are subsidizing long-distance Amtrak routes. There's also huge public subsidies for running the airport itself, and generally their capital projects are financed with tax-exempt municipal bonds that can command lower interest rates than normal commercial debt.
> 
> That's not to say that airlines are sustainable or use wise business practices, though.



I mostly set it at 100 million dollars so I could just use "spherical cows" unit conversion. But even if it is 50 million dollars, even if it is 20 million dollars, that is still many times more than the cost of a coach bus. I can't actually find the cost of a new coach bus on Daimler's page, but here is the cost of a used Coach bus:





Pre-Owned Motor Coaches | Luxury Motor Coaches for Sale | Setra Coach


Explore our lineup of pre-owned Setra motor coaches. You can search for the perfect coach by type, power train, region, model year, price, and more.




www.setrausa.com




All of those are under $200,000. Even if new models are twice that, they are still going to be 1/40th the cost of the cheapest price we can imagine for a very cheap airplane. 
So the question is, I can get a flight from San Francisco to Eugene, Oregon for 120 dollars. I can buy an Amtrak bus ticket from Portland to Eugene for 25 dollars. (This might be a single cherry-picked example, I know, but it is fairly representative). If even at our narrowest estimate of capital cost, the plane is 40 times as expensive, how are airlines selling tickets for only 5 times as much?


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## ehbowen (Wednesday at 8:15 PM)

One item I didn't see mentioned: Freight, mail, and express...especially mail. When I worked behind the scenes at Hobby Airport in the '90s their employees told me that their business model was to break even on mail and air freight; the passenger revenue was gravy.


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## Matthew H Fish (Wednesday at 8:32 PM)

ehbowen said:


> One item I didn't see mentioned: Freight, mail, and express...especially mail. When I worked behind the scenes at Hobby Airport in the '90s their employees told me that their business model was to break even on mail and air freight; the passenger revenue was gravy.



That makes a lot of sense. 
I guess my overall question is, are these routes just giving passenger service on top of another thing that is actually useful (such as carrying freight, or when a plane is rotating to another hub), in which case it is just a win/win for everybody, or is it part of a market strategy to capture market share (and to depress usage of other forms of transportation) that isn't sustainable?


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## Michigan Mom (Wednesday at 8:44 PM)

Budget airlines almost never have a good business model. As much as we love to complain about the legacy carriers, they are so much better positioned to absorb shocks to the system. Well, that used to be the case anyway, pre-pandemic. After they took bailout money and failed to maintain enough staff, we see the results. Even so, the legacy carriers have rebounded and are far more likely to be a stable presence going forward.
What we called LCCs (low cost carriers) back in the day, generally tried to succeed by identifying a market segment they could go after, and try to undercut the majors in that same market. These work for a time, until they don't. Dozens of stories abound as to failed or struggling LCCs. Spirit is one that is still around, but I would never fly them. At least Spirit has enough planes, pilots and employees not to implode as so many other LCCs did.
Southwest actually had a really good thing going, aided by some government favors and a unique business plan for a major airline at the time: All B737 fleet, no checked bags, mostly nice weather destinations, and happy employees. Customers loved the offering and Southwest made money too. "You are now free to move about the country." However, eventually they grew big enough to start to experience the pains of other major carriers. And that's where they are today.
It's a very complex topic and I used to work for one of those legacy carriers, so that's a window I have into the tension that exists between airlines and their passengers.


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## Matthew H Fish (Wednesday at 9:14 PM)

Michigan Mom said:


> What we called LCCs (low cost carriers) back in the day, generally tried to succeed by identifying a market segment they could go after, and try to undercut the majors in that same market. These work for a time, until they don't. Dozens of stories abound as to failed or struggling LCCs. Spirit is one that is still around, but I would never fly them. At least Spirit has enough planes, pilots and employees not to implode as so many other LCCs did.



That might also be part of the implicit or explicit business model of newly formed LCCs--- "if we fail, there will be someone else to buy our assets". I also wonder if at least in some cases, it is a "The Producers" type of business---holding companies open up an airline, run it at a loss for a few years, take a tax write-off, and then sell their assets to another business they control, which can then go into operation. I am not saying that is the case, but it wouldn't surprise me. 
The bottom line for me, in regards to train travel, is that I started wondering about this after reading a reddit thread by a European visitor who asked why anyone would take a train from Cleveland to Boston when they could get their cheaper and much faster using a budget airline. I am looking at Google Flights, and there is indeed a flight for 100 dollars round-trip. So we are at a point where despite many people (especially younger people) are more environmentally conscious---but also just take it for granted that they can hop a thousand miles for 50 or maybe 100 dollars.


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## Trogdor (Wednesday at 10:12 PM)

I think part of the problem might be that you have used certain assumptions that aren’t really accurate. For starters, as others have mentioned, $100 million isn’t what airlines are paying for 100-seat airplanes. A carrier such as southwest is probably paying on the order of $30-40 million for a plane that seats 175. So, off the bat, the plane seats 3 or 3.5 times as many people as a bus. And that’s for a brand new plane, that may last 30 years in service. Capital cost per year therefore is in the range of $3-4 million.

A new coach bus is going to be on the order of a half million dollars or more. I don’t know the expected lifespan of such a vehicle (FTA standards for transit buses are 12 yeras, but I don’t know how transferrable that is). If one considers a 15-year life span, that means spending $1 million in 30 years (discounted to today’s dollars). Now, consider that the plane actually has 3 times the capacity, and that means spending $3 million in 30 years to get the same number of seats as a $30 million jet. So now, your “100 times the capital cost” equation has been reduced to 10 times.

Then you have to consider that a plane can fly from, hypothetically, San Francisco to Seattle 10 times in the time it takes a bus to make that trip once, and suddenly, your capital cost per seat is almost equal between the two modes.

Pilots make a lot of money per hour, true. But a bus driver, taking 10 times as long to travel a given distance, is going to basically wash away the crew cost savings (considering, again, that you need 3 or 4 bus drivers to do the job of 2 pilots, and flight attendants combined maybe make as much as one of the pilots). So, now your staff costs on a per passenger-mile basis probably come out as a wash.

It’s going to be similar for fuel costs. Planes use a lot of fuel, but when averaged out per passenger-mile, it often doesn’t wind up being that much more (and possibly even less) than ground transportation modes.

While it is true that many budget airlines fail, many others have succeeded (not just Southwest, but also carriers such as Allegiant, Frontier, Spirit, etc.). So, clearly, the economics aren’t 100% bad. And many of them make money on other costs as well, such as high fees for checked bags (or even carryon bags), seat assignments, on-board food sales, etc. It can definitely work.


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## BCL (Wednesday at 10:43 PM)

Michigan Mom said:


> Southwest actually had a really good thing going, aided by some government favors and a unique business plan for a major airline at the time: All B737 fleet, no checked bags, mostly nice weather destinations, and happy employees. Customers loved the offering and Southwest made money too. "You are now free to move about the country." However, eventually they grew big enough to start to experience the pains of other major carriers. And that's where they are today.



I don't believe Southwest ever went without checked baggage. I specifically remember flying them several times in the 90s and they always had checked baggage. And these days their value proposition is that they still provide two pieces of checked baggage for every passenger at no extra cost. Granted it's not seeming like that great a deal for passengers who haven't gotten their baggage back that they checked in on Christmas Day.

It's gotten different though. These days they seem more traditional. I remember sometime back in the 90s the flight attendants all wore polo shirts. I also remember more or less fixed pricing which was considerably cheaper than other airlines, although then they went to their "Anytime" fares coupled with more dynamic discounted fares.


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## Matthew H Fish (Wednesday at 11:50 PM)

Trogdor said:


> I think part of the problem might be that you have used certain assumptions that aren’t really accurate. For starters, as others have mentioned, $100 million isn’t what airlines are paying for 100-seat airplanes. A carrier such as southwest is probably paying on the order of $30-40 million for a plane that seats 175. So, off the bat, the plane seats 3 or 3.5 times as many people as a bus. And that’s for a brand new plane, that may last 30 years in service. Capital cost per year therefore is in the range of $3-4 million.
> 
> A new coach bus is going to be on the order of a half million dollars or more. I don’t know the expected lifespan of such a vehicle (FTA standards for transit buses are 12 yeras, but I don’t know how transferrable that is). If one considers a 15-year life span, that means spending $1 million in 30 years (discounted to today’s dollars). Now, consider that the plane actually has 3 times the capacity, and that means spending $3 million in 30 years to get the same number of seats as a $30 million jet. So now, your “100 times the capital cost” equation has been reduced to 10 times.
> 
> ...



That is all great information, and a lot of this stuff is stuff that I don't know, and wouldn't even know how to look up--- how much is an airplane mechanic paid versus a diesel mechanic, and how many of them are required?
But I think the biggest mistake I looked for in my calculations was that I needed to look at more air fares from more cities. 
There are some ridiculously cheap flights that have to lose money for the airline, for example I found two flights from Atlanta to New Orleans for under 90 dollars, round trip, non-stop. Even if you add in the cost of luggage and other things, Spirit has to be losing money on a $27 flight one way. I mean, at this point, That is how much it takes for lunch for two people at a fast food restaurant! 
But then I checked from New Orleans to Memphis, a similar distance. And there are no direct flights. The traditional carriers are asking for more than 350 dollars for a round trip, with the shortest trip being four hours (flight time). Spirit Airlines does offer a 125 dollar round trip---with a 12 hour layover in Orlando. So a flight like this doesn't offer a clear advantage over Amtrak: Amtrak takes 8 hours to make the same trip, which is probably similar in time once the security and boarding time is included. And Amtrak is 50 dollars one way in coach, so a quarter of the cost. With a more comfortable seat and much more luggage available. 
So I guess the best answer to the mystery of how budget airlines can offer such low fares is...that they really don't. There are a few routes between cities of opportunity, but in general, flights between medium sized cities at intermediate distance either don't exist on low budget carriers, or are really expensive/troublesome.


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## Matthew H Fish (Thursday at 12:33 AM)

I am especially looking at this in terms of proposed corridor service, like Cleveland-Columbus-Cincinnati. If Budget airlines could really whisk people from Cleveland to Cincinnati the same way they can go from Atlanta to New Orleans, then rail would be a hard sale. 
But as it is, there are no non-stops between any of these cities, and the flights that are available are less competitive, in price and time (counting the boarding process) than ground transit. The only problem is, the ground transit right now is only the Greyhound bus. The proposed line would be very competitive in almost every way with what the budget carriers offer right now.


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## Devil's Advocate (Thursday at 1:05 AM)

Matthew H Fish said:


> As many people have pointed out, Amtrak is often being beaten not just on speed, but on cost, by budget and ultrabudget airlines.


Even First Class on a legacy airline can be half or a quarter of what Amtrak charges for the same trip in a sleeper. Amtrak is usually the slowest and least convenient option so they need to offer better pricing and service standards. Higher than average service at lower than average prices needs high volume to be financially viable. Unfortunately Amtrak keeps shrinking trains rather than expanding them. Which I suppose makes sense since they have no practical method for replacing wrecked and worn out hardware in a timely fashion.


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## Matthew H Fish (Thursday at 3:13 AM)

Devil's Advocate said:


> Even First Class on a legacy airline can be half or a quarter of what Amtrak charges for the same trip in a sleeper. Amtrak is usually the slowest and least convenient option so they need to offer better pricing and service standards. Higher than average service at lower than average prices needs high volume to be financially viable. Unfortunately Amtrak keeps shrinking trains rather than expanding them. Which I suppose makes sense since they have no practical method for replacing wrecked and worn out hardware in a timely fashion.



Well, I wouldn't find that a good comparison at all, because that is a comparison between an airplane coach seat, which is smaller than an Amtrak coach seat, and an Amtrak bedroom. If you want to do a comparison of that, you would need to compare an Amtrak bedroom to an airplane bedroom-- -which I don't think is something that exists on domestic commercial flights (I mean, I am guessing at this, I haven't flown domestically for decades). 
A better comparison is how does a normal Amtrak seat compare with a normal airline seat. 
Especially for an example like New Orleans to Memphis, or any other trip in the range of 4-10 hours---assuming that a sleeper is necessary seems to be quite a leap, especially when we are comparing it to an extremely narrow budget airline seat.


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## cirdan (Thursday at 4:59 AM)

I believe budget airlines are often able to undercut legacy airlines because

- they are able to turn around planes faster, meaning they can do more flights a day with the same equipment. I think the faster turnaround is due to the greater simplicity of the service, maybe also serving smaller airports with less waiting and taxiing time.
- smaller airports are also often cheaper in terms of the charges the airline must pay, often also supported by subsidies.
- budget airlines often don't wait for connections, so again can save time by reducing the layover buffer
- budget airlines focus very much on selling every seat if at all they can, legacy airlines are more concerned about fighting price erosion and will so prefer to fly with a half empty plane than to give away seats below cost
- in my observation budget airlines rely very much on external contractors to do a lot of work including maintenance, various handling jobs, whereas legacy airlines do everything in-house if they possibly can. Possibly there is an untapped savings potential here, which might of course be offset by the greater quality of in-house work.


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## Chris I (Thursday at 8:44 AM)

No one pays list price for aircraft, and many budget airlines get started with used aircraft. For used, you're looking at $10-$30 million. In some cases, budget airlines have made large orders at the right time and have snagged new builds for less than $30 million. Keep in mind that they also get to sell these for some value when they are done. They don't do major maintenance in-house, and save money by having it performed by external contractors in the cheapest foreign country possible.









House Passes Bill Targeting Foreign Repair Stations - FLYING Magazine


Lawmakers pass an aviation maintenance bill to hold foreign MROs to equal standards, and workforce bill to improve recruitment and retention.




www.flyingmag.com





The cost of the aircraft is kind of a distraction, though, as budget airlines are budget because of the way they operate. Southwest, Frontier, and Spirit all fly more segments per day than a similar aircraft on Delta/Alaska/etc. They have minimal staff, often outfitting their aircraft with seats as close to 100, 150, 200, etc so they can meet the 50 passenger per flight attendant requirement with the minimum staff. They have minimal airport staff, support staff, etc. They don't interline with other airlines. This all can result in extreme disruptions for travelers when weather or other operational events occur. It's very common for these airlines to tell customers that they can't rebook them for multiple days when there is a cancellation. They generally have very few flights per day from any given airport, fill their planes completely full, and can't interline to move passengers. This was all a big contributing factor in the Southwest meltdown recently.


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## jis (Thursday at 9:32 AM)

Here is an interesting article discussing what airlines do to achieve better return on investment...









The six secrets of profitable airlines


The airline industry has failed to earn its cost of capital in every year of its existence. Here's what can be learned from the most profitable airlines.




www.mckinsey.com


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## fengshui (Thursday at 1:19 PM)

The other key element on planes is their passenger-trips per day is much higher than ground transport, and their speed is much higher, so customers are willing to accept higher loads than buses can. If you have a bus running from City A to City B in 6 hours, people don't want to sit hand-to-jowl with a stranger, if that's the standard, they will drive their own car to be more comfortable. On a plane, the trips are shorter, and there is no substitute via car, so people accept being packed into every seat.

Other commenters have described the increased utilization rate of planes compared to buses well.


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## Matthew H Fish (Thursday at 2:27 PM)

fengshui said:


> The other key element on planes is their passenger-trips per day is much higher than ground transport, and their speed is much higher, so customers are willing to accept higher loads than buses can. If you have a bus running from City A to City B in 6 hours, people don't want to sit hand-to-jowl with a stranger, if that's the standard, they will drive their own car to be more comfortable. On a plane, the trips are shorter, and there is no substitute via car, so people accept being packed into every seat.
> 
> Other commenters have described the increased utilization rate of planes compared to buses well.



Maybe there could be a lot of savings if bus operators found a way to attach multiple buses to each other, using economies of scale. They could actually just move the engine into one single bus, and then the other buses could be for passengers. Then to even increase the efficiency further, the bus could have its own route where it could reach higher speeds without interruption. Maybe with some type of guideway. The economies of scale could go into effect, and you could fit a lot more people in one of those than in even a massive plane.


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## railiner (Thursday at 3:00 PM)

Matthew H Fish said:


> Maybe there could be a lot of savings if bus operators found a way to attach multiple buses to each other, using economies of scale. They could actually just move the engine into one single bus, and then the other buses could be for passengers. Then to even increase the efficiency further, the bus could have its own route where it could reach higher speeds without interruption. Maybe with some type of guideway. The economies of scale could go into effect, and you could fit a lot more people in one of those than in even a massive plane.


Sounds to me, what you are proposing is not a bus… but a railroad train…


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## Cal (Thursday at 3:07 PM)




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## Matthew H Fish (Thursday at 4:03 PM)

Cal said:


>



One thing mentioned in the video about European budget airlines seems to be directly opposite how American budget airlines work. The video says that budget airlines in Europe save money by not flying out of established, high-volume airports. From what I have seen (again, just from perusing Google flights), in the US, the cheapest fares are between the biggest hubs. I found a $45 flight between Atlanta and Chicago O'Hare, for example. But if I want to go between non-hub cities, those airlines don't offer flights. 
I also don't know much about airports in Europe, but are those airports owned, or at least supported by government entities? Because if that is the case, and the airport is basically financed as a base so that airlines can have very cheap flights, then that does come out to being a subsidy. Whether advertently or inadvertently, the government is making very cheap flights available to travellers. 
(That is also a big difference between the US and Europe as far as subsidies go, because in the US, the most obvious subsidy is through EAS, which is for more rural airports, not for airports that are close to, but outside of, big cities)


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## BCL (Thursday at 6:48 PM)

cirdan said:


> - in my observation budget airlines rely very much on external contractors to do a lot of work including maintenance, various handling jobs, whereas legacy airlines do everything in-house if they possibly can. Possibly there is an untapped savings potential here, which might of course be offset by the greater quality of in-house work.



The legacy airlines all work with partner airlines to provide regional service. You known - Skywest and Republic being the biggest.


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## Matthew H Fish (Thursday at 7:51 PM)

I might have gone really far down the rabbit hole today, and I now know way more about Western European airports than I need to. Maybe still not enough to make sense of things. 
I do think I can make a point here: European and US budget airlines have very different service models. And the first thing that needs to be mentioned about that is this:



This area of Western Europe has close to 180 million people. When we superimpose it on the eastern central part of the US, we can see that even though that area has some larger cities, they are smaller and further apart than they would be in Europe. Indianapolis and St. Louis are about as far away as Frankfort and Paris, and, apologies to Indianapolis and St. Louis, but they aren't exactly Frankfort and Paris as far as size goes. 
Which also explains why the European carriers seem to have a different strategy, they fly between "smaller cities", but those "smaller cities" are still closer to each other and larger than comparable cities in the US, outside of Boston-Washington. Without looking up exact routes, I imagine you can fill up a plane between Munich and Marseilles much faster than you can fill up a plane between Louisville and Birmingham. Budget carriers in Europe can fly those routes with full passenger loads and short turnaround times. Budget carriers in the US either don't serve cities like that, or if they do, they go between hubs like Chicago, Atlanta, Orlando or sometimes even Denver or Las Vegas! Again, I haven't looked at every single route, but it seems to be a very different service model. 
To return this back to the purpose of this forum, it also shows how much more competitive trains are on cost, comfort and even speed against airlines, in most situations. Of course, Amtrak will never be able to beat a budget airline in cost or speed when it comes to a route like Atlanta-Chicago. But across mid-sized cities at medium distance, it seems that it wins in cost, comfort, and speed.


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## cirdan (Yesterday at 5:36 AM)

Matthew H Fish said:


> This area of Western Europe has close to 180 million people. When we superimpose it on the eastern central part of the US, we can see that even though that area has some larger cities, they are smaller and further apart than they would be in Europe. Indianapolis and St. Louis are about as far away as Frankfort and Paris, and, apologies to Indianapolis and St. Louis, but they aren't exactly Frankfort and Paris as far as size goes.


I agree with all your points and don't wish to detract from your overall argument.

There is however another important difference between the US and Europe. The US is (relatively speaking) homogenous culturally, people speak the same language (more or less) and its no big deal to, say, move from Chicago to Atlanta for a job or for somebody in Denver to have parents in Miami and thus travel that route with some regularity.

Of course that happens in Europe too, but different languages and cultures are still a barrier, even if every generation is getting better than the last in overcoming this barrier. Nevertheless, I think you will find that there is much less of a travel market between say Munich and Marseille than there is between Vienna and Hamburg. And thus much less economy of scale the low-cost airlines can draw from.

The same is true of trains. You can get from Zurich to Hamburg by train about every hour (not necessarily directly, but with reasonable connections). According to the online timetable you can get to Marseille about six to eight times a day, but if you look more closely many of these trips are unreasonable and tortuous doglegs, so there are probably about three reasonable connections a day. And this despite the fact that geographically, Marseillle is closer than Hamburg.

So what I'm basically saying is that travel within a language area is far greater than travel between language areas.


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