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One has to question the competence of the executives who would sell a contract that obligates the company to nearly unlimited liability forever for a fixed one-

One has to question the competence of the executives who would sell a contract that obligates the company to nearly unlimited liability forever for a fixed one-time payment. Particularly in such a low margin industry as an airline.

wtvanhest 15y ago
When it was originally offered the airlines were regulated and they were high margin. At the time, in the 80s credit was almost nonexistent and they needed to raise money so they let their customers finance them. This is not so different then what startups do.
- corin_ 15y ago
  It's very different - most startups (in the HN world anyway), by offering an unlimited anything, are only losing the ability to make money off that customer in the future. They aren't having to pay high taxes for the rest of that customer's life, nor is he taking up slots that prevents them charging someone else for the seat.
  - wtvanhest 15y ago
    I was referring to the concept of financing your growth through first customers. There is always a cost. Sometime it is just opportunity costs.
robryan 15y ago
Sounds like what GM I think it was did with retirement plans, apart from limited lifespans it is essentially also an open book of unknown future obligations.
guan 15y ago
The article states that interest rates were high back then. If you assume that the buyers would use them for 40 years on average, and use a cost of capital of 15%, these things would make sense if the cost of providing the flights was expected to be less than about $37,000 per year. Change the assumptions to 30 years and 20%, and that figure becomes about $50,000. It’s not insane for the airline to think that typical buyers’ flights would cost less than that, especially since the marginal cost of even a first class seat would be low. It is true that the same people, who are probably rich, might have bought full price tickets anyway, but then again they might have traveled on other airlines.
- marshray 15y ago
  especially since the marginal cost of even a first class seat would be low The cost all depends on whether or not they would have two spare first class seats to throw away on someone (and his bag) that they are never going to get a dime from again. Even then they could use those seats to offer upgrades to loyal business/coach customers. $37,000 per year doesn't go very far when divided by the price of two first-class tickets. I think this is a classic case of short-term vs long-term thinking.

wtvanhest 15y ago

When it was originally offered the airlines were regulated and they were high margin. At the time, in the 80s credit was almost nonexistent and they needed to raise money so they let their customers finance them. This is not so different then what startups do.

corin_ 15y ago
It's very different - most startups (in the HN world anyway), by offering an unlimited anything, are only losing the ability to make money off that customer in the future. They aren't having to pay high taxes for the rest of that customer's life, nor is he taking up slots that prevents them charging someone else for the seat.
- wtvanhest 15y ago
  I was referring to the concept of financing your growth through first customers. There is always a cost. Sometime it is just opportunity costs.

robryan 15y ago

Sounds like what GM I think it was did with retirement plans, apart from limited lifespans it is essentially also an open book of unknown future obligations.

guan 15y ago

The article states that interest rates were high back then. If you assume that the buyers would use them for 40 years on average, and use a cost of capital of 15%, these things would make sense if the cost of providing the flights was expected to be less than about $37,000 per year. Change the assumptions to 30 years and 20%, and that figure becomes about $50,000. It’s not insane for the airline to think that typical buyers’ flights would cost less than that, especially since the marginal cost of even a first class seat would be low. It is true that the same people, who are probably rich, might have bought full price tickets anyway, but then again they might have traveled on other airlines.

marshray 15y ago
especially since the marginal cost of even a first class seat would be low The cost all depends on whether or not they would have two spare first class seats to throw away on someone (and his bag) that they are never going to get a dime from again. Even then they could use those seats to offer upgrades to loyal business/coach customers. $37,000 per year doesn't go very far when divided by the price of two first-class tickets. I think this is a classic case of short-term vs long-term thinking.