Why Do Airlines Always Lose Money? Hint: It’s Not Due to Taxes or Fuel Costs

(Digital Vision)

It’s been more than 30 years since the airline industry was deregulated in 1978. Since then it’s lost nearly $60 billion on U.S. operations, though most of the losses have come since 9/11. The airlines were already in trouble before the attacks happened. The plunge in demand and resulting liquidity crisis led to billions in government cash and loan guarantees– the first true bailout of the 21st century, and certainly a sign of things to come in the next decade.

In a paper published last month, (Abstract here; full version here) Berkeley economist and overall airline guru Severin Borenstein examines some of the most common explanations for the airline industry’s dismal performance, and why experts and deregulation advocates failed so badly to predict what would happen after deregulation 30 years ago. A few key stats:

  • Domestic passenger airline operations lost $10 billion from 1979 to 1989, made profits of $5 billion in the 1990s and lost $54 billion from 2000 to 2009. To put these numbers in context, at the end of 2009, the entire book value of U.S. passenger carriers’ assets was about $163 billion and the book value of shareholder equity was $10 billion. Even at the end of 2000, after six consecutive profitable years, their assets were $159 billion and shareholder equity was $40 billion.
  • From 1979 to 2001, the U.S. airline passenger fleet grew in every year, by an average of 4.9% per year measured by aircraft and 3.6% per year measured by aircraft-seats. From the end of 2001 to the end of 2008 (latest available date), aircraft and aircraft-seats declined by 1.7% and 1.4% per year respectively.
  • The domestic airline industry has reported negative net income in 23 of 31 years since deregulation and a strongly negative aggregate net present value of earnings.

The knee jerk explanation among many airline analysts has been to blame the industry’s poor performance on overly burdensome taxes and high fuel costs. But Borenstein argues they’ve had little to do with it:

Descriptive statistics suggest that high taxes have been at most a minor factor and fuel costs shocks played a role only in the last few years. Major drivers seem to be the severe demand downturn after 9/11 — demand remained much weaker in 2009 than it was in 2000 — and the large cost differential between legacy airlines and the low-cost carriers, which has persisted even as their price differentials have greatly declined.

Here’s his case against fuel costs as the main culprit:

Fuel costs increases have certainly been a significant component of losses in some years, most obviously in 2008. Over the deregulation era, however, oil costs were highest in the first 7 years and the most recent 5 years, over $40 per barrel in 2009 dollars, and much lower during the 19 intervening years. [F]rom 1986 to 2004 the average jet fuel price was below $1.40 per gallon — relatively stable and much lower than in the early period of deregulation. Yet, the industry still lost money in 13 of those 19 years and on net lost $31 billion in 2009 dollars.

While there have been several taxes added to the cost of flying (passenger facility charges in the early 1990s, the segment tax in 1997, and the September 11 security fee in early 2002), Borenstein argues that the problem seems not to be that taxes have risen, but that base fares have fallen and stayed so low. He attributes this to the rise of low-cost carriers (LCCs), and the inability of  the legacy players to adjust:

Adjusted for the average flight distance, legacy carrier costs have remained 30%-60% higher than the LCCs for nearly all of the deregulation era, averaging about 40% higher in the last decade.
While the cost differential between LCCs and non-LCCs has remained large, the average price differential has been shrinking. LCC fares have declined much less than those of legacy carriers in the 2000s, reflecting in part their lower burden of excess aircraft capacity. This is no doubt a large part of the reason that LCCs have suffered much milder losses in the 2000s.

Airline bottom lines improved in 2010 as the industry consolidated routes and took profits, but Borenstein sees no reason why the future will be any less dismal.

[T]here is little reason to think those disruptions will be less frequent in the future. Furthermore, after more than 30 years, it seems unlikely that airline losses are due entirely to a series of unfortunate exogenous events relative to what management and investors should have expected.

[T]he experience of the last decade suggests that until legacy carriers can either close the cost gap with LCCs or increase the price premium they maintain, they will likely have difficulty earning consistent profits through the typical cycles in the airline business environment.

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COMMENTS: 68


  1. Randall Hoven says:

    I don’t understand the dismay here, or the line “deregulation advocates failed so badly to predict.” So legacy, high-cost airlines lost money. Boo hoo. But now we consumers can fly cheaper, and “LCCs” like Southwest are profitable for making that happen. It seems like a market is working here, which is exactly what deregulation advocates predicted.

    Well-loved. Like or Dislike: Thumb up 79 Thumb down 11
    • Jim says:

      Problem is, the failure of the main-line carriers to make money has resulted in billions of dollars of cost to taxpayers. We haven’t let the market work- how many large carriers have been forced into liquidation? (none) Hence the dismay.

      Well-loved. Like or Dislike: Thumb up 52 Thumb down 5
      • Clancy says:

        What about Pan Am and TWA?

        Well-loved. Like or Dislike: Thumb up 8 Thumb down 3
      • Steve_0 says:

        Yeah. I didn’t see a peep in this article about the TSA as an obstacle, or much mention of the bailouts as an economic effect (merely that they happened).

        Well-loved. Like or Dislike: Thumb up 21 Thumb down 2
  2. Chris says:

    Pretty sure you mean $60 billion in that first paragraph, not $60 million.

    Thumb up 3 Thumb down 0
  3. Enter your name says:

    All I want to know about the airline industry is this:

    Why does it cost LESS to get on flight 1234, fly to a hub, then get on flight 2345, and fly to another destination, than it does to get on flight 1234 (same day, same time, same seats), fly to the same hub, and stop?

    Why do the airlines insist on paying me (usually $100) for the privilege of hauling me even further?

    Well-loved. Like or Dislike: Thumb up 26 Thumb down 4
    • Sbard says:

      Because the airline has less competition flying to the hub and can charge higher fares while presumably, there’s more competition flying to your ultimate destination because people can take different airlines and stopover at different hubs to get there.

      Well-loved. Like or Dislike: Thumb up 17 Thumb down 3
    • matthewglidden says:

      Many corporations that own airlines also operate hotels, rental cars, and other attractions in destination markets. Changing ticket costs is one way to encourage passengers to spend money at those higher-margin businesses by sacrificing profits on their low-margin flights.

      Hot debate. What do you think? Thumb up 13 Thumb down 17
    • James says:

      Along the same lines, why does it often cost less to fly to destination X and return, than to fly to destination X and stay there?

      Another irritation: why does it seem impossible (or at least it did a few years ago) to find flights leaving Europe for the US after noon?

      I don’t know why airlines lose money, but I’m guessing the above might provide a clue or two.

      Thumb up 8 Thumb down 5
      • pawnman says:

        Because you’re filling two seats for them instead of one, eliminating the transaction costs of finding another traveler to fill that seat on the return flight.

        Thumb up 7 Thumb down 10
      • James says:

        That doesn’t make any sense at all. It would make sense to discount the round trip below the cost of two one-ways, because of transaction costs, but below the cost of a SINGLE one-way? Worst case, they can’t sell the seat on the return, it stays empty, and they save a bit of fuel and a package of peanuts.

        That is, if a one-way fare to some destination was $500, it’d be understandable if the round-trip fare was $900, but instead it’s $400. I sure can’t see the (for want of a better word) reasoning there.

        Well-loved. Like or Dislike: Thumb up 11 Thumb down 1
      • scott says:

        If the cost of finding another passenger was a real factor, there would be a discount when I book flights for my family.

        I have been used to seeing the flight costs change as soon you inquire or are about to complete a transaction, but in the last year I have gotten the “the cost for this flight as changed…” message with changes as high as 120% in the last year.

        This does seem to be an issue of the free market not being able to operate, so some carriers are being kept alive that would likely have failed.

        When an airline can hand you a $400 voucher to wait 2 hours for the next flight because they intentionally overbooked, that too is an indicator that market share is more important than profitability.

        All in all, it’s a very weird looking industry to the outsider.

        Thumb up 2 Thumb down 1
    • Jack says:

      I feel like the triangle inequality should be pretty important for a business operating in Euclidean space.

      Well-loved. Like or Dislike: Thumb up 10 Thumb down 0
    • F Lorenzo says:

      Maybe because of “gentlemans” agreements in fares that were between the two carriers that flew non-stop between Atlanta and Dallas. That was one of the priciest markets.

      The very best question would be why can’t the IRS audit the carriers books?
      The fares are not based on rocket science, just using fare rules approved by the foxes in the hen house, that are un-auditable.
      The very fact that the overbooking results in “denied boarding coupons” that are written off at tax payer expense at almost the maximum coach fare, much, much more than what an average passenger pays for their ticket.
      Airlines are cash cows for the banks, preferred stock holders and the board members paid for by the U.S. taxpayer.

      Thumb up 1 Thumb down 0
  4. Adam says:

    One of the main reason’s I quit flying is the lack of time saving. Dallas is my most frequent destination from home, it’s about 11.5 hours from my door to my Brother-in-Law’s house by car. Gas is roughly $80-90 depending on variation in gas prices.

    Now for me to fly the cheapest way (I haven’t done this in several years so my reconstruction is hazy) when I pick my time and day to depart is around $300. But now my time investment:

    45 Minutes to the airport from my home
    Arrive 90 Minutes prior to departure
    1 Hour to Atlanta
    2 hour lay over in Atlanta (if you’re lucky)
    2 hour flight
    30 minutes to deplane
    30 mintues at rental car desk (another $200)
    45 minutes to drive from DFW to my destination
    Time Investment: 9 Hours.

    So to fly from my home in Florida to Dallas, assuming I can find someone to get me to and from the airport so I don’t have to pay for parking, I spend about $400 dollars to get there 2 hours earlier. Yes, I could shave some time off by paying the direct-flight premium, but then that is maybe 2 hours less, and another 75 dollars in fare? That’s still over $100 per hour of saving! That cost is still way above the marginal price of my time, and assumes I travel without my wife to see her brother(?).

    Most travel functions put transit time at ~ .5*wage and wait time ~ 2*wage. A rational consumer like me HAS to drive, even if I put a safety premium on flying, as my car insurance deductible still leaves me paying $50 for every hour saved of solo travel!

    Well-loved. Like or Dislike: Thumb up 64 Thumb down 3
  5. JPL says:

    So… “deregulation advocates failed to predict” disruptions in the affected industry post-deregulation, such as the entry of agile new competitors disruptive to the status quo? Exactly why were they “advocating deregulation” in the first place, then?

    Seems to me deregulation did exactly what it was intended to do… spawned the likes of Southwest, Airtran, etc.

    The fact that entrenched old-guard industry players are struggling to keep up is viewed by some as, well, progress.

    Well-loved. Like or Dislike: Thumb up 32 Thumb down 3
  6. HH says:

    “Since then it’s lost nearly $60 million on U.S. operations,”

    I assume this should be billions, or else it’s not a big deal.

    Thumb up 3 Thumb down 0
  7. Ian M says:

    I’m no economist but I’m pretty sure the airlines have lost a fair bit more than $60 million.

    What’s 3 orders of magnitude? Close enough.

    Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
  8. Scott from Ohio says:

    In other words, old airlines lost a lot of money, and are only still around because of the first government bailout of the 21st century. Yeah, that’s totally a failure of deregulation, somehow.

    Well-loved. Like or Dislike: Thumb up 17 Thumb down 1
  9. Brian Smith says:

    I think one large reason for this is that flying is honestly a miserable experience. Ever increasing TSA restrictions only make it more so. Most people will only fly now if it’s time sensitive or its cross country. Medium distance travel has been taken over by cars and now thing like the Megabus. Not only that, but most legacy carriers are constantly trying to squeeze every dime they can, which only discourages customers. $25/bag, $5/headphones, seats less comfortable than those at the dmv. Not only that, but as they keep trying to squeeze more and more seats in the plain, I cannot fit anymore. My shoulders are literally wider than the seat. Rather than looking at the costs analysis, I think looking at various factors that have decreased demand should be the focus.

    Well-loved. Like or Dislike: Thumb up 36 Thumb down 1
  10. Erik Ducker says:

    I wonder what effect the development of video chat has had on the airline industry. A lot of person to person business can now be done over the internet as opposed to flying out for the same meeting.

    Well-loved. Like or Dislike: Thumb up 17 Thumb down 3
  11. Mark says:

    What about the addition of the internet and travel websites and the much inability of the airlines to recoup from having pricing transparency?

    Well-loved. Like or Dislike: Thumb up 8 Thumb down 0
    • Walt French says:

      You’re onto something here: in truly competitive markets, prices should be lower and quantity higher (that’s for a like-quality comparison).

      But also in competitive markets, you expect providers to make only the minimum required return on their investments. The loss experience cited in the article is MUCH BELOW the cost of capital.

      This suggests there are positive externalities, that society overall benefits from MY flying. For San Francisco, I’d be suspicious. For Omaha, yes, it *might* be good to subsidize an airport. But why capitalists would do it? Beats me.

      Thumb up 0 Thumb down 0
  12. Mack says:

    It would help me understand all this if I could get answers to two questions.

    1) Do people own airline stocks?

    2) Why?

    Well-loved. Like or Dislike: Thumb up 13 Thumb down 0
  13. RS says:

    Airlines are a commodity business, made worse by being sexy.

    Most commodity business face such profit pressures, because there is little for them to differentiate against competition, other than price. Over time, as the weaker players fade and the economy fluctuates commodity businesses are prone to cycles and consolidation.

    What compounds the situation for the airline businesses, is that unlike cement or sugar, the business has had a great image premium for entrepreneurs and investors. This results in a continuous supply of new capital into the business, increasing supply and in the long-run, leading to further price competition and perpetual losses.

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  14. Mike B says:

    I’m surprised that the industry doesn’t push for re-regulation to bring back some stability and restore flying to the experience that it once was. Some may claim that since de-regulation the consumer has benefited with lower fares, but seriously, does anybody enjoy flying anymore? At least back in the regulated period people would pay for steak and get steak. Today they pay for ground beef and get something more like spam.

    LCCs are little more than a scam that tempt people with flashy low fares at the top of their Expedia search, but then extract the profits with hidden fees and abysmal service. Also don’t forget that as LCC cherry pick the flush routes that can sustain their model of operations, the types of destinations and flights that were cross subsidized under the old model will no longer be sustainable. Today if you don’t live near a major airport you’d better be content with either one or two flights a day or using the bus.

    Oh well I can’t stand air travel so the more it implodes the better. Having fun wading through security. I’ll be enjoying a lice liquid beverage while taking the train.

    Hot debate. What do you think? Thumb up 29 Thumb down 32
    • Greg says:

      “lice liquid” sounds disgusting.

      Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
    • Bill says:

      I don’t really get your argument. Sure the LCCs cherrypick routes – most airlines do now. If they happen to pick your favorite route then you save money and if they don’t it doesn’t affect you at all. If you live in some remote area where there’s only enough business to support two flights/day then don’t complain that that’s all you get. Why should the government force airlines to make money-losing flights to your location just to give you more travel options? And all airlines have hidden fees. In fact the legacy carriers are probably the worst for that. Southwest (a LCC) still doesn’t charge bag or change fees.

      All in all, deregulation has saved most people money and enabled the middle class in this country to fly for something other than their honeymoon or some other once in a lifetime occasion. I fly several times in a year just to visit relatives and friends in other parts of the country. A generation ago I’d have had to be a lot richer than I am to do that. You can fly first class if you still want the steak, champaigne, and personal attention. I’m happy with my cheap coach ticket bought online. If I never have to say two words to an airline employee or eat any of their food I’m fine with that.

      Well-loved. Like or Dislike: Thumb up 11 Thumb down 3
  15. Anakritis says:

    Can the fact that flying has become an ever increasing unpleasant experience on the whole be ignored?
    Over the past 15 years the experience has become so painful, uncomfortable, costly, and unpleasant as to be confused as something out of a Saturday night live skit.

    Well-loved. Like or Dislike: Thumb up 36 Thumb down 5
    • Tim says:

      Am I the only one that doesn’t really mind air travel? It’s relatively painless. Security is a piece of cake if you pack/dress properly. Then I can get from Chicago to Florida in a few hour for $80. It blows my mind. *shrugs*

      Hot debate. What do you think? Thumb up 22 Thumb down 18
      • name says:

        Hidden due to low comment rating. Click here to see.

        Disliked! Like or Dislike: Thumb up 10 Thumb down 22
      • James says:

        You think so? Never seen a security line yet that let white men (or anyone, really) go to the head of the line, not have to take off shoes, empty pockets, and all the rest.

        Well-loved. Like or Dislike: Thumb up 16 Thumb down 4
  16. mpod says:

    correction: Berk*e*ley

    Thumb up 2 Thumb down 1
  17. commonsenseless says:

    What?! So, the fact the prices are going down and competetion has increased leads to losses? That’s absurd economics. Just look at the smartphone industry for gods sakes!

    It is the goverment subsidies and regulations(yes it exists in the airline industry…FAA etc) that favor big airlines that is leading to the losses. Sort of like how government helped GM sustain despite its losses by bailing GM out and passing many regualations in GM’s favor (the Toyota Witch Trials for example). If anything we should be happy LCC’s exist and helping make sure prices are relatively low.

    Also, the only reason why LCC’s are a threat to the big airlines is becasue they are not tied by the damn Unions. Southwest airlines, for example, is profitable because the pilots are not part of any Unions!

    Hot debate. What do you think? Thumb up 8 Thumb down 12
    • flyergirl says:

      The pilots are part of a very strong union…SWAPA

      Thumb up 4 Thumb down 1
      • commonsenseless says:

        Yes but SWAPA is based in Dallas where unions are very weak! (Texas is a right to work state)

        Right to work laws are also the reason why southern state have a considerable leg up when it comes to manufacturing too. Most of the auto companies have factories in the South because Unions are relatively weak (They shouldn’t have even that small amount of power if you ask me)

        Thumb up 2 Thumb down 1
    • Alan says:

      Southwest is the most heavily unionized of all the carriers. The least-unionized airline is Delta.

      Thumb up 3 Thumb down 0
  18. TTFK says:

    This article does not take into account segments of cargo revenue, specifically US Mail.

    Just a rough example: In 1995, the mid-sized USAir cargo facility I worked at was overnight-processing upwards of 60,000-70,000lbs of mail per night, six nights a week. This does not include the mail tendered to the airline during the day directly from the BMC.

    Inside of a decade, USPS contracted out most all of it’s 1st class mail movements to Emery, then Fedex. The airlines went from receiving upwards of 5,000lbs of mail per flight to 500lbs. The mail they DID receive was all fluffy packages that Emery didn’t want to handle because of bulk. They kept all the poundage for themselves and gave airlines the fluff.

    As a result, the airlines were now making 10% of what they were just a few years earlier, despite the cargo taking up the same amount of space, prohibiting them from making up the shortfall elsewhere.

    This is a simplistic explanation, but should give you the general idea.

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 0
  19. toni says:

    I stopped flying because the TSA has just become too intrusive. I drive now, even if it takes longer. I don’t like paying to be treated like a criminal.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 1
  20. Slackdammit says:

    Of course, the difference between the legacy and LCC carriers is union labor at the legacys. Until the labor playing field is leveled, the industry will be a ragged patchwork of profit and loss. You do not seem to have the cohones to say that.

    Thumb up 7 Thumb down 5
  21. Sydney says:

    I have seen this position taken on fuel in previous discussion groups. The tax argument is harder to make – with 1/3 the price of a ticket being taxes if they were seriously reduced demand would increase significantly which would allow core revenue to increase and profits increase – the low cost guys would be more profitable still. One misnomer on the low cost guys is that Southwest made most of its money in the 2000s on fuel hedging, not their airline ops. They were really an oil hedging company that happened to own an airline for much of the last decade.

    The article would be more interesting if they had stated Southwest has the highest labor costs for pilots, flight attendants, maintenance personnel and ground crews…but is the most profitable airline. How can this be. It is in the utilization of their aircraft. They average two more turns per day per air frame than the rest of the industry driving down their unit costs. Legacy airlines run the hub-n-spoke systems allowing for massive connections but also meaning aircraft have to sit and wait for everyone to arrive at a hub and then depart. This productivity gap is the primary reason for the difference in costs between the airlines. Not the wages, fuel or infrastructure expenses.

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 2
  22. mfw13 says:

    I think one of the keys in understanding the problem is to look at the differences between profitable and unprofitable carriers. Since Southwest is the only carrier that has been consistetly profitable, I will use them as an example.

    1) Southwest only operates one type of plane, the 737 (although I think this is changing due to the Airtran acquisition), which has saved them huge amounts of money on training and maintainance.

    2) Southwest has an easy to use website with transparent pricing and allows you to build your trip one leg at a time in whatever fashion you desire…1-way, RT, 3-legged, 4-legged, etc. No hidden fees, ridiculous pricing schemes, etc.

    3) Southwest does not pre-assign seats and therefore saves money dealing with seat related issues.

    4) Southwest’s service is pleasant, their planes are comfortable, and most importantly, they deliver exactly what they promise.

    5) Southwest flies into smaller, less popular, airports, where gate fees are much lower.

    Now ask yourself how many of these statements are true for any other airline?

    Well-loved. Like or Dislike: Thumb up 13 Thumb down 0
  23. The Regular Joe says:

    maybe it is because they treat us like animals?
    http://theregjoe.blogspot.com/2011/05/flight-nightmare.html

    Thumb up 4 Thumb down 1
  24. Jim Ammerman says:

    Do the airlines still get government subsidies? Is that a hidden tax? Is that chosing winers and losers? Are our Airlines “too big to fail”? Are the carriers cutting back on maintenance to squeeze profits? Capitalism dictates profit. No matter what the reason if the airlines predominately lose money, seems like a poor business model and makes me want to drive home,since our rail system does not offer another option where I live.

    Thumb up 1 Thumb down 1
  25. Phen says:

    I recall aForbes article from nineties that explained the irrationality of the airline market. Basically, the capital cost of entering the market is so high and the marginal cost of adding a passenger to an existing flight is so low that ticket pricing will never be rational (you’ll always take what you can get rather than leave a seat empty). It will never get better…

    Extend this to overall market performance…

    Thumb up 1 Thumb down 0
  26. Jefff says:

    It never ceases to amaze me how so many economics pundits forget the basic law of the free market, which is that profits are not a right or an inevitability. In fact, if the market is really working correctly, everyone is right on the edge of losing money. All profits are by definition excessive, and the supplier who’s willing to lower prices and reduce its profit will get the business. The low cost suppliers set the going price, and airlines with higher expenses will either go out of business or merge until there are so few carriers that monopoly conditions set in and prices go sky-high.

    This is why you regularly hear stories about “airline X tried to raise prices, but the other airlines wouldn’t go along and X had to reduce them again.” These stories show that competition is working and we don’t yet have implicit price-fixing arrangements.

    Well-loved. Like or Dislike: Thumb up 8 Thumb down 0
  27. larry english says:

    it takes too long

    [[guy before left out more stuff - time to pack, time wasted not bringing important stuff, stuff that is too big, stuff that won;t go through security, having to think about what you can take and not take, inconvenience of not being able to bring some things]]

    it;s miserable

    companies seem to think they are too big or important to fail, no customer service

    wle

    Thumb up 1 Thumb down 0
    • larry english says:

      also time wasted trying to out-wit the asinine cost structure of airline tickets

      time wasted by inflexible leave/return requirements [[or money wasted by changing]]

      wle

      Thumb up 2 Thumb down 0
  28. Query says:

    So, “legacy” and “costs” . . . sounds like GM. Geez, you’re not suggesting that unions could be a primary culprit, are you?

    Thumb up 3 Thumb down 0
  29. Kaleberg says:

    The simple fact is that passenger service has never made money, at least not over any extended period. The US had subsidized steam boats, railroads and airlines over the years as the price of maintaining a transportation system. You can read old 19th century arguments about the pros and cons of subsidizing river boats on the Mississippi. You can read articles from the 1920s about the problems railroads had making money on passenger service. And now you can read about the airlines.

    My guess is that so much of passenger travel is discretionary. People ship freight with intent to make money on getting their goods from point A to point B. A few people make money by traveling from point A to point B, but demand is elastic. If the price is right, all sorts of people with travel for leisure, family, education and even business. If the price gets too high, they cut back. The producers have no slack. They have to absorb costs or lose business. In general, the government has to step in with either regulation or subsidies in consideration of travel as a public good.

    There was a reason Henry V (of England) regulated to post chaise prices.

    Thumb up 4 Thumb down 0
  30. Joe Jones says:

    “Legacy carrier costs” is a nice way of saying what Gordon Gekko phrased as “lousy unions.”

    Thumb up 4 Thumb down 1
  31. Jack says:

    One consequence of the low-cost/legacy split is that the no frills service of low-cost is most attractive to the able-bodied low hassle flyer. Low-cost airlines generally get the customers with no kids, who can check-in online and need no assistance. Legacy are left with families and the elderly who need the extra help, this raises the costs for legacy airlines and gives them a demographic who are not necessarily any more wealthy than those flying low-cost.

    Thumb up 3 Thumb down 1
  32. Nosybear says:

    How about the idea that, due to market saturation, air travel has become a commodity with the attendant theoretical return on investment, zero. There are a few profitable carriers but most are losing money. The graph I’ve seen of airline profitability – I work in aviation – shows a net negative ROI for several years. I’ve seen similar forces at work here in the Colorado casino industry, which, despite knowing exactly what rate of return they’ll get from every customer that walks in (statistically speaking), they’re asking for tax help from the state to remain profitable. There are now so many slot machines available to gamblers the requirement to market them to get gamblers sitting in front of them has reduced the profit to nearly zero. In other words, just like with the airlines, there are too many seats available at the casinos, resulting in a net yield per seat of nothing.

    Thumb up 2 Thumb down 0
  33. Julien Couvreur says:

    I’m not sure which part is a surprise to advocates of deregulation. In short, competition pushed airfares down (allowing more passengers to travel). The companies that adapted to the low cost constraints are doing well, but the legacy businesses that were used to the old model (and probably used to benefit from regulation and cartelization) are struggling.

    Thumb up 2 Thumb down 1
  34. AHodge says:

    let me say as an economist you are confusing these “companies” especially legacy
    with companies that care anything about their customers
    the airlines/ airports are legendary for neglectandabuse and foolish bureaucratic rules and possibly the absolute low o f customer satisfaction ever

    or their investors
    they invented prepackaged bankruptcy in the 80s and regularly stiff stock and bondholders since.
    Its all about their own employment and dollars including the pilot and other unions and the execs
    they live in a dream world of taking away all the coach class rights so first class looks more elite, like some 1980s country club.. a bunch o f old losers living the Catch Me If You Can dream

    Thumb up 1 Thumb down 1
  35. Nate W. says:

    “Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

    — Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.

    Thumb up 1 Thumb down 0
  36. Dave says:

    Since capacity can be added in very small increments, there is very little opportunity for profit (economic rents). When a route allows a profit, a competitor can enter quickly and compete away the profit margin. Thus, only the lowest cost position can win.

    There are niche opportunities for the “full service” options such as FlexJet and NetJets. However, corporate travel policies now specify not only “economy” class but “lowest fare”, often requiring acceptance of one or more hops if lower cost than a direct, non-stop fare.

    Let’s hear it for video conferences!

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  37. Paul says:

    What I want to know is…why is Southwest Airlines now trying to become more like the legacy players and abandon its successful strategy as the premier low-cost carrier? They are now in virtually every airport (higher cost ones included), they now do more long-haul flying including destinations outside the continental 48 states (less efficient), made their frequent flyer program much less attractive and far more complex than in the past, and now have fares that are often no more attractive than the legacy carriers. I loved Southwest, and now they are just another airline. I can’t figure out their management’s strategy and positioning today…other than bags fly free and no exchange fees.

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  38. anon pilot says:

    For all those market purists out there, you are seeing market correction. The industry is consolidating to survive. In the future, expect to see two or three large “legacy” carriers offering international service and two or three LCC or “national” airlines such as southwest taking the domestiv market. Once this happens you will see a dramatic rise in airfares as competition is reduced. Airline passengers have been spoiled with stagnant ticket prices for the last 20 years. In order for the airlines (and air travel) to survive, a market correction is in order and that means paying more for a ticket. Those who don’t consolidate will go the way of Eastern, TWA and Midwest.

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  39. skyliner500 says:

    Here’s what regulation offers.
    1)Air travel is not a right, but it does improve the flow of the economy. Regulation to ensure price efficiency is pro-economy.
    2)It costs some “constant” amount — let’s say C– to fly from point A to point B (all variables taken into consideration) If you are an airline and you want to offer the service of flying passengers from point A to point B — then pro-economic regulation could say “you can charge the constant C time 2(or some other multiple) to fly a passenger from point A to point B. Then you can compete with other carriers for those passengers by, I don’t know, BEING NICE to your passengers. That would certainly when me over.

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  40. dw says:

    Isn’t the real problem chapter 11?

    If the old, inefficient carriers like United and American simply went out of business when they ran out of money then they would be replaced by more Southwests and JetBlues. Instead they continue like zombies, using up most of the landing slots at airports.

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  41. Tommy says:

    Guys, i know nothing about the airline business. So far what i’ve read is all disappointments about the Industry. Nevertheless i am aspiring to start an Airline Business. Turn around the flying business, bring back the Howard Hughe’s times. Trying to make Commercial flights as Taxi’s only these ones are Air Taxi’s . Affordable price with the best service. BTW am only 18 yrs old. So forgive me if i sound too business naive, or crazy has some have called my idea. But i know it will work.

    PS. Forgive me, if my spellings are wrong or my English because English is my 4th language. Am an African by birth, been in the states only 5 years. I would appreciate your comments about this industry and what do you think of such an idea. I know i don’t have much information on how i will transform it, but am working on that.

    If you can email me @tizzo009@gmail.com

    Thanks and y’all have a great day.

    Tommy

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  42. F Lorenzo says:

    Airlines, in my opinion, since deregulation, are the most corrupt industry in the U.S.
    The costs are going down, except for fuel and that is kept to a minimum by flight cancellations of less than full equipment and using “free trip coupons” which actually profit the carrier for not operating as scheduled.

    We are the chumps.

    They are working on reduction of crews since the aircraft are becoming more and more automated…..sort of like drones. Many departments of carriers have been reduced, outsourced and automated. There is a severe lack of competition, as a result of very badly handled deregulation. It should have stayed regulated. The greed factor started with the carriers for the 80′s, 90′s and until today.

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  43. Tom Lessing says:

    I have spent about 10 years of my life developing systems for airlines. If you ask me they don’t make money for a number of reasons, 3 to consider:

    1) They don’t know where they are really losing the money. Too complicated! I have seen the arguments the systems the irrationality of complex logic. It simply doesn’t make sense in the end.
    2) Due to their revenue management models they end up slicing the cake roughly the same every time. That is why the LCC’s caused so much trouble initially. They turned the revenue model upside down and stole customers by cutting out much of what made the airlines lose money.
    3) Things like lounges, frequent flyer programmes all quietely ends up wipping out the profit on the bottom line. There are more sins with hard to calculate costs. In fact it is virtually impossible to calculate the cost of cannablism of your own revenue models. It is just assumed that you have an advantage. Nothing worse than a perceived advantage costing money.

    The obvious factors are compensated for because it is easy to relate the expense to the income it simple to raise airport taxes … , so is higher fuel etc. The non obvious things that cost airlines dearly are those pesky arguments about things that really have nothing to do with flying or are hidden from view. So what does our Frequent flyer program really cost us? No one knows and don’t you dare question the wisdom behind that. The externalties are just too complex and hard to understand. In the end airlines seem to almost always fall for the narrative fallacy … The end result is all the problems are pinned on high fuel costs or airport taxes, the economy or whatever it is. No mention of the real reasons. Besides who can hold a CEO post by saying to investors … I don’t know why we lost money?

    As Warren Buffet said he is an airoholic and I think he also said the biggest problem with airlines is testostorone.

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  44. SiliconDoc says:

    Anyone else notice the liberal OP declares deregulation has done all the damage the last 30 years then spews out endless paragraphs without a single regulation lost as proof ?
    I certainly noticed.
    How can people write up such crap that contradicts their main thesis declared as fact then, refute themselves so easily, and still pretend it’s deregulation ?

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  45. don't fly says:

    It’s not a big f’n mystery!!!! IT’S THE TSA

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  46. Don says:

    Cost containment is the key, as the airline industry as a whole has reduced their product to a commodity. Gone are competition based upon services, as marketing over the last 30 years has trained passengers to consider only price in selecting an airline flight. I would also argue in part that the increase in numbers of people flying post deregulation has been due to lowered fares (often below the point of cost recovery, much less profit) encouraging those who would previously not considered flying to fly.

    I would also argue that the two key cost issues negatively affecting airline results are the high levels of debt accumulated by airlines post deregulation in order to expand and seize market share from competitors (much of this debt discharged by numerous airline bankruptcies through the 1990s and early 2000s), and the higher cost of operating a hub and spoke system. While hub and spoke allows maximum passenger choice in selecting flights and permits an airline to “control” passenger traffic and yields out of a given airport, it requires more personnel and equipment during traffic banks (which often sit idle during slack times) and results in greater delays at an airport.

    Everyone seems to address fuel, taxes, and personnel costs; no one seems to consider the effect of high debt levels incurred in trying to squeeze competitors out and the higher costs to operate a hub and spoke network.

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