What are the economics/business structure that make the airline industry so fragile (bankruptcies, bail outs, etc)?
In: Economics
There’s a couple of things.
First, the airline industry requires a lot of debt to operate. An airline purchases an airplane (or fleet of airplanes) and then sells tickets over 10 or 20 years to make money. But the manufacturer won’t wait 10-20 years to get paid. So from day 1, the airliner is starting in the hole and working on climbing out.
Secondly, they are not very nimble. Airplanes are big and expensive to make. You can’t just flip a switch to turn the factory lines on and off. They need to make these purchasing decisions with decades long horizons. Likewise, they can’t just take off and land whenever they want; the sky’s are full of planes and they operate under strict flight patterns. This is all to say that airlines cant just make quick decisions or turn on a dime. If economic conditions deteriorate (like they currently on) there’s only so much airlines can do. They’re stuck in the position they are in with little ability to pivot.
Finally, airlines operate as a commodity. There isn’t a big difference between Delta, American, United, etc. They compete heavily on price. This means that even though it seems like airlines nickel and dime their customers, the reality is they operate on very thin profit margins.
So when you put these three together – a capital/debt intensive business, a lack of flexibility in operation, and small profit margins, it doesn’t take much to upend their business.
Even in the best of times, their profit margins are really thin. The industry is very competitive not only between airline companies, but they also have to compete with cars and trains.
But when the economy enters a recession, they start to lose customers. And the big problem with that is that flying a plane full of customers costs them the same as a plane only half full, but they get half as much income from it. Regardless of how many passengers are on the plane, the insurance cost, the personnel costs, the maintenance costs, and the docking fees are the same. There’s some savings in fuel cost, but not enough.
The bailouts themselves make businesses willing to take larger risks as they know they will be bailed out.
Also, in America we have a quarterly profit model of business. Meaning the CEOs are not concerned with the long term viability of their company only boosting shrot term profits to maximize their own bonuses and return shareholder investments.
Airlines only make money when their planes are in the air. Every moment on the ground is just cost.
Right now airlines are flying as few as 1/20th the passengers they once did. That means that a plane that might break even when 66% full is losing a ton of money.
Thats right now. Other times fuel costs have sent discounter airlines packing, as well as pilot/crew labor action (Eastern Airlines)
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