This must be the dumbest American industry ever. For the past 58 years, or ever since their profit-and-loss records have been kept, U.S. airlines have rung up a cumulative net loss of $14 billion. A loser for all time.
There will be another loss of as much as $10 billion in 2005, the carriers' trade group estimates. Three of the five biggest U.S. airlines are hiding from creditors in Chapter 11 bankruptcy proceedings. And these are good times for the U.S. economy.
Airline executives have excuses for their staggering $32 billion in losses during the past four years, which wiped out what through 2000 had been a cumulative historical profit of $18 billion.
Airlines keep making the same mistake: overloading the skies with planes and then cutting fares to unprofitable levels to fill them. ``Every 10 years, beginning in the 1970s, the industry has had a crisis,'' says Julius Maldutis, an independent analyst who has seen them all.
The industry now may have 20 percent to 30 percent more passenger-carrying capacity than it needs, says George Hamlin, a former airline executive and a director at MergeGlobal Inc. in Arlington, Virginia. The excess capacity is the equivalent of one or two major airlines.
Maldutis points out that the industry's dust-up of the early 1990s ended with the deaths of Braniff, Eastern and Pan Am airlines, which allowed the others to raise prices. In the six years starting with 1995, the industry earned $23 billion.
In the current climate, however, airlines don't die.
Given the industry's sorry history, it seems unlikely the airlines will ever cut their capacity enough. They'll still feel forced to match the low fares of the latest upstart -- a foolish reaction since the only low-fare airline to succeed over time has been Southwest Airlines Co.
And, of course, there will always be the temptation of the latest gleaming jets to roll off the Boeing and Airbus production lines.
MarshalN From Hong Kong, joined Sep 2005, 1520 posts, RR: 1 Reply 1, posted (3 years 4 weeks 16 hours ago) and read 3315 times:
Well, Warren Buffet once said something along the lines of "airlines are a survival industry". This is after his investment in US Airways, which gained him a little profit, but way below his usual return. Basically, in the US you don't make money in the airline industry -- you just try not to lose it. It's a shame.
StuckInCA From United States, joined Oct 2005, 1145 posts, RR: 1 Reply 3, posted (3 years 4 weeks 7 hours ago) and read 3121 times:
I wonder if Mr. Pauly has any suggestions (he may and I'm just unaware).
It seems like this will never really end until the airlines are able to raise prices. My understanding is that they can't all communicate and "come to an agreement" to do that. I don't see it just happening all at once. One carrier or another is always going to cut prices.
We've had similar pressures in the industry I work in. Consumers will no longer accept that electronics actually cost money. They buy many high tech items for below the cost of manufacture. This trickles down to everyone in the food chain of the companies who produce those goods. If we raise the price of our goods, our competitor will sell at a loss to try to steal our market share. I don't know that we've completed "adjusting" to this new reality, but it seems we've done it much more effectively than most major US airlines. Cut costs (there is NO entitlement) and invest in the product. Convince the customer that your product is worth a slightly higher investment.
Vicious cycle, but this must have been going on for as long as society has existed in one market or another.
TPASXM787 From United States, joined Mar 2005, 1730 posts, RR: 42 Reply 6, posted (3 years 4 weeks 7 hours ago) and read 3044 times:
Quoting JetMaster (Thread starter): Airline executives have excuses for their staggering $32 billion in losses during the past four years, which wiped out what through 2000 had been a cumulative historical profit of $18 billion.
That is incredible. The airline industry in the US is such a disaster I don't even know where to begin. B6 and WN as positives, and investors seem to be warming up to the new US.
Other than that, with DL, UA, and NW posting monumental losses, and even AA with a $158mil+ loss last quarter, the industry is a wreck with no end in sight.
Concorde001 From United Kingdom, joined Jan 2005, 1224 posts, RR: 3 Reply 7, posted (3 years 4 weeks 7 hours ago) and read 3035 times:
Quoting StuckInCA (Reply 3): My understanding is that they can't all communicate and "come to an agreement" to do that. I don't see it just happening all at once. One carrier or another is always going to cut prices.
If they did, they will have created a cartel, which is anti-competitive! The market will have to sort this problem out, of what seems like too much supply and less demand, which = lower prices!
StuckInCA From United States, joined Oct 2005, 1145 posts, RR: 1 Reply 8, posted (3 years 4 weeks 7 hours ago) and read 3015 times:
Quoting Concorde001 (Reply 7): If they did, they will have created a cartel, which is anti-competitive!
That's what I meant... that I understand they can't legally do this. Sorry I wasn't more clear. I agree the market will have to sort it out, but I think it will be challenging with bull-headed consumers who generally choose price over all else. People buy cheap DRAM at Fry's (West coast US members understand me) and then whine when their computer crashes a lot. People demand cheap airfare and then whine when they don't get a steak dinner on board. Tough challenge to overcome, but that's why I'm just an engineer and not a CEO.
N79969 From , joined Dec 1969, posts, RR: Reply 9, posted (3 years 4 weeks 6 hours ago) and read 2944 times:
I do not think this guy is particularly insightful. It is one thing to look from the outside at the airline industry and entirely another to be an airline manager and make decisions about whether or not to expand. During expansions, the economic signals airline managers see dictate that they grow or cede ground to competitors and thus risk locking themselves into strategically disadvantageous circumstances.
This is not to say that big egos and bad decisions have not played a part but in the current mess but to say that the entire group is hopelessly stupid is not right either.
Hoya From United States, joined Jun 2004, 310 posts, RR: 0 Reply 12, posted (3 years 4 weeks 5 hours ago) and read 2774 times:
The more I read all these analysis from these 'experts', the more I come to believe that they know very little about the industry. Mr. Pauly says that there's an overcapacity problem. Well, ok, true, but whose fault is that? What airlines out there keep on adding shiny new planes? Not the legacies. In fact, the equivalent of one, maybe even two, airlines has been cut from the skies. US, UA, and now DL and NW are getting rid of planes in their fleets. I read somewhere that US alone got rid of over 200 aircraft!
Quoting JetMaster (Thread starter): They'll still feel forced to match the low fares of the latest upstart -- a foolish reaction since the only low-fare airline to succeed over time has been Southwest Airlines Co.
What are airlines supposed to do? Raise their fares and cede market share to others? Get a clue Mr. Pauly. Also, WN is beginning to hit some turbulence. Their fuel costs will rise and their labor costs are now one of the highest in the industry. I actually think that they will get pummelled in DEN by both F9 (already a LCC, but offers IFE and seat assignments) and UA (lowered its costs after restructuring).
Quoting TPASXM787 (Reply 6): Other than that, with DL, UA, and NW posting monumental losses
DL and NW may be posting losses, but UA has been making money. Yes, they lost $1.8 billion in the last quarter, but those were all paper losses. If one looks closely at the financial data, they made a net profit. Only other legacy, if not US airline, to do that was CO.
TomFoolery From Austria, joined Jan 2004, 335 posts, RR: 2 Reply 13, posted (3 years 4 weeks 4 hours ago) and read 2711 times:
Why should they be any different than AMTRAK? Profit is only by accident, and quickly fixed, yet, people still invest. The stock value of many carriers (US) are at junk status, and as a rusult, it drags the worth of others down with it. B6 started out at around $35 +/- at its IPO, and people were on it like flies on sh*t, where are they now- not nearly as bad as some, but still lost. USairways, for fun, I bought $50 worth, ,just before the first bankruptcy, at $.77 each. Now, after 3 years, I have enough for a weekend (cheap one) in Vegas. That was PURE luck though. Thats life i guess.
Tom
Petazulu From United States, joined Jan 2003, 701 posts, RR: 1 Reply 14, posted (3 years 4 weeks 4 hours ago) and read 2671 times:
The real problem here is that airlines don't die due to politics, lease holders, debt holders and chapter 11. With no way to get out of the market, airlines are forced to continue to operate at a loss due to the obvious over capacity. Let carriers die!
RedFlyer From United States, joined Feb 2005, 3186 posts, RR: 20 Reply 15, posted (3 years 4 weeks 4 hours ago) and read 2632 times:
One item the author of the article failed to mention is the impact unions have on the airlines' high overhead and inability to be more flexible in a dynamic market.
Quoting Hoya (Reply 12): Also, WN is beginning to hit some turbulence.
No disrespect intended; however, I've been hearing that line on a regular basis for the past 15 years.
IRelayer From United States, joined Jul 2005, 880 posts, RR: 2 Reply 19, posted (3 years 4 weeks 3 hours ago) and read 2532 times:
Uhh...yeah...this is OBVIOUS. There are simply TOO MANY airlines flying too many routes too many times per day that are too inefficient to do the job while showing consistent profit. A notable counterexample is Southwest...consistent product, simple strategy, efficient use of metal, smaller overhead, good at finding routes that make money and matching demand with capacity, etc...it has been said many times before. Although many say Southwest is based on growth and once they can't grow anymore, their business model will not be viable anymore.
Supa7e7 From , joined Dec 1969, posts, RR: Reply 20, posted (3 years 4 weeks 3 hours ago) and read 2502 times:
Quoting N79969 (Reply 18): True. But the capital keeps coming for some reason.
Absolutely. Why is airline (mgmt) stupid? They just work on behalf of airline investors. Investors lose their money; airline management gets paid rain or shine. Meanwhile, the most sophisticated transportation system worldwide has been created by network US carriers. They lose lots of money, but to call them stupid to say the airline industry is for-profit in a literal sense. It is nothing of the sort and, if it were, would not exist at all.
Airlines exist to benefit GE, Boeing, Airbus, airp
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