perpetual money-losers (economics)

[furt]

Warning: OP is an economic illiterate.

In this column George Will claims that the airline industry has not shown a profit in decades. Whether or not this is true in regards to the airline industry is not my question. I have heard many times about companies, and sometimes whole industries, that lose money year after year. Magazines are one example; I have heard that many big-name magazines have lost money year after year for decades.

How does this happen? Do they just keep taking out loans to stay solvent? I can't imagine that would be sustainable. I can guess that some magazines might have especially loyal and rich and generous readers, or they are subsidized by other, profitable, publications by the same company. And obviously some companies are run at a loss because they promise to pay off eventually.

But what about companies that run in the red year after year? Someone explain this to me. (or is it all a myth?)



And while you're at it, I'd be interested in hearing any records for money-losing. What's the record for keeping a company in the red and yet in the business the longest?

[js_africanus]

I can only offer a guess:

A firm has fixed costs and variable costs. Fixed costs are fixed; i.e. they are there whether they produce and regardless of how much they produce. So if a firm stops producing, it still has to pay the fixed costs. Variable costs vary based on production. Imagine you own a cafe, because I can't spell restaraunt. You have to pay rent for the lenght of your lease and you have to hire employees. If you decide to shut down, you are no longer paying employees, but you still pay rent for the term of the lease. If you make enough to pay your employees and have a few bucks left over, but not enough to pay your rent fully, you would stay in business since doing so lowers the amount you have to pay out of pocket. You pay the amount of the rent, but some of that comes from running your business. If you can't even pay your employees, then you should shut down because you have to pay the rent out of pocket and then shell out more to cover wages.

If a company has a lot of capital that lasts a long time and takes a long time to pay off, and if it is making enough to cover variable costs plus a bit more, then it may be best for it to stay in business for a long time. A company probably can't up and sell a Boeing 777 and an airport terminal for a good price, there isn't much of a market I'd imagine, so it may be better to keep the business going at a loss because that's cheaper than trying to pay off the plane & terminal and calling it quits.

That might be the reason. I mean, it is a reason to stay in business at a loss, but I have no idea if it applies to the cases you're asking about.

[MaryEFoo]

Some business get government subsidies of some sort (Amtrack, probably always airlines, for instance the lumbering industry where the gov't provided the reserved timber and built them roads etc).

They can lost money till too much annoyance arises.

[MaryEFoo]

Drat.

"They can lose money till ...."

[John Mace]

I read the G. Will article, too, and re-read the part in question about 5 times thinking I must've missed something. Don't remember the exact wording, but I think he stated that no company had made any money since the early 20th century. I finally figured that what he must have meant was that if you add up all the profits and losses over the years, the losses outweigh the profits. I can't believe that there was NEVER a year that the airline industry wasn't in the black. Anyway, that's my 2 cents. And I guess that's more money than has ever been made in the US airline industry.

[John Mace]

Oops. Didn't see you linked to the article. The questionable part:

"As of Sept. 10, 2001, the industry had not netted a nickel since 1913"

supports what I said, above. The opperative word is "netted".

[aahala]

Mr. Wills statement that the industry as a whole never showed a profit in any calendar year since 1913 is quite impressive.

Now if it only had the additional virtue of being true. . .

[Spectre of Pithecanthropus]

I'd say Will's statement isn't entirely true. Some airlines, like Southwest and, I think, Jet Blue, are generating profit even now. Other, larger companies seem to be subject to the cycles of the marketplace, and do very badly during business recessions and slowdowns.

It's hard to quantify the real profitability of airlines, because the utility of air travel is such an essential part of modern life. Even if you never travel yourself, you almost certainly rely on air transport in some area of your life or work. So somehow the money is always found, somewhere, to keep the industry going--be it through government guaranteed loans, or other sources of credit. Nationalized airlines in other countries are, perhaps, more honest and straightforward about the fact that they are government funded; American companies keep up the pretense of being independent, nut-and-bolt businesses.

[BrotherCadfael]

Some industries find it useful to just barely break even for tax purposes or other reasons. A heavily subsidised industry like the airline business, might well be one of those, as the subsidies would dry up if the business was consistently profitable.

It is said that in Hollywood, the truly creative people are the accountants. From Shakespeare in Love:

"But I can't pay them anything!"

"So promise them a share in the profits."

"But there never are any...you know, you just might have something there!"

[furt]

Originally posted by aahala
Mr. Wills statement that the industry as a whole never showed a profit in any calendar year since 1913 is quite impressive.

Well, if you'd bothered to read the article, or even the F'in post right above yours, you'd know that he did not in fact say this, and that I was misinterpreting him somewhat. Reading is fundamental...

[Exapno Mapcase]

The airline industry lost an astounding amount of money over the past couple of years, tens of billions IIRC. The total profits of the airline industry over the past almost 100 years was also in the same range of tens of billions. Ergo, no net profits.

But this is entirely misleading. Mixing current dollars over time leads to wildly inaccurate impressions of the value of money. A few tens of millions in profits in the 1930s, say, was a huge amount of money. Today it's a roundoff error.

And not every paper loss is a real amount of money. AOL Time Warner had to write off almost $100 billion dollars because of the loss of value of its stock, but that money was essentially imaginary to begin with.

The current losses in the airline industry are serious. But they are not retroactive. A good year for the industry could equal all the profits from 1930-1990. So what? This say that times have changed, nothing more.

[ghjm]

This is not as surprising as you think it is.

Products have a life cycle. They start out in R&D, during which time lots of money goes in and practically none goes out. Then they start to climb the adoption curve, during which the amount of money coming out increases, but the amount of money going in remains high (think of this as "building infrastructure"). Finally, they enter the declining phase, during which time very little new money goes in and lots and lots of money comes out. This is also known as the "cash cow" phase.

The airlines have never quite reached "cash cow" status. They have always continued to build infrastructure, by buying new airplanes. Were it not for 9/11, it's questionable whether the current generation of airplanes would be the last - or whether the airlines would require massive new investment in order to buy more new next-generation airplanes.

So it's quite conceivable that they might never have shown a profit. All that means is that their investors have continued to pour in lots of new, additional cash, in order to finance new, additional capabilities - because at each turn, they believed that the new stuff would allow the final payout to be much higher.

Hope this makes any sense.

-Graham