The numbers are in, and the losses are staggering. Since 9/11, major american airlines have been losing tons of cask-AA estimates losses at $60 million/day!
Obviously, this is not sustainable. What is it about this business that makes it so chancy? Is it because the fedral Govt. forces airlines to fly unprofitable routs? If this is correct, why doesn’t the govt. allow AA to stop flying to Podunk, Arkansas? Is it required that to fly the profitable routes (like NY-Miami), you must service out-of-the way cities, that never have sufficent pasengers to turn a profit?
What’s in store for the airlines-is it a good time to buy airline stocks? I find it hard to believe that several major carriers are poised to go bankrupt! Or is this industry one that investors should avoid (Warren Buffet apparently thinks so!)
They are not consistently unprofitable. They are currently unprofitable.
Throughout the 1990s, airlines racked up consistent gains in profits. The really big guys developed and relied upon the hub-and-spoke concept to reduce the number of low-passenger-count flights. This, combined with the depressed cost of kerosene throughout much of the 90s allowed the airlines to maintain sufficient cash-flow to leverage their capital and bring in lots of money.
Beginning with the reduction in tourist (and some business) flights concurrent with the recession that coincided with an upturn in fuel prices, the airlines began hurting. Following the WTC/Pentagon attacks, a number of the airlines were unable to meet debt repayment while they were grounded. Since last October, the number of fliers has dropped significantly (and the recession has caused a further drop in business travellers flying first class, which was where most of their guaranteed profit lay), and they have been unable to recoup the losses that they had incurred.
Southwest, which runs their operation differently, eschewing buth the hub-and-spoke and the catering to first class travel has not had a loss, at all.
There’s currently a thread in GQ that addresses some of this:
My theory is that it’s because they spend so much money buying such delicious food.
Or maybe it’s from picking up the pilots’ bartabs?
zing!
I think it would be more accurate to say they are periodically profitable.
The US domestic market may be big enough to be self supporting, but most of the international carriers have a level of government ownership/control/subsidy on the basis they are integral to the tourism infastructure.
It’s a brutally transparent business. If you know which type/age of planes they are flying you can estimate their marginal costs very accurately, a head count at the gate accurately predicts their income. Their pricing schedules are in the public domain. Travel agencies use simple search engines to cherry pick the best fares. Which is why so much advertising falls back on nationalistic themes to hold the home town customers. About the only other non-price cards to play are on-time departures and more smiles from the cabin staff.
IMHO investing in airlines is a mugs game.