The United States Airline Industry
The U.S. airline industry has long struggled to make a profit. In the 1990s, investor Warren Buffet famously quipped that the airline industry would have been more fortunate if the Wright Brothers had crashed at Kitty Hawk. Buffet’s point was that the airline industry had cumulatively lost more money than it had made it has always been an economically deleterious proposition. Buffet once made the mistake of investing in the industry when he took a stake in USAir. A few years later, he was forced to write off 75% of the value of that investment. He told his shareholders that if he ever invested in another airline, they should shoot him.
The 2000s have not been kinder to the industry. The airline industry lost $ 35 billion between 2001 and 2006. It managed to earn meager profits in 2006 and 2007, but lost $ 24 billion in 2008 as oil and jet fuel prices surged throughout the year. In 2009, the industry lost $ 4.7 billion as a sharp drop in business travelers a consequence of the deep recession that followed the global financial crisis more than offset the beneficial effects of falling oil prices. In 2010, however, the industry returned to profitability, making a slim $3.7 billion in net profit on revenues of $114 billion.
Why has the industry been so unprofitable? Analysts point to a number of factors. Over the years larger carriers such as United, Delta, American, Continental, and US Air have been hurt by low cost budget carriers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America. These new entrants have used nonunion labor, often fly just one type of aircraft (which reduces maintenance costs), have focused on the most lucrative routes, typically fly point to point (unlike the incumbents who have historically routed passengers through hubs), and compete by offering very low fares. New entrants have helped to create a situation of excess capacity in the industry, and taken share from the incumbent airlines, whose cost structure was often much higher (primarily due to higher labor costs).
The
incumbents have had little choice but to respond to fare cuts, and the result
has been a protracted industry price war. To complicate matters, the rise of
Internet travel sites such as Expedia, Travelocity, and Orbitz has made it much
easier for consumers to comparison shop, and has helped to keep fares low.
