Whither Aviation? By Jane Galt

Why can’t the airlines seem to get it together?

Three reasons, seemingly. First, the labour model is terrible. They are saddled with pensions promises they made back when the industry was heavily regulated and airlines were basically allowed to operate on a cost-plus basis. They have multiple, militant unions, none of whom have any incentive to leave any value on the table at negotiating time because they justifiably fear that anything they leave at the negotiating table will simply be claimed by another union. And the unions, plagued by loss aversion, will generally not give up enough in downturns to make the airline profitable unless they are ordered to by a bankruptcy judge.

Second of all, the business model is terrible. Airlines have a very high fixed cost, which is the cost of flying even if you don’t carry any passengers, and a very low marginal cost, which is the cost of carrying each additional passenger. The temptation for airlines to sell empty “extra” seats at a very low price is extremely high. But every time one airline does this, it makes it that much harder for competitors to operate at a profit. Because so many of the costs are fixed, companies seem to enter a competitive death spiral, where everyone is desperately trying to dig themselves out of the hole as best they can by selling their product below cost. Also, the “hub-and-spoke” model, which makes it easy to get connecting flights, is much less profitable than the point-to-point model competitors use, cherry-picking only the most lucrative routes. And the airlines are hugely vulnerable to swings in the price of fuel.

Third, the legal model sucks. Easy bankruptcy is a very fine thing for the economy as a whole, but for industries like airlines, which because of the high-fixed/low-marginal cost thing already tend to be plagued by overcapacity, it’s a disaster. Creditors would almost always rather keep the hulk running in the hopes of getting some cash out down the road than liquidate, especially because most of an airline’s major assets, like planes, tend to be secured, leaving precious little for hungry debtees. So they rehabilitate the business with radically reduced debt and labour obligations. But this doesn’t remove the excess capacity that makes it hard for anyone to make a profit; in fact, it makes the rehabilitated business more competitive, which pushes other companies into bankruptcy.

Is there hope? Transportation seems to be an iffy business; railroads as an industry never made a dime for their owners. Certainly, if I were an airline employee, I’d be looking into acquiring some new skills.

This content was used with the permission of Asymmetrical Information.

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