Bleeding airlines can’t gain Altitude

A causal observer of the struggling airline industry might think the nation’s biggest carries are either inept for losing billions of dollars with no end in sight, or pretty clever for managing to stay in business through it all. Neither image would be fair. Analysts say the bulk of the industry has no easy way to turn around its fortunes. Factors such as soaring fuel prices are beyond its control. The pressure to keep fares low has barley let up. And a legacy of inefficient operations will take a few more years – and negotiations – to fix. It’s not necessarily stellar management that has kept the sickest airlines from going out of business. Lenders, suppliers, and regional airlines with vested interest in the carriers’ survival have committed a steady stream of capital to keep the industry hobbling along. While their strategic options are limited, executives haven’t given up. They’re still trying to squeeze labor costs, raise extra revenue where possible, and lobby the government to stop an increase in security fees and ease pension-fund obligations.

The current crisis that is upon airlines is driven by fuel prices. That doesn’t excuse the industry’s other fundamental problems, such as glut and unprofitably low fares, but the high price of fuel has masked significant cost-cutting progress, and we need to continue to lower our costs, said Dan Garton, executive vice president of AMR Corp. So will air carries make it through these hard times? Analysts say yes, that the troubled carries will continue “limping along” until fuel prices drop to more manageable levels, capacity tightens and demand rises enough so that fares can hit profitable levels. Do you think this will ever happen?


Fred said...

Yes, I think eventually it will happen. So many people depend on airlines to get around, that there is no way the whole airline industry will just crash. Although some may not make it through, there will still be airlines left. Even if they might have to lower prices to where they don't see much profit, eventually more people will choose to fly and their demand, and profit, will go back up.

Dr. Tufte said...

-1 on Keston's post for a spelling error.

I think the airlines are a good example of an industry that is fighting its own industrial organization. Transportation is a perfectly competitive industry (if you doubt this, try and recall the last time you didn't take the lowest available price). Zero economic profits are the rule, and cost cutting is the main way to gain an edge. A lot of airlines don't seem to recognize this - to their dismay.