8 ms·

Can Airlines Make Money?

47 points by pavornyoh 11y ago

transfire 11y ago
The business model of airlines is to shove as many people as possible into a giant tin can and deliver them from one hub to another. Despite the number of people and high cost of tickets, this alone is not enough to turn a profit, so the hubs are turned into high-priced shopping traps. When fuel prices are low enough, it is enough to keep the airships afloat. But it is a completely backward system of travel, where the actual travel becomes almost a secondary matter. It's all the fanfare and bazaar around it that drives the wasteful economics, and likewise the hate of it. An efficient and beloved system would turn to smaller planes and point-to-point trips. Smaller planes would allow automobile-like scaling of plane manufacture and point-to-point trips would provide a reduction in fuel costs. But we will never see it, b/c as it turns out, Capitalism is not about efficiency or catering to the common customer. Rather it is about moving around as many bits of currency as fast as possible. The airline industry is one the great examples of this.
- lujim 11y ago
  Traditionally the cost per seat/mile is lowest on wide bodies and skyrockets as you get towards regional aircraft. The higher (per seat/mile) cost of operating smaller planes is offset by the near poverty wages payed to regional airline crews. Maybe someday small point to point aircraft will be economical, but we aren't there yet. Southwest has done pretty well operating outside of hubs mainly due to smart management that knows when to hedge fuel costs and a fleet composed of a single type of aircraft (737).
  - ju-st 11y ago
    No, narrowbodies have lower cost per seat mile because they weigh less per seat because they fly shorter routes (=less fuel and structures). Very small airplanes have the problem that many costs don't scale linearly like the wage for 2 pilots, structural weight, efficiency of combustion engines. I found this Wikipedia article interesting... https://en.wikipedia.org/wiki/Fuel_economy_in_aircraft#Example_Values https://en.wikipedia.org/wiki/Fuel_economy_in_aircraft#Examp...
    - lujim 11y ago
      Yeah agreed. That chart is great, but it's not telling the whole story. If you take a 747-400, 757, 737, and a CRJ (1 fuel stop) move a full load of passengers 3000 miles the widebodies will have better seat/mile costs. That chart compares the seat/mile of a 737 going 1000 miles to a 747 going 6000 miles. If you flew a 737 6000 miles (with stops of course) the seat/mile cost would be huge. Similarly a Cessna 150 could get you a better seat/mile cost than a CRJ if you're going 30 miles. A 747-400 going 6000 miles nonstop will have tremendous first hour fuel burns because it's carrying... tons of fuel. Each extra pound of fuel you carry requires that you take on.... yup more fuel. It compounds.
- jessaustin 11y ago
  I'm sympathetic to this sort of critique, but my impression after years of observing this industry is that anything that makes air travel less insane also makes it less affordable, so there is strong pressure toward insanity. It doesn't seem odd that a market for expensive short-term services would be like that, or at least would have a segment like that. After all the utopia you envision exists for those who are willing to spend more, e.g. on fractional ownership.
  - lujim 11y ago
    Until a technological leap as large as the move from piston engines to turbine engine occurs and flight crews are replaced by computers, airlines will scrape by on the narrowest margins of almost any industry. As much as it seems like the airlines torture passengers for the shear joy of it, this model is the best thing that could come out of intense competition, high overhead costs, and the prohibitively high fuel costs of the early 2000's
  - mikeash 11y ago
    It's absolutely this. Airline customers care about price above all else. A price differential as low as $5 is enough to get people to switch flights, even if the pricier flight is better. It's utterly cut-throat. Why do airlines cram people in so tightly you can barely breathe? Because that lets them shave dollars off the ticket price, which attracts customers from anyone who doesn't do this. Given the choice between a cheaper flight that's less comfortable, or one that's $5 more and has more room, people will choose the former. Why do airlines not serve meals anymore unless they absolutely have to? Well, those meals aren't free. People will choose the meal-less flight for $5 less over the flight with a meal that costs slightly more. Why does everybody charge for checked luggage now? Because it lets them shave the price of a ticket. If people wanted comfort, good food, free luggage, and all that, we would have it. But what people want above all else is to pay less. And actually, airlines have gotten pretty good at segmenting the market, which for their customers (us) means we can pretty much choose our own tradeoff there. You'd rather pay more money for a larger seat? Almost all of them let you do this now. You want a meal during your flight? Just about any suitably-long flight will have meals available for purchase. You want to check bags? Go for it, just pay for it. I hate getting crammed into tiny airline seats (I'm 6'3" and barely fit) and all the rest... but every time I get on an airplane and pass those better seats, I remember that I'm just voting with my wallet here, and clearly I value the $100 or whatever it is more than the space.
- sbuttgereit 11y ago
  So let me get this straight: airlines, for all their pseudo-efficiencies, cannot make a profit (since they really aren't efficient) so they rely on ground concessions. But to my knowledge airlines don't really participate in the ground concession profit stream... airports do, but not airlines. Yet, all these inefficient, unprofitable airlines care about is moving currency around quickly. All of this is spite of the customers. And this is Capitalism. Sorry to say I have to disagree. Not only is the appeal to chasing dollars in the last part of your argument contradictory with the loss statement of your first point, the behaviors of customers and the role of competition under Capitalism is completely ignored or misunderstood. Under Capitalism, trades are voluntary. If the common customer were not receiving sufficient value for their travel dollar, they wouldn't be spending it on air travel. It's true, I would love to have one of those Emirates private rooms on every airline trip I take, but even a cramped little chair across country is often sufficient... when it's not I upgrade. Sometimes that trade isn't worth it: if I'm travelling between the Bay Area and Los Angeles, I'll usually drive because of the security hassle, though the cramped seats don't help the airlines either. Mind you, efficiency likely does require that I settle for the sufficient rather than the desirable... at least to keep things at a price I am willing to pay. If the current system is not sufficient, under Capitalism a few things can happen. Airlines can go bankrupt if they don't attract customers or fail to keep costs reasonably below revenue. If you see an industry where the entrenched players are old, inefficient, and failing to genuinely meet customer needs, hell that sounds like a golden opportunity! Why not create an airline that is efficient and caters to the common customer and take advantage of the vacuum? If a record label executive can do it why not some of the YC crowd? I thought this group was about entrepreneurial disruption! That is the Capitalist solution to marketplace inefficiency and it happens all the time. So I have to reject your premise about what Capitalism is or is not about: your statement just doesn't make sense nor does it bear up under study of the facts. I suspect that the reason the airline industry is so apparently FUBAR is because it's not so easy to achieve that ideal you envision for it, at least not without stealing money from some people to subsidize the travel of others.
  - SilasX 11y ago
    >But to my knowledge airlines don't really participate in the ground concession profit stream... airports do, but not airlines They don't participate directly, but they're still economically coupled the concessions (and various other surcharges like for taxis): to the extent that airports can charge extra for frills, they don't have to charge for the landing spots. The ability to do so may be what makes them viable (that landing charges + surcharges can cover operating costs).
philfrasty 11y ago
European low-cost carrier Ryanair had a net profit of 523 Mio. €. Seems there are ways to make money. http://investor.ryanair.com/wp-content/uploads/2015/04/Q4FY-2014-AnnualInterm_Results-Results.pdf http://investor.ryanair.com/wp-content/uploads/2015/04/Q4FY-...
- pavornyoh 11y ago
  Oh, good. They must have dropped the $15 fare to Europe then. http://money.cnn.com/2015/03/17/news/companies/ryanair-transatlantic-flights/ http://money.cnn.com/2015/03/17/news/companies/ryanair-trans...
  - ceejayoz 11y ago
    Probably not. It's a marketing gimmick - only one or two seats on the plane goes for the $15.
    - pavornyoh 11y ago
      You are right. I wondered ever since that article came out how they arrived at $200 in taxes if the ticket cost $15. Unless they are changing taxes on using the bathroom and other things then maybe. But like you said, a clear gimmick...
      - URSpider94 11y ago
        In most cases, these taxes are per-passenger landing fees charged by various international airports/nationalities to cover the costs of Customs and terminal operations. They have no bearing on the actual ticket cost, i.e. they are the same for a $15 ticket as for a $1500 ticket.
  - Symbiote 11y ago
    Ryanair has a very effective marketing department, which seems to work on the basis that any exposure is good. Hence there are press releases and news articles about plans for standing tickets, or charging to use the toilets. I guess the theory is, if you tell people how cheap Ryanair is often enough, they won't check other airlines. Norwegian is the budget airline that's flying US-Europe, for example NY to Oslo in January for $300 return (hand luggage, no food, no seat reservation).
samfisher83 11y ago
Pretty much every major airline has gone Bankrupt at some point. I think there are short periods when they can make money, but based on history it is unlikely they can make profits long term.
jonnathanson 11y ago
Excellent encapsulation. I'm far from an expert, and this is pure, naive speculation, but on a philosophical level, I wonder if the issue is that we've not yet really mastered the technology of air travel. By that I mean we seem incapable of building and managing aircraft at a sustainable, "MVP" level, operating on a fuel consumption minimal enough to withstand the vagaries of commodity prices. Perhaps Boeing and Airbus are overengineering their aircraft and baking in economic rent to a degree that makes the airlines fundamentally incapable of sustaining a profitable business model. Perhaps this industry can't actually survive with current technology and design methods absent some sort of government backstop or subsidy. Not sure. But the supply-side theory of this business seems like the most compelling (if not wholly complete) theory I've heard. Maybe we need a firm to come along and build the AK-47 or Toyota Prius of commercial aircraft, so to speak: cheap, reliable, efficient, elegantly engineered, and innovative in its use of parts and fuel. I also wonder if there is a correlation between airline profitability and the airlines using the oldest aircraft. Seems to me (again, naively) that aircraft from back in the day were more purpose-built and simpler, with less complex global supply chains. Sort of a similar situation to the military's concerns about phasing out the old, reliable A-10s and F-16s in favor of the massive, modern boondoggle that is the F-35.
- nerfhammer 11y ago
  The 787 was supposed to be a much more efficient aircraft, though it's not cheap and it's had several reliability issues
- nether 11y ago
  Aeroflot opted for the 787 but has ordered some Sukhoi Superjet 100s. I think "simple, rugged" philosophy is difficult to maintain for massive projects with huge part counts. Most Russian airliners have not had much success in the global market. I think the biggest cost saving in aircraft development will come from cheaper engineers, mainly in China. It would be interesting to see if development costs plummet if we were all willing to accept auto traffic rates of accidents and deaths in air travel.
- saosebastiao 11y ago
  I think the aircraft has only a tiny effect on profitability. In general, aircraft total cost of ownership and operations is proportional to size. There are some outliers, but the purchase price and/or leasing costs are negotiated up or down based off of perception of costs, so if there are any issues with aircraft costs they are short lived and go away after a while because those cost differences are eventually negotiated away. Similarly, any aircraft with lower than normal operational costs will have its price bid up until it breaks even with the cost levels of inferior aircraft (scarcity of production capacity for aircraft ensures that higher bidders get first dibs). The real issue is flight capacity utilization. Airline cost structures follow what accountants would call a step-fixed cost. In other words, the marginal cost per person is negligible until you fill the aircraft and then the marginal cost per person is the cost of a whole new flight. This also means that once you fill a plane past its break-even load factor, every additional seat sold is pure profit. The airline industry as a whole is operating on load factors between 82% and 84%, and it is net neutral in terms of profitability. That would lead me to believe that at current fuel prices (really the only source of variability in operational cost), that 83% load factors represent the zero-profit scenario. Now if Airline A can achieve 85% load factors, they will have a positive EBIT. If Airline B can acheive 87% load factors, they will roughly double the EBIT of Airline A. Some airlines make money. They do it using the same exact planes and technology as other airlines that do not make money. The difference is that they have higher load factors. They are better at selling seats.
cbr 11y ago
Has anything changed with pilots unions? "The interaction between labor laws and FAA regulations results in pilot unions having a strong claim on 100 percent of an airline's profits. An investor in a unionized U.S. airline should not expect to see a return on that investment and, indeed, should expect an eventual Chapter 11 bankruptcy filing to wipe out his or her investment altogether." http://philip.greenspun.com/flying/unions-and-airlines http://philip.greenspun.com/flying/unions-and-airlines
- 6stringmerc 11y ago
  Yes, George Bush (i.e. his administration) forbade the Delta pilots from going on strike, sent the pilots and airline to binding arbitration, and as a result, the pilot's pensions were dumped on the US taxpayers: http://money.cnn.com/2006/06/16/news/companies/delta_pensions/ http://money.cnn.com/2006/06/16/news/companies/delta_pension... Later, when Delta started doing well again, they didn't bother taking back that obligation.
chrismealy 11y ago
Businesses with high fixed costs (like airlines) generally need to be some kind of monopoly to survive. Some monopolies are based on difficult to duplicate quality (Apple) or network effects (Windows). Sometimes it's regulatory. But without some protection from price wars, high-fixed costs business usually end up in a death spiral.
pavornyoh 11y ago
A naive question... Based on the comparison Peter Thiel made here between the airline industry and Google. https://www.youtube.com/watch?v=DLWyP83iU5M&list=PLG0NEzaDlePoz-Pls2f0kG3skZpVJY2E1&index=5 https://www.youtube.com/watch?v=DLWyP83iU5M&list=PLG0NEzaDle... How come no one has disrupted it? Surely there has to be way to make it work?
- codazoda 11y ago
  I recently read an article about the government wasting money on billion dollar jets that didn't work for front-line fighting. The author suggested the slower, cheaper, and more capable WWII airplanes instead. Got me wondering, could someone maintain and fly dual prop or larger airplanes on the cheap and disrupt the airline industry with it's jets that cost hundreds of millions? I have no idea if props or jets are more fuel efficient but I assume the former.
  - CamatHN 11y ago
    You would first have to build a suitable dual prop for long flights which costs hundreds of billions of dollars (boeing doesnt sell dual props I dont think for big commercial flights). Thats assuming you can get it working and fits with all the safety requirements and what not. As such perhaps only for short distance flights? i.e. 3 hours. Dual props are also a lot slower.
trhway 11y ago
make money or show profit? If one to look at the salaries of the army of airlines' executives and mid-managers one would definitely see the money (and would understand why no profits are shown). Oil is cheap. Planes are reliable and fuel-efficient. The flights are completely booked and the passengers are stuffed tightly in. Tickets are pricey. Where are the money going once it ingested by an airline?

47 points by pavornyoh 11y ago

The business model of airlines is to shove as many people as possible into a giant tin can and deliver them from one hub to another. Despite the number of people and high cost of tickets, this alone is not enough to turn a profit, so the hubs are turned into high-priced shopping traps. When fuel prices are low enough, it is enough to keep the airships afloat. But it is a completely backward system of travel, where the actual travel becomes almost a secondary matter. It's all the fanfare and bazaar around it that drives the wasteful economics, and likewise the hate of it. An efficient and beloved system would turn to smaller planes and point-to-point trips. Smaller planes would allow automobile-like scaling of plane manufacture and point-to-point trips would provide a reduction in fuel costs. But we will never see it, b/c as it turns out, Capitalism is not about efficiency or catering to the common customer. Rather it is about moving around as many bits of currency as fast as possible. The airline industry is one the great examples of this.

lujim 11y ago
Traditionally the cost per seat/mile is lowest on wide bodies and skyrockets as you get towards regional aircraft. The higher (per seat/mile) cost of operating smaller planes is offset by the near poverty wages payed to regional airline crews. Maybe someday small point to point aircraft will be economical, but we aren't there yet. Southwest has done pretty well operating outside of hubs mainly due to smart management that knows when to hedge fuel costs and a fleet composed of a single type of aircraft (737).
- ju-st 11y ago
  No, narrowbodies have lower cost per seat mile because they weigh less per seat because they fly shorter routes (=less fuel and structures). Very small airplanes have the problem that many costs don't scale linearly like the wage for 2 pilots, structural weight, efficiency of combustion engines. I found this Wikipedia article interesting... https://en.wikipedia.org/wiki/Fuel_economy_in_aircraft#Example_Values https://en.wikipedia.org/wiki/Fuel_economy_in_aircraft#Examp...
  - lujim 11y ago
    Yeah agreed. That chart is great, but it's not telling the whole story. If you take a 747-400, 757, 737, and a CRJ (1 fuel stop) move a full load of passengers 3000 miles the widebodies will have better seat/mile costs. That chart compares the seat/mile of a 737 going 1000 miles to a 747 going 6000 miles. If you flew a 737 6000 miles (with stops of course) the seat/mile cost would be huge. Similarly a Cessna 150 could get you a better seat/mile cost than a CRJ if you're going 30 miles. A 747-400 going 6000 miles nonstop will have tremendous first hour fuel burns because it's carrying... tons of fuel. Each extra pound of fuel you carry requires that you take on.... yup more fuel. It compounds.
jessaustin 11y ago
I'm sympathetic to this sort of critique, but my impression after years of observing this industry is that anything that makes air travel less insane also makes it less affordable, so there is strong pressure toward insanity. It doesn't seem odd that a market for expensive short-term services would be like that, or at least would have a segment like that. After all the utopia you envision exists for those who are willing to spend more, e.g. on fractional ownership.
- lujim 11y ago
  Until a technological leap as large as the move from piston engines to turbine engine occurs and flight crews are replaced by computers, airlines will scrape by on the narrowest margins of almost any industry. As much as it seems like the airlines torture passengers for the shear joy of it, this model is the best thing that could come out of intense competition, high overhead costs, and the prohibitively high fuel costs of the early 2000's
- mikeash 11y ago
  It's absolutely this. Airline customers care about price above all else. A price differential as low as $5 is enough to get people to switch flights, even if the pricier flight is better. It's utterly cut-throat. Why do airlines cram people in so tightly you can barely breathe? Because that lets them shave dollars off the ticket price, which attracts customers from anyone who doesn't do this. Given the choice between a cheaper flight that's less comfortable, or one that's $5 more and has more room, people will choose the former. Why do airlines not serve meals anymore unless they absolutely have to? Well, those meals aren't free. People will choose the meal-less flight for $5 less over the flight with a meal that costs slightly more. Why does everybody charge for checked luggage now? Because it lets them shave the price of a ticket. If people wanted comfort, good food, free luggage, and all that, we would have it. But what people want above all else is to pay less. And actually, airlines have gotten pretty good at segmenting the market, which for their customers (us) means we can pretty much choose our own tradeoff there. You'd rather pay more money for a larger seat? Almost all of them let you do this now. You want a meal during your flight? Just about any suitably-long flight will have meals available for purchase. You want to check bags? Go for it, just pay for it. I hate getting crammed into tiny airline seats (I'm 6'3" and barely fit) and all the rest... but every time I get on an airplane and pass those better seats, I remember that I'm just voting with my wallet here, and clearly I value the $100 or whatever it is more than the space.
sbuttgereit 11y ago
So let me get this straight: airlines, for all their pseudo-efficiencies, cannot make a profit (since they really aren't efficient) so they rely on ground concessions. But to my knowledge airlines don't really participate in the ground concession profit stream... airports do, but not airlines. Yet, all these inefficient, unprofitable airlines care about is moving currency around quickly. All of this is spite of the customers. And this is Capitalism. Sorry to say I have to disagree. Not only is the appeal to chasing dollars in the last part of your argument contradictory with the loss statement of your first point, the behaviors of customers and the role of competition under Capitalism is completely ignored or misunderstood. Under Capitalism, trades are voluntary. If the common customer were not receiving sufficient value for their travel dollar, they wouldn't be spending it on air travel. It's true, I would love to have one of those Emirates private rooms on every airline trip I take, but even a cramped little chair across country is often sufficient... when it's not I upgrade. Sometimes that trade isn't worth it: if I'm travelling between the Bay Area and Los Angeles, I'll usually drive because of the security hassle, though the cramped seats don't help the airlines either. Mind you, efficiency likely does require that I settle for the sufficient rather than the desirable... at least to keep things at a price I am willing to pay. If the current system is not sufficient, under Capitalism a few things can happen. Airlines can go bankrupt if they don't attract customers or fail to keep costs reasonably below revenue. If you see an industry where the entrenched players are old, inefficient, and failing to genuinely meet customer needs, hell that sounds like a golden opportunity! Why not create an airline that is efficient and caters to the common customer and take advantage of the vacuum? If a record label executive can do it why not some of the YC crowd? I thought this group was about entrepreneurial disruption! That is the Capitalist solution to marketplace inefficiency and it happens all the time. So I have to reject your premise about what Capitalism is or is not about: your statement just doesn't make sense nor does it bear up under study of the facts. I suspect that the reason the airline industry is so apparently FUBAR is because it's not so easy to achieve that ideal you envision for it, at least not without stealing money from some people to subsidize the travel of others.
- SilasX 11y ago
  >But to my knowledge airlines don't really participate in the ground concession profit stream... airports do, but not airlines They don't participate directly, but they're still economically coupled the concessions (and various other surcharges like for taxis): to the extent that airports can charge extra for frills, they don't have to charge for the landing spots. The ability to do so may be what makes them viable (that landing charges + surcharges can cover operating costs).

philfrasty 11y ago

European low-cost carrier Ryanair had a net profit of 523 Mio. €. Seems there are ways to make money. http://investor.ryanair.com/wp-content/uploads/2015/04/Q4FY-2014-AnnualInterm_Results-Results.pdf http://investor.ryanair.com/wp-content/uploads/2015/04/Q4FY-...

pavornyoh 11y ago
Oh, good. They must have dropped the $15 fare to Europe then. http://money.cnn.com/2015/03/17/news/companies/ryanair-transatlantic-flights/ http://money.cnn.com/2015/03/17/news/companies/ryanair-trans...
- ceejayoz 11y ago
  Probably not. It's a marketing gimmick - only one or two seats on the plane goes for the $15.
  - pavornyoh 11y ago
    You are right. I wondered ever since that article came out how they arrived at $200 in taxes if the ticket cost $15. Unless they are changing taxes on using the bathroom and other things then maybe. But like you said, a clear gimmick...
    - URSpider94 11y ago
      In most cases, these taxes are per-passenger landing fees charged by various international airports/nationalities to cover the costs of Customs and terminal operations. They have no bearing on the actual ticket cost, i.e. they are the same for a $15 ticket as for a $1500 ticket.
- Symbiote 11y ago
  Ryanair has a very effective marketing department, which seems to work on the basis that any exposure is good. Hence there are press releases and news articles about plans for standing tickets, or charging to use the toilets. I guess the theory is, if you tell people how cheap Ryanair is often enough, they won't check other airlines. Norwegian is the budget airline that's flying US-Europe, for example NY to Oslo in January for $300 return (hand luggage, no food, no seat reservation).

samfisher83 11y ago

Pretty much every major airline has gone Bankrupt at some point. I think there are short periods when they can make money, but based on history it is unlikely they can make profits long term.

jonnathanson 11y ago

Excellent encapsulation. I'm far from an expert, and this is pure, naive speculation, but on a philosophical level, I wonder if the issue is that we've not yet really mastered the technology of air travel. By that I mean we seem incapable of building and managing aircraft at a sustainable, "MVP" level, operating on a fuel consumption minimal enough to withstand the vagaries of commodity prices. Perhaps Boeing and Airbus are overengineering their aircraft and baking in economic rent to a degree that makes the airlines fundamentally incapable of sustaining a profitable business model. Perhaps this industry can't actually survive with current technology and design methods absent some sort of government backstop or subsidy. Not sure. But the supply-side theory of this business seems like the most compelling (if not wholly complete) theory I've heard. Maybe we need a firm to come along and build the AK-47 or Toyota Prius of commercial aircraft, so to speak: cheap, reliable, efficient, elegantly engineered, and innovative in its use of parts and fuel. I also wonder if there is a correlation between airline profitability and the airlines using the oldest aircraft. Seems to me (again, naively) that aircraft from back in the day were more purpose-built and simpler, with less complex global supply chains. Sort of a similar situation to the military's concerns about phasing out the old, reliable A-10s and F-16s in favor of the massive, modern boondoggle that is the F-35.

nerfhammer 11y ago
The 787 was supposed to be a much more efficient aircraft, though it's not cheap and it's had several reliability issues
nether 11y ago
Aeroflot opted for the 787 but has ordered some Sukhoi Superjet 100s. I think "simple, rugged" philosophy is difficult to maintain for massive projects with huge part counts. Most Russian airliners have not had much success in the global market. I think the biggest cost saving in aircraft development will come from cheaper engineers, mainly in China. It would be interesting to see if development costs plummet if we were all willing to accept auto traffic rates of accidents and deaths in air travel.
saosebastiao 11y ago
I think the aircraft has only a tiny effect on profitability. In general, aircraft total cost of ownership and operations is proportional to size. There are some outliers, but the purchase price and/or leasing costs are negotiated up or down based off of perception of costs, so if there are any issues with aircraft costs they are short lived and go away after a while because those cost differences are eventually negotiated away. Similarly, any aircraft with lower than normal operational costs will have its price bid up until it breaks even with the cost levels of inferior aircraft (scarcity of production capacity for aircraft ensures that higher bidders get first dibs). The real issue is flight capacity utilization. Airline cost structures follow what accountants would call a step-fixed cost. In other words, the marginal cost per person is negligible until you fill the aircraft and then the marginal cost per person is the cost of a whole new flight. This also means that once you fill a plane past its break-even load factor, every additional seat sold is pure profit. The airline industry as a whole is operating on load factors between 82% and 84%, and it is net neutral in terms of profitability. That would lead me to believe that at current fuel prices (really the only source of variability in operational cost), that 83% load factors represent the zero-profit scenario. Now if Airline A can achieve 85% load factors, they will have a positive EBIT. If Airline B can acheive 87% load factors, they will roughly double the EBIT of Airline A. Some airlines make money. They do it using the same exact planes and technology as other airlines that do not make money. The difference is that they have higher load factors. They are better at selling seats.

cbr 11y ago

Has anything changed with pilots unions? "The interaction between labor laws and FAA regulations results in pilot unions having a strong claim on 100 percent of an airline's profits. An investor in a unionized U.S. airline should not expect to see a return on that investment and, indeed, should expect an eventual Chapter 11 bankruptcy filing to wipe out his or her investment altogether." http://philip.greenspun.com/flying/unions-and-airlines http://philip.greenspun.com/flying/unions-and-airlines

6stringmerc 11y ago
Yes, George Bush (i.e. his administration) forbade the Delta pilots from going on strike, sent the pilots and airline to binding arbitration, and as a result, the pilot's pensions were dumped on the US taxpayers: http://money.cnn.com/2006/06/16/news/companies/delta_pensions/ http://money.cnn.com/2006/06/16/news/companies/delta_pension... Later, when Delta started doing well again, they didn't bother taking back that obligation.

chrismealy 11y ago

Businesses with high fixed costs (like airlines) generally need to be some kind of monopoly to survive. Some monopolies are based on difficult to duplicate quality (Apple) or network effects (Windows). Sometimes it's regulatory. But without some protection from price wars, high-fixed costs business usually end up in a death spiral.

pavornyoh 11y ago

A naive question... Based on the comparison Peter Thiel made here between the airline industry and Google. https://www.youtube.com/watch?v=DLWyP83iU5M&list=PLG0NEzaDlePoz-Pls2f0kG3skZpVJY2E1&index=5 https://www.youtube.com/watch?v=DLWyP83iU5M&list=PLG0NEzaDle... How come no one has disrupted it? Surely there has to be way to make it work?

codazoda 11y ago
I recently read an article about the government wasting money on billion dollar jets that didn't work for front-line fighting. The author suggested the slower, cheaper, and more capable WWII airplanes instead. Got me wondering, could someone maintain and fly dual prop or larger airplanes on the cheap and disrupt the airline industry with it's jets that cost hundreds of millions? I have no idea if props or jets are more fuel efficient but I assume the former.
- CamatHN 11y ago
  You would first have to build a suitable dual prop for long flights which costs hundreds of billions of dollars (boeing doesnt sell dual props I dont think for big commercial flights). Thats assuming you can get it working and fits with all the safety requirements and what not. As such perhaps only for short distance flights? i.e. 3 hours. Dual props are also a lot slower.

trhway 11y ago

make money or show profit? If one to look at the salaries of the army of airlines' executives and mid-managers one would definitely see the money (and would understand why no profits are shown). Oil is cheap. Planes are reliable and fuel-efficient. The flights are completely booked and the passengers are stuffed tightly in. Tickets are pricey. Where are the money going once it ingested by an airline?