Domestic airlines in the United States are failing financially. Fine. Sure. We knew that. But here's the kicker: They've been financially failing for 40 years, almost the entire time they've been popular. And that? Is fascinating. Back at the turn of the 20th century, a lot of the first electric utilities and long-distance railroad companies went bankrupt, because people couldn't figure out how to make a profit in an industry with huge, fixed overhead costs. This is some evidence that the kinks haven't totally been worked out on that, even today. (Via Matt Yglesias)

  • http://profile.yahoo.com/4R4LSWO25O3AYM5FPXTFN22C54 Dingos

    Creative accounting.  I had a relative that worked for Anheuser Busch in Williamsburg Va.  He said that the “Busch Gardens” there NEVER made a profit.  It only ever operated  at a loss.  I’m thinking the same people do their books too.

    • http://profiles.google.com/george.herbert George Herbert

      It’s not creative accounting; both on a P/L and cashflow basis most airlines lose money most or many years (and, over time, lose money on the whole).  

      • http://profile.yahoo.com/4R4LSWO25O3AYM5FPXTFN22C54 Dingos

         You really need to learn to recognize humor when you see it.

    • digi_owl

      That would perhaps be a classic “loss leader” example.

      • awjt

        Exactly.  It’s a failed experiment in mixing inter-airline collusion with government subsidy.  

        If airlines charged what it truly cost to fly people, and decisions were customer-driven, we wouldn’t be cramped into 12 inch wide seats made of recycled milk jugs and duct tape, facing the wrong way, starving and thirsty, feeling violated because the TSA just body cavity searched us and our kids.

        It’s a racket, the way it is, designed to maximize our fear and discomfort. Only Branson is getting it right.

  • http://profiles.google.com/george.herbert George Herbert

    More insightfully – the “airplane industry” – including airports, aircraft manufacturers, aircraft maintenance, fuel, travel booking, all the total bells and whistles PLUS the airlines, is fairly profitable, persistently profitable, profitable over most and nearly all long time periods of roll-up analysis.  The Airlines portion by themselves are persistently not.

    The Airlines are – on the whole – fucking up on their business model with competition, and accepting losing money when they should not be.  Their creditors and investors should not put up with it, but do.

    There are well-managed exceptions (Southwest, some other lower-cost airlines) which are consistently profitable.  SW has lost money a few quarters here and there, but persistently makes money, because they undiscount when they start to encounter losses.  Not on every flight every day, but on flight numbers that are losing money, and in particular segments and the company as a whole if they start to lose margins too badly.

    The big ones that are tanking repeatedly?  Don’t.

    There’s a lot of talk in industry news about cost advantages to the smaller lower cost airlines as well, which is not insignificant.  But large airlines structurally accepting losing money over long periods of time is the root of the rot here.

    • gibbon1

       Couple of months ago I read an interesting essay on the history of rail.  One of the authors points was that transportation is hard business to make a profit in because what makes it worth while is the secondary and tertiary users and there is no way to charge those customers except via subsidies paid by taxes.

      So yes businesses that interface with airlines are profitable but the airlines themselves, not so much.

      • Purplecat

        I’ve seen a similar argument about the economics of transport in general. Good transportation creates value, but it’s very difficult to capture that as fares. Instead, most of the effect is to increase the value of land in areas with good transportation links.

        One obvious solution is the one that we’ve taken for road transport, in which the infrastructure is publicly owned, and paid for by taxation on all the value that the road has helped to create. It’s just a quirk of modern political life that generalising that solution to other modes of transport would cause widespread allegations of Communism.

  • Michael Tomczak

    Maybe I’m reading the graph wrongly, but it appears that with the exception of a brief period in the early 90s and post-9/11, the airlines have been fairly profitable, to the tune of billions of dollars.

    • digi_owl

      In finance lingo, anything that do not show a 3% or higher growth in profits pr year is a failure. One can see something similar regarding a “mature market”. This is a market that while still shipping say millions of units pr year, is not showing a growth in unit shipments. This means that it is of not short term finance interest, and so will get little to no press coverage. This is why there is a whole lot of talk about smartphones, while PCs are never mentioned. The former shows a year over year market growth (total of units shipped), while the latter is shipping pretty much the same as last year.

      Btw, the graph do not include cargo flights. I suspect that would show a much higher profit margin than passenger (cargo do not require the overhead of food and comfort).

      • niktemadur

        In finance lingo, anything that do not show a 3% or higher growth in profits pr year is a failure.

        It’s like a tumor, isn’t it – growth for growth’s sake?  When does it stop, when there’s a Starbucks across the street from another Starbucks?  Oh, wait…

        At what point does growth go beyond the point of equilibrium and becomes either over-saturated or Too Big To Fail?  What’s wrong with a nice company that plateaus at a healthy level and stays there?

        In finance lingo…

        That Wall St school of flash-and-cash “glamor” poisons everything it touches.

        • http://hgomersall.wordpress.com/ heng

           I was going to say this. Doesn’t a small but steady profit and lots of employment equate to a great business. Capitalism at its finest – a nice equitable position in which suppliers and consumers alike benefit.

          • dnebdal

             As I said above , it’s the effective purchasing power that needs to be steady, and to get that the raw number of dollars needs to increase slightly each year.

            I agree, though – a steadily profitable company that’s not losing market share ought to be ideal in an “old” market.

        • digi_owl

          Thing is, economists (at least those found in fianance and in non-fringe politics) think that there can be both growth and equilibrium. Never mind that their equilibrium is the worlds biggest pipe dream…

      • dnebdal

         Is that a 3% growth/year in inflation adjusted dollars, or in absolute numbers? If it’s the latter, then that makes sense – if your income doesn’t keep up with inflation, you’re effectively in decline.

        • digi_owl

          Ah yes, inflation. The big hangup of everyone since WW1.

          • dnebdal

            It exists, though – the decrease in purchasing power of any fixed amount of dollars is a real and quantifiable thing.  Because of that, companies have to run to stand still – their profits (in dollars) have to increase at the same rate just to remain effectively constant. Of course, the incomes of their customers will hopefully be increasing at about the same rate.

            If this is a good, bad, or neutral thing is a separate discussion, really. :)

          • digi_owl

            True. Tho the source is a bit different than one may thing. Best i can tell, inflation comes from excess demand. Meaning that the market is willing to throw more money at the merchants than the merchants has goods to sell, and so they instead up the price.

            But that may be overly simplified, as these days one company/merchants worker is another’s customer.

            As such there is a feedback loop going there.

            Also, demand is more than just the paycheck. there is also debt in all its forms being stacked on top. As such, a more likely source of inflation is lending-happy banks and credit card companies than the excess money printing of post-ww1 Germany and Congo in more recent times.

            And deflation can be just as bad, especially when a economy is heavily in debt (as we see in various places right now).

            In the end tho, all this talk about inflation adjustment is a distraction imo. Trying to wind back inflation to some supposed ideal starting point will do just as much harm as letting things run rampant (something that may well have happened already thanks to economists in general ignoring the effect of debt and banking on demand and therefor inflation).

          • dnebdal

            The one good thing about inflation is that it’s making my student loans effectively smaller every year. ;)

            Generally speaking, it seems to be beneficial if you’re in debt, neutral if you live hand-to-mouth, and negative if you’re holding money.

          • digi_owl

            And that would be why those that freak the most about inflation are those that large savings or in some other way has piled up the cash.

            Reminds me that it seems the US financial elite have used the “american dream” to convince the US public that they can all become elites, and so should vote as if they are already elites, because it will benefit them once they become elites (tho the reality of that happening is remote to say the least).

  • Nicky G

    Well, at least we just let failing airlines fail, and never bail them out. Ever.

    It’s too bad we subsidize trains so much though, to the point where we have just a ridiculously good rail system that puts other first-world nations, like Spain, to shame.

    • social_maladroit

      Funny you should say that (snark included). NPR had Delta CEO Richard Anderson on to tell us that he thinks the “country should make a volitional determination that the airline industry is a strategic industry for the US.” By that, he means that the US should treat the airline industry like the Chinese treats theirs. Oh, he doesn’t want the government to tell the industry what to do — he wants more deregulation and less taxes. He wants the US to put money and PR into the airline industry the way China evidently puts money and PR into theirs.

      Your free market system at work.

  • technobach

     You _are_ reading it wrong.  The steadily increasing line is their revenue.  The line that increases right along with it is the costs.  The dotted line that floats around the bottom axis is their profit.

  • atimoshenko

    I think it is the same for rail lines in Europe and Japan. Interesting that an important and obviously value-generating part of the economy (long-distance rapid transport struggles to make profits) at the same time as industries with more dubious value contributions roll around in cash even in bad years. 

  • niktemadur

    On the graph, that early-nineties growth in profits is when some genius junior-exec decided to eliminate the olive in the salad, less overhead to the tune of 25 thousand buckaroos a year.  The 97-98 spike is when they axed the tomato slice.  Things went sharply downhill when they ditched the salad altogether. One step too far.

  • Peter Flint

    I remember somebody once asking Richard Branson how to become a millionaire. His reply was ‘Start out as a billionaire and buy an airline’.

    • Antinous / Moderator

      The joke of the week is:
      “How do you make a small fortune with Facebook stock?”
      “Start with a large fortune.”