Friday, June 24, 2011

Why Do Airlines Always Lose Money?

U.S. airlines have lost nearly $60 billion (2009 dollars) in domestic markets since deregulation, most of it in the last decade.  More than 30 years after domestic airline markets were deregulated, the dismal financial record is a puzzle that challenges the economics of deregulation.  I examine some of the most common explanations among industry participants, analysts, and researchers -- including high taxes and fuel costs, weak demand, and competition from lower-cost airlines.  Descriptive statistics suggest that high taxes have been at most a minor factor and fuel costs shocks played a role only in the last few years.  Major drivers seem to be the severe demand downturn after 9/11 -- demand remained much weaker in 2009 than it was in 2000 -- and the large cost differential between legacy airlines and the low-cost carriers, which has persisted even as their price differentials have greatly declined.

Source: ON THE PERSISTENT FINANCIAL LOSSES OF U.S. AIRLINES: A PRELIMINARY EXPLORATION