The global airline industry incurred a loss of USD 6 billion in 2005. Since the year 2001, the industry's total losses amount to a whopping USD 42 billion. This industry has a long history of incurring losses, with no competition whatsoever. It is expected to post a loss of USD 4.3 billion in 2006, says the International Air Transport Association.
Economics teaches us that intense competition leads to zero-economic profits. But, companies are expected to earn reasonable returns on their capital, just to stay in business. Marginal cost price = selling price is how we define competitive markets.
But, the airline industry simply amazes me.
Airlines are a form of transportation, just like railways and automobiles. But, its different. It has far more advantages over the former two. It reduces travel time substantially, provides safer travel (road travel is more dangerous. Read this in Freakonomics) and gives you great comfort. Yet, it makes losses. Whereas railways and automobiles earn decent returns on their capital. Atleast, automobiles as a industry does.
And, so do other fiercely competitive industries such as financial services, telecom and consumer goods.
So the question is - Why do airline companies continue to fly ?