Wednesday, March 22, 2006

Why do airline companies continue to fly ?

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 ?


Ranjit said...

i don't know what the global aggregates are saying. if u take a look at individual nos., then a handful of airlines have performed quite well in 2005. The overall picture is tainted mainly due to huge losses by American companies.

See this-
Singapore Airlines reported a rise of 66.8% in net income in 2005. Net income of Vergin Airlines grew by 10 times! Net income of British Airways grew by 100% while that of Air France KLM rose by 300%. Lufthansa earned a profit of half a million dollars. (the last three compnaies are the top three airlines in Europe in that order). Net income of Japan Airlines was USD 280 million and that of All Nippon Airways grew by modest 7% (these are the top 2 from Japan).

i think, results of the world's top 3 companies are a drag. in 2005, AMR which owns American Airlines lost USD 861 million whereas United Airlines reported net loss of USD 1,721 million. Delta Airlines lost USD 5.2 billion. the first 2 cos are trying to come out of bankruptcy, while Delta filed for ch 11 in 2005. Also, Northwest Airlines lost USD 862 million in 2004.

Now, it can be clear that the business is not as scary as it may be depicted by the aggregate nos!!

if u want to know why American guys are making losses please visit the link below -

Ravi Purohit said...

Jit ram: Thanks for the information. Infact after reading that piece I should rephrase my question - Why do US airline companies continue to fly ? ;-)