More on the Airline Industry's Woes

Thu, 24 Apr 2008 14:42:18 +0000

The impact of rising jet fuel costs on the airline industry's bottom line has been substantial. From yesterday's Washington Post:

Faced with skyrocketing fuel bills, major U.S. airlines have announced nearly $1 billion in losses for the first three months of the year, a financial toll that is forcing carriers to slash flight schedules, cut jobs, add passenger fees and even seek potential merger partners.

It would be nice if the tone of the article were a little bit different. When the price of an input rises, then of course less of the output will be produced. This is one of the least subtle lessons in introductory economics, right along with the rise in the price (here, the fees) of the output. But when it's the airlines, we're now "slashing" and "cutting." It's a supply curve shifting. Chill.

If you run the numbers, you see that the airlines can't possibly be making money with the fares their charging and the costs they're paying. Fuel costs have nearly tripled since 2000. What's disappointing--as a reasonably frequent flyer and a would-be admirer of the industry--is how its leaders seem to be distracted in making the changes that need to happen. I'll give them two pieces of advice.

First, stop looking to mergers to reduce capacity. There is plenty of redundancy within each hub-and-spoke carrier's route system to make the reductions. And that can happen without getting the DoJ involved.

Second, go find an airline that's doing well and copy it. In terms of performance, Southwest is the industry leader. Do what they do. It's good stuff. Yes, Southwest will be subject to the cost pressures from jet fuel purchases. But is there anyone who doesn't think it will hurt them less than the rest of the industry?

Both pieces of advice go to the industry's confusion of size for profitability. It is much better to make "small" profits than "large" losses.