Money I Airlines
The unprofitable business of airlines
In 2019, before the pandemic, American Airlines had a revenue of $34 billion. Yet, they didn’t make any profit, they lost $1.1 billion.
And it’s not only American Airlines that loses money as we speak, these companies do too:
- Continental Airlines
- Air France
- Virgin Galactic (went bankrupt in 2020)
American Airlines, United Airlines, and Delta Airlines have all filed for bankruptcy but recovered by merging with other airlines.
But why do all these companies lose money?
Here are some reasons:
Unprofitable airlines who offer cheap tickets force the other airlines to compete with that pricing. Therefore other airlines are forced to lower their prices, which makes them unprofitable.
Unprofitable airlines can continue to operate for many years even though they lose tons of money.
Closing down a large and unprofitable airline would result in the loss of thousands of jobs, inconveniences to hundreds of thousands of travelers, and millions of dollars in losses for the airline’s lender.
If the airline goes bankrupt, the bank that owes them billions is screwed because they will never get their money back.
Additionally, the bankruptcy of American Airlines, a national carrier would result in a loss of national pride.
Governments often bail out airlines, giving it a financial lifeline to stay in business.
Airlines are really complex machines. And complex machines come with expensive salaries to be paid.
Additionally, the airlines need to pay back the loan on the airplanes. All of these fixed costs give the airline a massive overhead.
Rising fuel costs also impact the airlines tremendously. As you already know, fuel prices have soared since the war in Ukraine. This affects the airline’s bottom line.
Due to events like 9/11, the coronavirus, and natural disasters, the demand for airplane tickets can decrease.
In 2001, airlines suffered a loss of $7.7 billion due to the terrorist attacks on the twin towers.
In 2010, airlines missed out on $2 billion dollars in revenue due to the closure of the European airspace caused by the eruption of a volcano in Iceland.
Airlines that go out of business file for bankruptcy in September and October. Why?
In the summer, airlines make the most money since people go on vacation. Travelers book their flights between March and August. This is when airlines have the largest amount of cash flow.
Struggling airlines typically survive the summer because of the large demand for flights. But once demand falls, they go bankrupt.
That is why almost every airline that goes bankrupt, files in September or October since there isn’t as much cash flow so they struggle to pay off debt.
In the last decade, American Airlines, Delta, and United Airlines have all filed for bankruptcy at one point. Legacy airlines struggle the most. Why?
It’s because of labor costs.
All airlines have high labor costs, but the staff of legacy airlines is less productive.
Low-cost airlines have a way more productive and efficient staff which lowers overall labor costs.