Plane Conversations

 

Something is horribly wrong with a business model that has an increase in demand without an ability to increase pricing to achieve profitability.

 

The article goes on to say:

Earlier fears of a wave of new airline bankruptcies during the winter low season have subsided, thanks to the industry’s collective cash reserves of around $38 billion — most of that built up through aircraft sales and leasebacks as well as borrowings from international capital markets.

“The industry is structurally out of balance,” Mr. Bisignani said. “The precipitous fall in yields will likely never be fully recovered.” Yield refers to the average revenue earned per distance travelled. “It is difficult to see how this can be balanced on the cost-side of the equation,” he added. “After almost a decade of cost cutting,” additional savings other than fuel “will be incremental at best.”

So, the answer to systemic  losses is to leverage up the balance sheet by sale and leaseback of aircraft and by borrowing more money? That does not seem like a long-term game plan for recovery or survival. However, it does sound much like our current government’s idea of recovery based on borrowing and printing money. In the long term, that will not work for our government any better than it will work for the airlines. Fundamentally a business or industry has to create value at a level where profits are generated in order to sustain itself over the long haul. Am I missing something here?   

The present state of the airline industry worldwide is a model that has too much capacity (supply of seats) which puts it in a state of marginal profit at best, to continuous losses at worst. It is a system being propped up (pardon the pun) by the supply chain including aircraft manufacturers and aviation capital markets which need for the airlines to stay flying in order to support their business models. Additionally, governments in many other countries have supported their national brands through subsidy, nearly free capital or artificially lower fuel prices. That’s fine if governments who choose to subsidize this form of transportation can pay for it. Subsidizing mass transportation through taxation has been going on for a long time, but I don’t think our government has the ability to foot the bill for the airlines in this country.

For the United States airlines, who say they don’t want the government involved in their business, there has to be some solution other than government subsidy. Other than reducing capacity through the failure of weaker airlinesand the discipline of the survivors to create sustainable capacity, what will work? There must be answers out there somewhere.  What are yours?