American Airlines Files For Bankruptcy--Business As Usual

The economic IQ of many Americans is truly appalling. To many, being a large international corporation is equated to having a license to print money, when in fact corporate profits are a relatively small percentage of gross sales, and payroll payments to employees far outstrip net profits. I highlighted this belief in a previous posting with a quote from a Occupy Wall Street protester who said he was demonstrating because he worked for American Airlines and hadn't had a raise in eight years. Well, d'oh, they couldn't afford to give raises. With its stock selling for a little over $1 a share, American Airlines has been on the bankruptcy watch for quite a while, so the actual filing was not that big of a surprise. This quote was particularly disturbing since you'd think that a longtime employee would be aware of his employer's precarious economic position.

What might be a real surprise to most people is the fact that from the beginning of the airline industry in the early 20th century to date, the cumulative historic profit of the airline industry as a whole stands at somewhere around zero. This point was humorously brought to light recently by Warren Buffett, who stated that had there been potential investors present at Kitty Hawk when the Wright Brothers made their first flight, they would have done a great favor to future investors had they shot the Wright Brothers on the spot. An equally humorous comment was made by Richard Branson, who said that the easiest way to become a millionaire was to be a billionaire, then invest in an airline.

The fact that a major industry like the airlines has never made money is truly astounding and hard to fathom. Why would anybody invest in an industry or enterprise that has never shown the ability to make a profit, particularly with a track record of many decades? Well, there are some answers to that. Airlines have had good years and indeed stretches of profitability. So once it had been shown that airlines could make money it's easy to think that they would continue to make money. Also, somebody may come up with a better idea (e.g., Southwest) and indeed make money doing it. And who could foresee the events of 9/11 which ultimately led to the bankruptcy filing of most of the major US based carriers.

However my uneducated guess is that the main reason for the lack of profits in the airline industry is the subsidization of airlines by foreign governments. Whether it's to give their airlines a "competitive" advantage, national pride over a flagship airline, viewing airline transportation as an extension of public transportation, or what, such subsidies artificially reduce fares charged by both subsidized airlines and their competitors. While US airlines have their own indirect subsidies, such as the restriction on foreign carriers to connect between domestic locations and the flight infrastructure established by major airports and the federal government, these are probably diluted by pressures to serve unprofitable domestic markets and other government restrictions.