Why airlines are always going bankrupt
13 hours ago
- #bankruptcy
- #airline industry
- #game theory
- Airlines are consistently unprofitable due to structural issues, with the industry collectively failing to cover its cost of capital.
- The airline industry exhibits an 'empty core' in game theory, meaning it cannot reach a stable competitive equilibrium due to high fixed costs, low marginal costs, and volatile demand.
- Minimum efficient scale is large relative to market demand, leading to cycles of overcapacity, price wars, and bankruptcies when too many firms enter or exit.
- Bankruptcy, particularly Chapter 11 in the U.S., serves as a relief valve for airlines to renegotiate costs but does not solve the underlying instability.
- Historically, attempts to stabilize the industry include government-regulated cartels (like the Civil Aeronautics Board) and private strategies like hub monopolies or frequent flyer programs.
- Deregulation in 1978 led to lower fares for consumers but increased volatility, with airlines like Delta offsetting losses through profitable credit card partnerships.
- The empty-core problem suggests airlines must choose between being competitive or profitable, often leading to anticompetitive consolidation or treating flights as loss leaders.