Flying off Course: The Economics of International Airlines

Flying off Course: The Economics of International Airlines

Flying off Course: The Economics of International Airlines

Flying off Course: The Economics of International Airlines


This is a guide to the inner workings of the aviation industry. The topics examined in the book cover: international deregulation; alliances; low cost airlines; and new technology.


In the few weeks that followed the terrorist attacks of 11 September 2001 in the United States, several airlines collapsed or had to be bailed out by their governments. They included Sabena, Swissair and Canada 3000, all of which closed down, while Air New Zealand, the Polish airline LOT and a number of others were saved by capital injections from their governments. By the end of 2001 the airline industry was in turmoil. Other airlines were on the verge of collapse. But the underlying crisis predated 11 September. These airlines were well on the way to collapse before the terrorist attacks. The latter turned crisis into disaster.

The underlying crisis facing many international airlines was already apparent early in 2000. Over-capacity and increased competition were inducing airline managements to reduce fares and tariffs at a time when costs were rising. But it was the airlines themselves which had created the over-capacity in the first place. It looked as if the very profitable years of the late 1990s were to be followed by three or four years of falling, if not vanishing, profits. The airline industry was once again flying off course.

During the last forty-five years the airline industry has undergone an expansion unrivalled by any other form of public transport. Its rate of technological change has been exceptional. This has resulted in falling costs and fares which have stimulated a very rapid growth in demand for its services. A seemingly insatiable demand. In addition, for the first half of this period scheduled airlines enjoyed considerable protection from both internal and external competition. Any other industry faced with such high growth of demand for its products, especially while cushioned from competition, would be heady with the thought of present and future profits. But not the airline industry: it is an exception to the rule. High growth has for the most part spelt low profits. Increased demand has not resulted in long-term financial success. While some airlines have consistently managed to stay well in the black, the industry as a whole has been only marginally profitable.

There is no simple explanation for the apparent contradiction between the industry's rapid growth and its marginal profitability during recent decades. But for the individual airline financial success depends on matching supply and demand in a way which is both efficient and profitable. This is theunderlying

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