Aviation Finance

5 Pages 1249 Words

In the past few years, we have been able to see the near demise of some of the world’s largest airlines. However at the other end of the table sit such sound companies as Jet Blue and Southwest. The mere existence of such companies proves that airline carriers can be viable business entities. Troubled airlines such as United Airlines and American Airlines can see brighter skies in the future, by minimizing costs and maximizing revenues. Nevertheless, lowering costs and raising revenues cannot effectively fix the struggling airlines problems if the airlines are not able to operate in a free market environment.
The airline industry is a service industry. The airlines are in the business of transporting people and their belongings as well as products. The major characteristics of the industry include the following: capital intensive, high cash flows, labor intensive, highly unionized, and seasonal. These characteristics are the cause of the industry’s then profit margin. In fact “airlines, through the years, have earned a net profit between one and two percent, compared to an average of above five percent for U.S. industry’s as a whole”. Due to the industry’s thin profit margin, it comes as no surprise that the history of airlines has been a rocky one.
The airline industry has been for the most part profitable for the last sixty years. However a thin profit margin has been a major problem throughout the industry’s history. The majority of the airlines are unable to profitably deal with extreme economic events such as depression, recession, war, and of course the September 11 attacks. Furthermore they are unable to profitably deal with changes in the industry such as, the government deregulation that occurred in the late 70’s and early 80’s. The results of such events are larger than average declines in profit compared to higher profit margin industries. This fact can be seen in the annual reports publish...