1-During the 1990’s, none of the five largest air carriers in the United States earned its cost of capital. Why do such low rates of return on investment persist in the airline industry?
That’s correct, airline companies margins were below the average for US industries for a long time, especially after the 1978 deregulation. For 40 years, prior to 1978, the airline companies had operated under the regulation of the CAB (Civil Aeronautics Board), which was responsible for managing routes and fares, and thus protected companies revenues and, more important, profitability. Protected by cost-plus pricing, airlines regularly assented to labor union demands and in fact didn’t care too much by the costs incurred by the union deals. Due to the market environment during regulation, the airline companies used to overcharge for tickets, to compensate the costs. After deregulation, airline companies found themselves with high fixed costs and expensive labor. The companies started then running to gain productivity, customer loyalty, explore other routes, decrease costs (using alternative airports, etc...) and focus on how to develop a system that would ensure high load factors; the companies started to pursue the returns/ yields. Together with all the costs problems, the big legacy carriers had to fight the Low Cost Carriers that appeared after deregulation, and were gaining market share rapidly.
2-Despite the challenging industry environment, airlines like Southwest and Jetblue earn enviable returns. How?
Southwest and Jetblue are part of the LCC that appeared after 1978 deregulation. These companies remained profitable despite all the markets ups and downs, and even after Sept 11/ 2001. Basically, the LCC operated differently from legacy carriers using secondary airports, short turn times, high load factors and different labor costs (flexible work rules vs. profit sharing plans) helping the companies have a much more enthusiastic workforce....