Crisis in a Fragile Industry: Airlines Struggle to Survive in an Uncertain Future

Abstract

In early 2001, the U.S. airline industry was already feeling the effects of one of its great historical enemies—economic recession—and expected to lose $3 billion.1 Economic recession exposes overcapacity in the market— too many seats and not enough passengers. As demand falls, prices decline as carriers scramble to fill seats and retain market share. This tends to place further cost pressure on carriers struggling from declining yields, the difference between cost per available seat mile and revenue per available seat mile. The industry then experiences a series of bank ruptcies and consolidations before the cycle begins again. The last U.S. recession in 1990–1991 combined with another perennial enemy of aviation, war (in this case, the Gulf War of the early 1990s), to produce industry losses of $10 billion.2 These losses would pale in comparison to those of the current crisis. In fact, the first decade of the twenty-first century has been the “Perfect Storm” for the global airline industry that has experienced a confluence of four distinct factors.3 Two of these factors have a long history of creating problems for the industry—economic recession and war. The other two factors were new—the 9/11 terrorist attacks and potentially severe contagious diseases such as Severe Acute Respiratory Syndrome (SARS) and bird f lu. Together these factors created a crisis that resulted in worldwide airline losses greater than all the profits made in the industry since the 1903 flight at Kitty Hawk by the Wright Brothers.4