The Economist explainsWhy airlines make such meagre profits

FROM taking foreign holidays to eating out-of-season fruit, once-exotic experiences have become commonplace thanks to the airline industry, which has shrunk the globe in the 60 years or so since commercial flights started in earnest. In those six decades passenger kilometres (the number of flyers multiplied by the distance they travel) have gone from almost zero to more than 5 trillion a year. But though the industry has done much to connect the world, it has done little to line the pockets of the airlines themselves. Despite incredible growth, airlines have not come close to returning the cost of capital, with profit margins of less than 1% on average over that period. In 2012 they made profits of only $4 for every passenger carried. Why has a booming business failed to prosper?

Profits were not a concern in the early years of commercial aviation. Airlines were state-owned beasts in receipt of juicy handouts from state coffers. These “flag carriers” were regarded as important strategic businesses with monopoly powers that conferred national pride and international prestige. But they rapidly turned into bloated nationalised industries that regarded profit as a dirty word. Air travel was governed by inter-governmental deals that dictated which airlines could fly where, how many seats they could offer and, in many cases, what fares they could charge. The result was inefficiency and losses.

The liberalisation of air travel in the 1980s led to competition from upstarts to the state behemoths, many of which were privatised wholly or partly. Low-cost carriers, such as SouthWest and Ryanair, introduced cut-throat rivalry on short-haul routes. Former flag-carriers struggled with the legacy of older fleets, large networks, uppity unionised workforces and vast pension liabilities. Low-cost carriers devastated their model of feeding short-haul passengers onto more lucrative long-haul services. Meanwhile, a new breed of state airlines, based mainly in the Persian Gulf, has brought more competition for long-haul passengers. Long-established airlines regularly yelp that the Gulf newcomers get state handouts in the form of reduced landing fees and subsidised fuel from the governments of Dubai, Qatar and Abu Dhabi, though the charges are largely unwarranted.

As well as stiff competition from their rivals, airlines face the problem that there is little competition in the industries that supply them. Two firms—Airbus and Boeing—provide the majority of the planes, and airports and air-traffic control are monopolies. At the same time the industry is vulnerable to outside shocks, such as the 9/11 terrorist attacks, outbreaks of illnesses such as SARS or bird flu, and rises in the oil price. But the outlook is brightening. America’s airlines are consolidating, passenger numbers are growing, especially in Asia, and forecasts suggest that global profits could hit nearly $20 billion in 2014, with margins of 2.6%—pitiful in other industries but stellar for airlines. Unless, of course, something unexpected causes the skies to darken once again.

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