This aero-news.net report says that intra-Asia air travel, with 647 million passengers in 2009, has surpassed the North American market, which carried 638 million people. Can Asian airlines celebrate? Maybe not; they collectively lost $3.4 billion last year.
6 thoughts on “Asia surpasses North America as an air travel market”
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You always hear about the airlines losing money.
So what I’m wondering is: why does the invisible hand not whack them?
Either they should go out of business, or increase prices.
Are the airlines in a bad way because people don’t want to travel by air? I don’t think there’s any other industry which is perpetually in losses.
It was bound to happen considering how many people live in Asia vs. North America.
J: I think that there are three problems with the airlines. The first is that everyone knows air travel is a growing market. That prompts overinvestment, which reduces the return to everyone else who might have benefited from the growth. The second is that the marginal cost of carrying one extra passenger is near zero (aside from the fees charged by airports, which keep getting higher due to the fact that many airports are run by government workers who get higher salaries, pensions, etc.). That leads to price wars for whatever seats are vacant. The third problem is the interaction between rules about unions and rules about who can work in the cockpit. In the U.S., the government says that the airline must recognize a union and allow it to bargain for wages. The government, via the FAA, also says that the airline cannot operate with replacement workers, e.g., pilots brought in from another airline. So if the union strikes, the airline is shut down until it agrees to whatever the union is demanding.
Some foreign non-union airlines have made a lot of money in the past couple of decades. JetBlue is an example of a domestic non-union airline that has been generally profitable even though it does not have the lucrative international routes of the legacy airlines.
http://www.blogsouthwest.com/blog/labor-relations-southwest-airlines talks about how Southwest has remained the outlier: a U.S. unionized airline that is consistently profitable.
Very good analysis of a crazy situation.
Next question: How come you didn’t run for Mass. Senator?
J: Thanks for the kind words. I’m assuming that you think that I’m qualified to be a U.S. senator because some of the ideas here strike you as good ones. Washington insiders will tell you that the job of a politician is not to have good ideas, nor to make the U.S. a better place to live, but only to get reelected. No matter how bad the ideas put forward in Congress and no matter how inadequate representatives and senators may seem to the challenges at hand, a Washington insider will assure you that all of these folks are great at winning elections. It is a skill that has almost nothing to do with having good ideas for legislation.
Philg:
Close, but In your first paragraph, substitute non-recourse lending.
Bankers are willing to lend money to purchase the airplane against the value of the airplane itself. If the loan goes south, the airplane is repossessed, but no claim exists against the future earnings of the corporation.
Works the same way in shipping.
Once overcapacity sets in, pricing moves towards operational costs, as everyone is trying to price for pax yields that generate positive cash flow in order to keep debt service current.
Also results in horrible volatility in plane prices, as buyers bid up price of planes when debt-fueled demand for assets exceeds new capacity, and banks attempt to offload foreclosed/seized a/c at the other end of the cycle.
Non-recourse loans create over-investment, overcapacity, and declining margins in every industry in which it is the prevalent custom.
Smart people avoid such industries, in any capacity (investor, employee, management.). Nice people work there, but in the vast scheme of things, not smart people.