Is AirLine Bad Business?
The news on November 29, when AMR Corp. (better known as American Airlines) filed for bankruptcy. The company has lost $10 billion since 2001. As with almost all bankruptcies, it's likely common shareholders will get nothing.
American Airlines needs to go bankrupt so it can reduce its debt burden and remain competitive with United and Delta – both of which have been through bankruptcy and mergers.
It seems the only way to stay in the airline business is to declare bankruptcy. That's because airlines are bad businesses.
Before you can sell one ticket, you need airplanes and all kinds of machines and people to keep the planes loaded and functioning. You also need to deal with unions. You need to borrow huge sums of money. And you need to compete on price with a dozen other airlines. You really don't have any pricing power as an airline. The cost of fuel can rise at any time and eat into profits.
All those factors pushed American Airlines to consistently produce net losses. Its operating margin last year was a measly 1.4%.
Bad businesses – like airlines – must consistently spend money. But because of circumstances outside their control, they can't consistently earn it. That's why American Airlines, like so many airlines before it, is going bankrupt. It's hard to run a great airline business.
excerpts from Daily Wealth
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