Why airlines are always going bankrupt

From the article:

The collapse of Spirit was unique in that in its death throes it managed to solicit a bailout offer from the U.S. government; but it was not unique among its fellow airlines in going broke. Airlines are a bad business: a really, really bad business. The International Air Transport Association, the trade body of the global airline industry, has documented for years that airlines as a sector destroy investor value in the aggregate. The IATA’s 2026 outlook, looking forward to a quite strong year—this was before the Iran war broke out and oil prices surged—projected an average return on invested capital of 6.8 percent, against a weighted average cost of capital of 8.2 percent. As the IATA’s report said, “the airline industry collectively does not generate earnings that cover its cost of capital.” This has been the case for a long time. From its deregulation in 1978 to the end of 2025, the airline industry has cumulatively lost money: its net profit over those 47 years sits at negative $37 billion.1

Given these grim economics, you won’t be surprised to hear that airlines have a bad habit of going insolvent. This includes many of the most famous names in the history of aviation. Pan Am, long the unofficial flag carrier of the United States, ceased operations in 1991; Eastern Air Lines liquidated the same year; TWA, the carrier of Howard Hughes, was absorbed into American Airlines after a third bankruptcy filing in 2001; Braniff died in 1982. And those are only the most famous names; countless aviation startups have come and gone. (Have you ever heard of Trump Shuttle?) Even airlines with the backing of a national government go bankrupt all the time: Alitalia, Italy’s flag carrier, reported only a single year of profit since its founding in 1946 and was saved countless times by the Italian government before ultimately ceasing operations in 2021. Even those airlines that survive for long periods of time are perpetually in financial distress. Between 1978 and 2005, more than 160 airlines filed for bankruptcy; virtually every major U.S. carrier other than Southwest has been to bankruptcy court at least once. In September 2005, every one of the four largest American airlines—United, Delta, Northwest, and US Airways—was operating simultaneously under Chapter 11 protection.

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One of the central ideas in the study of cooperative games is the idea of the core. The “core” of a game is simply the set of outcomes that no coalition of players can improve upon by breaking away and dealing among themselves. If an outcome is “in the core,” it’s stable, such that nobody can propose a side deal that makes every member of some subgroup better off; if the core is “empty,” then every arrangement is vulnerable to being undercut by some side-coalition, and the market has no resting point, no stable equilibrium. It cycles, destabilizes, and, without outside intervention of some kind, eventually breaks down.

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Suppose you try to run the industry with just two firms. Demand exceeds supply, such that prices are high and there’s plenty of profit to enjoy. But that profit is exactly what invites a third firm to enter, undercut both incumbents, and still cover its costs. Now there are three firms, and supply exceeds demand. Someone has to operate below scale and bleed money on fixed expenses; eventually one of the firms will have to leave the market. Now you’re back to where you started: prices recover, profits climb higher, and the cycle begins again.

So whichever side of the integer you land on—one firm too many, one firm too few—there is some coalition of firms and customers that can profitably reorganize the market against the existing arrangement. In the language of cooperative game theory, the allocation is always vulnerable to defection by some coalition. The core is empty.

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You find the empty-core syndrome, for example, in the railroad industry of the nineteenth century. Building a railroad required vast capital expenditure on track, rolling stock, depots, and bridges; but once the infrastructure was in place, the marginal cost of carrying an additional ton of freight or another passenger across it was almost zero. Two railroads running competing lines between, say, Chicago and New York could not both operate at full cost recovery; so they spent the 1870s and 1880s alternately forming pools and rate-fixing agreements, then watching them collapse into ruinous price wars, going bankrupt, reorganizing, and starting the cycle over again.

And you’ll find the same dynamic in the contemporary airline industry.

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The economics of a genuinely competitive airline industry, then, are really bad—for the same reason the economics of any empty-core industry are bad. And this suggests that, in search of stability, the market participants will eventually try to suppress competition, if only so they can survive.

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In the course of this long path of suffering, every airline has decided, in one way or another, that the competitive airline industry is structurally unprofitable, and not really worth participating in.

One response is to cartelize the industry through means other than direct rate-fixing: to recreate, by private contract, the kind of competition-suppressing arrangements that the CAB previously wrote into statute. The international alliances of which airlines are so fond—Star, SkyTeam, and Oneworld, with their codesharing and antitrust-immunized joint venture agreements—are one form of this: they allow nominally competitive airlines to coordinate scheduling, share revenues, and refrain from undercutting each other on high-value trans-oceanic routes.

The hub-and-spoke model that dominates domestic aviation is another form of this tacit cartelization. By concentrating its operations at a few major airports, an airline can turn those airports into something close to local monopolies. American Airlines, for example, carries about 90 percent of passengers at Charlotte Douglas and 82 percent of passengers at Dallas-Fort Worth, but only about 7 percent of passengers at San Francisco, where the market is dominated by United, and 2 percent at Atlanta International, which is the central hub for Delta. In effect, major domestic airlines have carved up the country into a sort of feudal map of fortress hubs, with each one operating a quasi-monopoly through which it produces the margins that cannot be earned in genuine competition.

But the other response, and perhaps the more interesting one, is to leave the airline business entirely: to treat the planes as a kind of loss-leading distribution channel for what has become the actual product. The main innovation of the airline industry of the last few decades, from this vantage point, has been the frequent flyer program. Invented in the immediate aftermath of deregulation as airlines scrambled for ways to lock in customer loyalty, frequent flyer programs have become something quite different: enormous, free-floating financial businesses, miles-as-currency operations whose value bears essentially no relationship to the cost of the seats backing them.