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Abstract
The history of the US airline industry has been composed of a series of “boom/bust”
cycles, capped by periods of near panic. The record losses of the early 1990s were
followed by the record profits of the late 1990s, only to be supplanted again by the record
economic losses starting in 2000 (and exacerbated by the events of 9/11). Since
deregulation, over 145 carriers have filed for receivership, and the industry still remains
in fragile shape in spite of the success of a few members like Southwest and Jet Blue.
Many industry analysts argue that the industry’s problems are the result of high labor
costs, fuel cost spikes, overcapacity, etc. The authors do not deny the effects of these
factors on the carriers’ plight, but there is a deeper, more fundamental factor at work.
That factor is the tremendous over leverage, both at the operating and financial levels,
present to this industry. The purpose of this paper is to explore this leverage situation and
examine the effects on air carrier profitability that results from this state.