“That’s bold talk for a one-eyed fat man.” - Ned Pepper in the film "True Grit"
To be clear, American Airlines chairman and CEO Doug Parker is neither one-eyed nor fat. But last week during his airline’s annual huddle with Wall Street analysts at the company’s Fort Worth headquarters, he certainly was bold.
“I don’t think we’re ever going to lose money again,” Parker said. “We have an industry that’s going to be profitable in good and bad times.”
But whether he was talking specifically about American, the world’s largest airline, or the entire passenger airline business (he didn’t make that entirely clear), Parker probably should have consulted early-19th-century Spanish philosopher and writer George Santayana, who famously said, “Those who cannot remember the past are condemned to repeat it.”
It wasn’t long ago – just four years ago – when Parker’s old company, the twice-bankrupt US Airways, bought the then-bankrupt American out of Chapter 11 bankruptcy and merged with it to form today’s most mega of megacarriers. Before that, in 2005, Parker’s America West Airlines, a chronic money loser that had spent three years in bankruptcy in the 1990s, had bought U.S. Airways out of Chapter 11.
So you’d think he’d remember how easy it is for big airlines to go south, financially speaking. For that matter, you’d think that, as a Vanderbilt-educated financial manager, he’d be aware of how many companies that once appeared to be world-beaters immune from ever losing money eventually lost so much that they no longer exist, or at least no longer exist as independent companies.
However, he apparently did not recall – or chose to ignore – those factoids when making his jaw-droppingly bold prediction.
True, American earned just over $1 billion in first-half profits this year. And all North American carriers combined earned $15.4 billion in the first six months of 2017. But carriers this year are benefiting from fuel prices that are less than half what they were, on average, in 2013. Back then, the industry paid an average of $3.07 a gallon. Last year, it paid just $1.46. And so far this year, the average is about the same, although prices have recently spiked into the $1.70-$1.95 range in the wake of Hurricane Harvey, which disrupted oil production in the Gulf of Mexico and refining and pipeline operations in southeast Texas in late August.
In fact, last year, when American by itself earned $2.7 billion, U.S. airlines combined to report “just” $13.5 billion in net profits, down $11.3 billion from the $24.8 billion they earned in 2015. They experienced that staggering 45.6% decline in profits in 2016 despite the fact that they paid 36 cents, or 20%, less per gallon for jet fuel than in 2015.
Does that sound to you like an industry that’s so stable it could never possibly lose money again?
What happens if oil prices soar again, and push jet fuel prices north of $3 a gallon again, or even north of $4 a gallon, where they were at one point in 2008 before the oil market collapsed? There appears to be nothing on the geopolitical or economic horizon that could send fuel spiraling that high again. But the same was true in 2006. No one saw oil price issues on the horizon that year, when U.S. carriers reported profits of $15.1 billion. But by 2008 the jump in fuel prices had pushed the industry to a staggering $25.7 billion loss, an all-time record.
It could happen again. Indeed, if history is any guide at all, it will happen again. We just don’t know if it’ll be next year, or sometime in the next decade.
Similarly, while no one is currently ringing alarm bells about airlines’ costs, which at $134.32 billion in 2016, were still 8% lower than the peak total of $146.10 billion in 2014, cost creep has returned to the industry. In 2016 U.S. airlines’ costs – excluding fuel costs – rose 13.7% over those same two years. Meanwhile, their combined revenue fell 3.5% over that same two-year period. And non-fuel costs will be up significantly again this year.
Yes, U.S. airlines remain profitable – handsomely so, especially given the industry’s dismal history of financial performance. But Parker’s having trouble convincing analysts and investors that he’s right about his airline’s and the industry’s financial future. History is set strongly against his view.
Until 2014 the U.S. airline industry was still showing a net-negative number in the “profits” category. For the first almost 85 years of their existence U.S. airlines were cumulatively still in the red. And even if you include the $55.7 billion the industry has earned in the previous four years, their cumulative historical return on invested capital is staggeringly negative. And that’s not even counting the hundreds of billions of invested dollars written off in the dozens of bankruptcies that litter the industry’s history.
In that context, Parker’s boast that either American or the U.S. airline industry will never lose money again is, well, almost laughable.
Consider that only 60 companies that were included in the 1955 FORTUNE 500 still exist today. And even if you adjust for a change in the criteria for listing that took place in 1965, less than 20% of the original 500 continue to operate as stand-alone businesses, or at all. Thus, Parker’s comments appear to be not just bold, but hubristic. It’s as if he’s unwisely tempting fate.
Of course, some of those members of the original 500 remain on the list today. So U.S. airlines’ ultimate failure is not a certainty. But the airlines’ odds aren’t good.
Someday airlines are almost certain to lose control of their labor costs again because it always is cheaper to give in to unions’ demands than to be shut down by a strike (airlines have extremely high fixed costs that must still be paid even when they don’t fly).
Oil prices almost certainly will explode again, sooner or later.
Consumer demand once again will crater amidst a deep recession at some point in the future, dragging fare prices and revenue down, too.
Carriers probably will be stuck again with too many of the wrong type of planes sometime in the future, as they were in the 1940s, the 1950s, the late 1960s, the late 1970s and early 1980s, and again in the 2000s.
New and/or improved competitors featuring significantly lower costs and lower fare prices will disrupt the market again in the future. And that’ll be more likely to happen in the international markets, where today’s Big 3 (American, Delta and United) currently make virtually all of their profits, than in the domestic market where existing low cost/low fare carriers already keep the big guys from flying profitably.
A volcano somewhere will blow up. A nuclear power plant will melt down. A wave of terrorism will scare the bejabbers out of billions of people. A war will be launched in some geo-politically important country or region. Something will happen. Such events will forever hold the potential for turning the ink in airlines’ books bright red overnight.
And, eventually some new form of transportation – maybe bullet trains, Elon Musk’s hyperloop or rocket transport ideas, or even a Star Trek-like “transporter” – will replace airlines partially or entirely as people’s preferred means of long distance travel. Who knows? But the probability is that some new form of transport will do to airlines what airlines did a century ago to trains.
So before he repeats his bold prediction again, Parker might want to re-watch either the 1969 or the 2010 - or both - versions of True Grit. Better yet, he could read the excellent book written by Charles Portis on which those films were based.
He’ll find it instructive that the matter-of-factly braggadocios lead character, Sheriff Rooster Cogburn, ultimately got his horse shot out from under him by the evil Ned Pepper, to whom Cogburn had declared “I aim to kill you in one minute, Ned.” Indeed Cogburn would have been executed at close range as he lay helpless on the ground, one leg pinned under his dead horse, had his Texas Ranger sidekick not dropped Pepper with an remarkable sniper shot from nearly a mile away.
